Texas sales tax audit on home renovations
Real Property Repair and Remodeling
Here are some important rules:
Labor to repair, remodel, or restore residential real property is not taxable. Residential real property means family dwellings, including apartment complexes, nursing homes, condominiums, and retirement homes. It does not include hotels or residential properties rented for periods of less than 30 days. The property doesn’t have to be the residence of the owner.
On the other hand, the total amount charged for remodeling, repairing, or restoring nonresidential real property is taxable. Examples of nonresidential real property are hospitals, office buildings, refineries, warehouses, parking garages, retail shops, restaurants, manufacturing facilities, and other commercial establishments.
If your contract is to repair, remodel, or restore “multiple-use property” (property used for both residential and commercial purposes), you should call and ask for the guidelines for repairing, remodeling, or restoring such property.
Residential Repair and Remodeling
When you repair or remodel residential property, you are a contractor. As a contractor, you may have a lump-sum contract (one price for the entire job). Or, you may have a separated contract (you charge separately for materials and labor). Under a lump-sum contract, you pay tax on all your supplies, materials, equipment, and taxable services when you buy them. You don’t charge your customer tax.
Under a separated contract, you give your suppliers resale certificates instead of paying tax on materials you incorporate into the customer’s real property, and on certain services if the charges for the services are separately identified to the customer. These services are surveying, landscaping, final cleanup, and security systems that are incorporated into the customer’s realty. You then collect state sales tax, plus any local tax, from your customer on the amount you charge for the materials and those services. Your charge for the materials must be at least as much as you paid for them. The construction labor charge is not taxable.
Nonresidential Repair and Remodeling
When you do any of the following types of jobs on nonresidential real property, the job is taxable:
- rebuilding real property;
- upgrading any part of an existing structure;
- replacing any part of an existing structure, except for minor replacement of parts during maintenance of the real property, such as replacing a belt on a machine; or
- repairing damaged, broken, or defective parts of a structure.
- Repair or remodeling includes reroofing and repainting. But if the repainting is maintenance (as defined in this bulletin), tax is not due on the repainting labor.
- Collecting Tax on Nonresidential Repair or Remodeling
When you repair or remodel nonresidential real property, you should collect state sales tax plus any local tax on your total charge for the job. (See publication 94-105, regarding local tax.) This figure includes all costs passed on to your customer, except separately stated building permit fees you pay on your customer’s behalf.
Using a Resale Certificate
You may give your suppliers resale certificates instead of paying tax on materials that will be incorporated into the customer’s real property. You may also use resale certificates when you purchase job-site waste removal, janitorial, landscaping, surveying services, and security systems incorporated into the customer’s realty when the services are essential to the completion of your contract.
Accepting a Resale Certificate
If you subcontract to remodel or repair a nonresidential structure, the remodeler or repair person may give you a resale certificate instead of paying tax on the job. Your customer, the remodeler, will then collect tax from his or her customer.
Natural Disasters
The labor to repair nonresidential property damaged in an area declared a natural disaster by the President of the United States or the Governor of Texas is not taxable. (Materials are still taxable.) The property must have been damaged by the condition that caused the area to be declared a natural disaster. The contract or billing must separately state the amount charged for labor from the amount charged for the incorporated materials.
Real Property Repair and Remodeling Contracts with Exempt Organizations
You don’t need to charge tax when you do a job for a governmental agency – federal, State of Texas, or Texas local government. Some nonprofit organizations also are exempt from tax but must give you an exemption certificate. Other nonprofit organizations must pay sales tax. If an organization has a letter from the Comptroller of Public Accounts exempting it from sales tax, and the real property improvement relates to the exempt purpose of the organization, certain exemptions are available. If you have a question about a customer’s exempt status, give us a call.
When your contract is with an exempt organization, you may give your suppliers an exemption certificate instead of paying sales tax on:
tangible personal property that is necessary and essential for the performance of the contract and completely consumed (used up or destroyed after one use) at the job site;
taxable services performed at the job site that are integral to the performance of the contract; and
taxable services performed at the job site that the contract requires the service provider to purchase.
Tax is due on all machinery and equipment and accessories, repair and replacement parts used at the job site, office supplies, furniture, and computers.
Maintenance of Real Property
Maintenance is scheduled, periodic work on real property that is not broken. Maintenance is necessary to keep property in good working order by preventing its deterioration. Charges for maintenance of real property are not taxable. You must pay sales tax on all taxable items bought for use in providing nontaxable real property maintenance service. In addition, you must have a contract or other documentation to prove that the services are scheduled and periodic. The incorporated replacement or repair parts and materials are taxable. Real property maintenance may be performed under either a separated or lump-sum contract (see guidelines under Collecting Tax on New Construction).
Increased Capacity of Chemical Plants and Petrochemical Refineries
Labor that causes a production unit to make more of the same product in a unit per hour or unit per year production ratio, or labor that causes a production unit to make a new product is called increased capacity. The labor to increase the production capacity of a manufacturing or processing production unit in a petrochemical refinery or chemical plant is not taxable. You may perform increased capacity jobs under either a lump-sum contract (one price for the entire job) or under a separated contract (itemized charges for incorporated materials and labor). You should refer to administrative Rule 3.362, regarding Labor Relating to Increased Capacity in a Production Unit in a Petrochemical Refinery or Chemical Plant, for more information about the limitations to this exclusion and your tax responsibilities when providing these services.
Under a lump-sum contract, you pay tax on all your supplies, materials, equipment, and taxable services when you buy them. You don’t charge your customer tax.
Under a separated contract, you give your suppliers resale certificates instead of paying tax on materials you incorporate into the customer’s real property. You then collect state sales tax, plus any local tax, from your customer on the amount you charge for the materials. Your charge for the materials must be at least as much as you paid for them. The construction labor is not taxable.
New Construction
When your contract is for any of the following jobs, you are acting as a contractor and your construction labor is not taxable:
- building new structures;
- completing unfinished structures;
- initial finish out work to the interior or exterior of a structure;
- building, repairing, or remodeling homes, duplexes, apartments, nursing homes, or retirement homes (but not hotels);
- repairing real property damaged in an area declared a natural disaster by the President of the United States or the Governor of Texas when the repair labor is separately stated from the materials.
Collecting Tax on New Construction
You may perform new construction jobs under either a lump-sum contract (one price for the entire job) or a separated contract (itemized charges for materials and labor). Under a lump-sum contract, you pay tax on all your supplies, materials, equipment, and taxable services when you buy them. You don’t charge your customer tax.
Under a separated contract, you give your suppliers resale certificates instead of paying tax on materials you incorporate into the customer’s real property and on certain services, if the charges for the services are separately identified to the customer. These services are surveying, landscaping, final cleanup, and security systems that are incorporated into the customer’s realty. You then collect state sales tax, plus any local tax, from your customer on the amount you charge for the materials and those services. Your charge for the materials must be at least as much as you paid for them. The construction labor is not taxable.
If Your Contract is for New Construction AND Real Property Repair
If you have a contract to add new square footage and to remodel existing footage in nonresidential realty for a single charge and the portion relating to the remodeling is more than five percent of the total charge, the total charge is presumed to be taxable. You may overcome this presumption at the time the transaction occurs by separately stating to the customer a reasonable charge for the taxable services. However, if the charge for the taxable portion of the services is not separately stated at the time of the transaction, you or your customer may later establish for the Comptroller, through documentary evidence, the percentage of the total charge that relates to the new construction. Examples of acceptable documentation include written contracts detailing the scope of work, bid sheets, tally sheets, schedules of values, and blueprints.
Facing a sales tax audit in Texas? Contact our attorney for a consultation.
