Texas Sales Tax Audits for Audio, Video, and Low-Voltage Contractors

Texas companies that install audio systems, video equipment, low-voltage wiring, security cameras, access-control systems, conference-room technology, and structured cabling can face complicated sales-tax issues.

The Texas sales-tax treatment of these businesses is not always straightforward. Two contractors may perform nearly identical work but have very different tax obligations depending on whether the work is performed on a new building or an existing building, whether the property is residential or commercial, whether the contractor is installing a security system, and how the contract is structured.

For businesses undergoing a Texas Comptroller sales tax audit, properly classifying each type of project can substantially affect the audit assessment.

Why Audio, Video, and Low-Voltage Contractors Face Texas Sales Tax Issues

An audio/video or low-voltage company may perform many different types of work, including:

• Structured cabling
• CAT5, CAT6, or fiber installation
• Speaker and audio-system installation
• Television and projector installation
• Conference-room systems
• Home theater installation
• Network wiring
• Security-camera installation
• Burglar alarms
• Access-control systems
• Card readers and electronic door systems
• Equipment sales
• Equipment repair
• Monitoring services
• Commercial tenant finish-outs

Texas does not necessarily tax all of these services the same way.

During an audit, one of the first things the Texas Comptroller may examine is whether the company is selling tangible personal property, providing a taxable service, performing new construction, or performing taxable nonresidential real-property remodeling.

The Comptroller’s audit procedures specifically instruct auditors to determine the taxpayer’s type of business, the services it performs, whether it sells tangible personal property, and whether its customers are commercial, residential, contractors, or exempt entities.

New Construction Versus Existing Commercial Property

One of the most important distinctions for a Texas low-voltage contractor is whether the work is performed as part of new construction or on an existing commercial building.

New Construction

Texas generally does not impose sales tax on construction labor used to build new structures, complete unfinished structures, or perform an initial finish-out.

For example, a low-voltage contractor may be hired while a new office building is under construction to install:

• Ethernet cable;
• speaker wire;
• HDMI or audiovisual cabling;
• equipment racks;
• wall plates;
• conference-room infrastructure; and
• related wiring.

Construction labor associated with qualifying new construction is generally not taxable. However, the treatment of materials depends in part on whether the construction contract is lump sum or separated.

Under a lump-sum new-construction contract, the contractor generally pays sales tax when purchasing taxable materials and does not collect sales tax from the customer.

Under a separated contract, the contractor may purchase incorporated materials for resale and collect sales tax from the customer on the separately stated materials, while qualifying construction labor remains nontaxable.

Existing Commercial Buildings

The result may be substantially different when similar work is performed on an existing commercial building.

Texas generally taxes the entire charge for repairing, remodeling, restoring, altering, modifying, or upgrading existing nonresidential real property. This can include both materials and labor.

Nonresidential property includes businesses such as:

• offices;
• restaurants;
• retail stores;
• warehouses;
• manufacturing facilities;
• hospitals; and
• other commercial establishments.

Suppose a low-voltage contractor enters an existing office building and opens ceilings, pulls new cable, installs wall plates, adds speakers, and upgrades the conference-room audiovisual system.

The Comptroller may argue that some or all of this work constitutes taxable nonresidential real-property remodeling.

For taxable nonresidential remodeling, Texas generally requires sales tax to be collected on the total charge, including labor and materials.

This distinction is frequently important in a Texas sales-tax audit because a contractor that treated all installation labor as nontaxable may face a significant assessment if a large percentage of its jobs involved existing commercial buildings.

Residential Low-Voltage and Audio/Video Work

Residential projects are treated differently.

Texas generally does not tax labor to repair or remodel residential real property. Residential real property includes family dwellings and certain other residential facilities.

For example, a contractor installing speakers, wiring, or an audiovisual system in an existing residence may have different sales-tax obligations from a contractor performing essentially the same work in an office building.

Again, contract structure can matter.

Under a lump-sum residential remodeling contract, the contractor generally pays sales tax on its taxable purchases and does not collect tax from the homeowner.

Under a separated contract, tax may be collected on separately stated incorporated materials while qualifying construction labor remains nontaxable.

Therefore, during an audit it is important to separate residential projects from commercial projects rather than allowing the auditor to treat the company’s entire customer base uniformly.

Security Cameras, Alarms, and Access-Control Systems Require Special Attention

Low-voltage companies frequently perform security-related work in addition to traditional audiovisual installation.

This can create a separate Texas sales-tax issue.

Texas specifically includes certain security services within its taxable-services provisions. Taxable security services include certain:

• burglar-alarm installations;
• alarm monitoring;
• security services;
• locksmith services; and
• other activities requiring licensing under applicable Texas security laws.

A business that provides a taxable security service generally must collect sales tax on the total amount billed for the taxable service, unless an applicable exemption or resale certificate applies.

Therefore, an audiovisual contractor should not automatically treat the installation of security cameras, alarms, card readers, door-control systems, and monitoring equipment the same way it treats ordinary speakers, televisions, or network cabling.

During an audit, security-system revenue should usually be identified separately and analyzed under the applicable security-service rules.

Equipment Sales Can Create Additional Exposure

Many audiovisual contractors do more than perform installation labor.

They may also sell:

• televisions;
• projectors;
• amplifiers;
• receivers;
• speakers;
• control processors;
• cameras;
• network equipment;
• equipment racks;
• switches;
• mounts; and
• other tangible personal property.

Sales of tangible personal property are generally presumed taxable unless an exemption applies.

The audit should therefore distinguish between equipment that is simply sold to the customer and equipment or materials that become part of an improvement to real property.

For example, a freestanding amplifier or receiver may present a different tax issue from wire installed permanently inside the walls of a building.

Mixed Taxable and Nontaxable Contracts Can Be Dangerous

Another common audit problem occurs when a contractor bundles multiple services together for one price.

For example:

Conference Room Technology Package — $40,000

The package might include:

• televisions;
• cameras;
• speakers;
• structured cabling;
• programming;
• installation;
• training; and
• modifications to an existing office.

Some portions may have one tax treatment while other portions have another.

Texas has rules addressing transactions that combine taxable and nontaxable services. In certain circumstances, if taxable and nontaxable services are bundled together and the taxable component exceeds five percent of the total charge, the entire charge may be presumed taxable unless the taxpayer can substantiate an appropriate allocation.

Good contracts and detailed invoices can therefore become critical evidence during an audit.

What Records Should an Audio/Video Contractor Maintain?

A company facing a Texas sales-tax audit should generally be prepared to provide more than sales invoices.

Important records may include:

• sales-tax returns;
• sales invoices;
• customer contracts;
• proposals and bids;
• purchase invoices;
• job-cost reports;
• general ledger detail;
• resale certificates;
• exemption certificates;
• subcontractor invoices;
• customer lists;
• project lists;
• project addresses;
• construction plans;
• certificates of occupancy;
• documentation showing whether the work involved new construction;
• documentation showing whether a property was residential or commercial; and
• records showing sales or use tax paid to vendors.

The objective is to establish the actual nature of each transaction rather than allowing the audit to classify transactions solely from vague invoice descriptions such as “installation,” “AV services,” or “low-voltage work.”

Creating a Project-by-Project Audit Matrix

One effective method of defending a low-voltage sales-tax audit is to prepare a project matrix.

For each project, consider identifying:

Customer | Invoice | Job Address | Residential or Commercial | New Construction or Existing Building | Scope of Work | Equipment | Cabling | Security Work | Labor | Contract Type | Tax Collected | Exemption Certificate | Proposed Tax Treatment

This analysis can reveal important patterns.

For example, a company may discover that:

• 40% of its revenue involved new construction;
• 25% involved residential projects;
• 20% involved taxable commercial remodeling;
• 10% involved equipment sales; and
• 5% involved security-system work.

That is much more useful than allowing an auditor to apply one tax treatment to 100% of the company’s revenue.

Sales Tax Paid to Vendors Should Also Be Reviewed

A Texas sales-tax audit should not focus exclusively on whether the contractor failed to collect tax from customers.

The company should also determine whether it overpaid sales tax to suppliers.

Depending on the type of contract and transaction, a contractor may have paid tax when purchasing materials that could have been purchased for resale.

Those amounts may potentially affect the audit calculation or give rise to credits, depending on the facts and applicable Texas law.

Purchase invoices should therefore be reviewed along with sales invoices.

Local Sales Tax Can Be Another Audit Issue

State sales tax is only part of the analysis.

For taxable nonresidential real-property repair and remodeling, Texas local sales-tax rules may also apply. The Comptroller states that the entire taxable charge for nonresidential repair or remodeling is subject to applicable local tax, and jobsite location can be important to determining the proper local tax.

A contractor working throughout Texas should therefore examine whether it has correctly collected:

• city sales tax;
• county sales tax;
• transit tax; and
• special-purpose district tax.

Incorrect local-tax sourcing can sometimes create significant exposure even where the contractor correctly collected the 6.25% Texas state sales tax.

Questions to Ask Before a Texas Sales Tax Audit

An audio/video or low-voltage contractor preparing for an audit should be able to answer at least the following questions:

What percentage of revenue comes from residential customers versus commercial customers?

How much commercial work involves new construction versus existing buildings?

Does the company install security cameras, alarms, access-control systems, or monitoring equipment?

Does the company separately sell audiovisual or networking equipment?

Does the company use lump-sum contracts or separated contracts?

Does the company perform work as a subcontractor for general contractors?

Does the company receive resale or exemption certificates?

Has the company paid sales tax to vendors on materials incorporated into projects?

Are taxable and nontaxable activities separately stated on contracts and invoices?

The answers can have a major effect on the final audit liability.

How a Texas Sales Tax Attorney Can Help

Texas sales-tax audits involving audio/video contractors and low-voltage installation companies can become highly fact-specific.

A taxpayer should not assume that all installation labor is taxable. Likewise, a taxpayer should not assume that all installation labor is exempt.

The proper treatment may depend on:

• whether the property is residential or commercial;
• whether the project involves new construction;
• whether the work constitutes remodeling of existing commercial real property;
• whether tangible personal property is being sold;
• whether security services are involved;
• how the contract is structured;
• whether the customer is exempt;
• whether a resale certificate applies; and
• whether the taxpayer previously paid sales tax to its vendors.

At Ansari Tax Law Firm, we assist businesses with Texas Comptroller sales and use tax audits, audit defense, taxability analysis, sampling issues, administrative appeals, and disputes concerning the proper classification of transactions.

For audio/video, structured-cabling, security-system, and low-voltage contractors, a careful project-by-project review can help identify transactions that have been incorrectly classified and develop documentation supporting the taxpayer’s position before the audit is finalized.

If your business has received a Texas Comptroller audit notice or is currently undergoing a Texas sales-tax audit involving audio/video installation, low-voltage wiring, structured cabling, security systems, or commercial construction, obtaining a detailed taxability analysis early in the audit can be critical.