Do Texas Contractors Charge Sales Tax on Labor?

Residential repair and remodel: labor is clean, materials depend on the paperwork

Labor to repair, remodel or restore residential property is not taxable. What you do owe on the materials depends on how the contract reads.

• Lump sum. One price for the whole job. You pay sales tax on your supplies, materials, equipment and taxable services when you buy them, and you charge the customer no tax at all.
• Separated. You state a charge for materials and a charge for labor. Now you are the retailer of those materials: you give suppliers a resale certificate instead of paying tax at the counter, and you collect state and local tax from the customer on the materials line. The labor line stays untaxed. Your charge for the materials has to be at least what you paid.

Watch that second one, because the Comptroller decides which kind of contract you have by reading it, not by what you called it. If the price is split between materials and labor anywhere in the contract or in the invoices the contract requires, it is a separated contract and you owe tax on the materials you billed.

Source: Comptroller 94-116, Real Property Repair and Remodeling and 94-157, Homebuilders and Real Property Services.

Nonresidential repair and remodel: the whole bill is taxable

Rebuilding, upgrading part of an existing structure, replacing part of it, or repairing damaged or defective parts of a commercial building is a taxable service. Reroofing and repainting count. You collect state and local tax on the total charge for the job, which includes every cost you pass on: labor, materials, dump fees, equipment rental, travel. The only thing you leave out is a separately stated building permit fee that you paid on the customer's behalf.

The flip side is that you stop paying tax at the supply house. You may give suppliers a resale certificate for materials that go into the customer's property, and for job-site waste removal, janitorial, landscaping, surveying and security systems when those services are essential to finishing the contract.

Subcontractors work the same way in reverse. If you sub for a remodeler on a commercial building, that remodeler can give you a resale certificate and collect the tax from the building owner instead.

Source: Comptroller 94-116, Rule 3.357.

Maintenance is not repair, and the difference is real money

Maintenance is scheduled, periodic work on property that is not broken, done to keep it in good order and stop it deteriorating. Charges for maintenance of real property are not taxable, even on a commercial building. Repainting an office is taxable as remodeling. Repainting on a scheduled maintenance program is not.

Two conditions come with it. You need a contract or other documentation proving the work is scheduled and periodic, so a quarterly service agreement is worth having in writing. And you pay tax yourself on the taxable items you buy to perform nontaxable maintenance, with incorporated replacement parts following the same lump-sum or separated rules as new construction.

This is the distinction that decides whether an HVAC service agreement on a restaurant is taxable. Scheduled filter changes and coil cleaning under a maintenance contract are not taxable. The compressor you replace after it fails is repair, and on a nonresidential building that is taxable.

Source: Comptroller 94-116, Maintenance of Real Property.

New construction, and the 5 percent trap in mixed jobs

Construction labor is not taxable when you are building a new structure, completing an unfinished one, doing initial finish out, or building and remodeling homes, duplexes, apartments, nursing homes and retirement homes. Materials follow the lump-sum or separated rule above.

The trap is the mixed commercial job. If one contract covers adding new square footage and remodeling the existing footage on a nonresidential building for a single price, and the remodeling part is more than 5 percent of the total, Texas presumes the whole charge is taxable. You beat that presumption by separately stating a reasonable charge for the taxable remodeling work at the time of the transaction. Do it in the contract. Proving the split three years later with bid sheets and blueprints is possible, and it is a bad afternoon.

Source: Comptroller 94-116, New Construction.

Real property services: the trades that always collect tax

Texas taxes six real property services no matter whose building they are performed on: landscaping, care and maintenance of lawns, yards and ornamental plants, garbage and waste removal, building and grounds cleaning including janitorial and custodial work, structural pest control, and surveying. If that is your trade, you collect tax on the total charge at a house exactly as you would at an office park.

The details that catch people:

• Landscaping stops where construction starts. Building a deck, retaining wall, fence or pool, or installing an underground sprinkler system, is construction rather than landscaping, and it follows the construction rules instead. Separate those charges from the mowing and planting.
• The 5 percent presumption applies here too. Nontaxable work such as mowing a highway right of way or a cemetery has to be separately stated, or the total is presumed taxable once the taxable part passes 5 percent.
• Small self-employed lawn operators are exempt. Lawn care and landscaping are not taxable when performed by a self-employed individual who does the work personally, has no employees or partners doing it, and has $5,000 or less in gross receipts from those services over the most recent four calendar quarters. Cross $5,000 and you start collecting on the first day of the next quarter.
• Cleaning is taxable, housekeeping is not. A maid or janitorial company collects tax on cleaning a home, office, warehouse or restaurant. A self-employed person doing traditional household work as an employee of that household, rather than as a subcontractor to a service, does not.
• Pool maintenance and pressure washing are taxable on residential and commercial property alike, including testing, chemicals, filter changes and vacuuming.
• New residential construction is the exception. Real property services bought by a homebuilder as part of improving property with a new residence are not taxable. Get the builder's certification in writing, because whoever signs it carries the liability if the work turns out not to qualify.

Source: Comptroller 94-112, Landscaping and Lawn Care, 94-111, Cleaning and Janitorial Services, 96-259, Taxable Services.

Work on things that are not buildings

Repairing, remodeling, maintaining or restoring tangible personal property is a taxable service in Texas, and here the labor really is taxed. Fix a customer's mower, appliance, compressor or piece of shop equipment and you collect tax on the entire charge for parts and labor. You buy the parts on a resale certificate. You collect tax even when the customer supplies the parts and you only supply the work.

Motor vehicles run on the opposite rule and it is worth knowing if you do fleet work. There is no sales tax on the labor to repair a motor vehicle. Parts are taxable. If you invoice a single lump-sum price for parts and labor, you do not collect tax from the customer and you pay tax to your supplier on the parts. If you itemize, you buy the parts on a resale certificate and collect tax on the parts line only.

Source: Rule 3.292 and Comptroller 94-113, Motor Vehicle Repairs.

Which rate: the job site picks it

The state rate is 6.25%. Cities, counties, transit authorities and special purpose districts can add up to 2% on top, so the highest combined rate anywhere in Texas is 8.25%. Plenty of addresses sit below that, and the difference between an address inside city limits and one just outside is real.

For work performed at the customer's property, local tax follows the job site, not your shop. Collect the local rate for the address you worked at, on the labor and materials for nonresidential repair and remodeling and on the separately stated materials charge for a residential separated contract. Look the address up on the Comptroller's rate locator rather than reusing the rate from your last job.

Source: Texas Sales and Use Tax and 94-105, Local Sales and Use Tax Collection.

Two exemptions worth remembering

Disaster repairs. Labor to repair nonresidential property damaged in an area declared a natural disaster by the President or the Governor is not taxable. Materials still are. The damage has to come from the condition that caused the declaration, and your contract or bill has to state the labor separately from the incorporated materials. After a hurricane or a freeze, that one line on the invoice is the whole exemption.

Government and exempt customers. You do not charge tax on a job for a federal, state or Texas local government agency. Some nonprofits are exempt too, and they give you an exemption certificate. On an exempt job you can buy consumables and integral job-site services with an exemption certificate, though you still pay tax on your own machinery, tools and repair parts.

Source: Comptroller 94-116.