A homebuilder is a contractor who improves residential real estate and who, in making such improvements, incorporates tangible personal property into the property improved.
As a contractor, the homebuilder's sales and use tax responsibility depends upon the type of contract used. Contracts may be either lump-sum or separated contracts.
Lump-sum Contracts - A lump-sum contract is a contract through which the price is billed as one lump-sum amount. The contract does not state a separate charge for the skill and labor from the materials incorporated into the work nor does the contract require invoices or progress billings, etc., to separately state these charges.
Under a lump-sum contract, the homebuilder is considered the ultimate consumer; the homebuilder's lump-sum charge to the customer is not taxed. The homebuilder owes the tax on the purchases of equipment, incorporated materials, consumable materials, and taxable services. However, the homebuilder does not owe tax on purchases of real property services.
Separated Contracts - A separated contract is one in which the price is divided into at least two amounts: a charge for skill and labor to perform the work and another for the materials incorporated into the realty. A contract that requires invoices or progress billings, etc., to separately state these charges is a separated contract.
Under a separated contract, the homebuilder is considered a retailer of the incorporated materials. The homebuilder must collect sales tax from the customer on the agreed contract price of all materials incorporated into the realty. The homebuilder may furnish the supplier a resale certificate when purchasing these incorporated materials.
The homebuilder owes the tax on the purchases of equipment, most consumable materials, and taxable services.
Also, a homebuilder, who in the contract separately states a charge for consumable materials, transfers title to these consumable materials, and labels these consumable materials as the customer's property, is reselling these consumables to the customer. As with the incorporated materials, the homebuilder must collect sales tax from the customer on the agreed contract price of these consumable materials. (The agreed contract price may not be less than the amount the contractor paid for the materials.)
Real property services are taxable services, but they are not taxable if purchased by a homebuilder as part of a contract to build a new residential structure or other improvement next to the new residential structure and used in the residential occupancy of the structure.
A homebuilder can be a contractor, a developer, or a home owner acting as a general contractor to improve a new residential structure.
"Residential structures" include houses, apartments, condominiums, nursing homes, and retirement homes. However, hotels, motels, hospitals, rehabilitation centers, prisons, and recreational vehicle parks are not residential structures.
Examples of "new improvements" next to a new residential structure include new rooms, sidewalks, swimming pools, gazebos, garages, fences, sprinkler systems, decks, retaining walls, driveways, fish ponds, and patios. However, tax exemptions for real property services provided while constructing these new improvements apply only in connection with building a new residential structure (living quarters). The term "new improvements" does not include repairs, renovations, or interior remodeling, e.g., re-roofing a house or renovating a garage.
There are six real property services: landscaping; the care and maintenance of lawns, yards, or ornamental trees or other plants; removal or collection of garbage, rubbish, or other solid waste; building or grounds cleaning, janitorial, or custodial services; structural pest control service; and surveying of real property.
If a homebuilder is constructing a new residential structure, under a lump-sum contract, the homebuilder is considered the ultimate consumer, but he does not owe tax on purchases of real property services. Under a separated contract to build a new residential structure, the homebuilder does not owe tax on purchases of real property services, but must include these costs in the labor portion of the contract.
Landscaping is the activity of arranging and modifying areas of land, natural scenery, and other areas, such as indoor or outdoor patios, for aesthetic effect, considering the use to which the land is to be put. The term includes adding, removing, or arranging natural forms, features, and plantings, including vegetation, and other features to fulfill aesthetic requirements. It includes the application of soil, soil additives, and amendments to prepare or maintain the planting area.
Some examples are garden planting or maintenance, arborist services, ornamental bush or shrub planting, tree planting or removal, tree surgery, pruning or spraying, and lawn sodding. The term does not include the addition of sprinkler systems, retaining walls, ponds, pools, or fences, or other construction activities or services provided by landscape designers or landscape architects, such as consultation, research, preparation of general or specific design or detail plans, studies, specifications, or supervision, or any other professional services or functions within the definition of the practice of engineering or architecture. Landscaping services performed by landscape designers or landscape architects are taxable.
Another example is lawn and yard maintenance, which includes mowing, trimming, fertilizing, watering, and any other treatment or service that may be performed on private or commercial yards or lawns. It also includes maintenance of trees and plants whether inside or outside a building. The term does not include clearing land for buildings and power line rights-of-way or pipeline rights-of-way. Maintaining land belonging to a governmental entity if the service is required by the governmental entity is not yard maintenance.
Surveying is a real property service. It includes activities performed to determine or confirm the boundaries of real property, or to determine or confirm the location of structures or other improvements in relation to the boundaries of the property by the use of relevant elements of law, research, measurement, analysis, computation, mapping, and land description. Examples include boundary recovery, residential surveying, lot surveying, title surveying, as-built title surveying, and right-of-way surveying. The term does not include activities performed after taxable surveying has been completed to search the surveyed area for items of archaeological or historic significance. (Effective October 1, 1999, the owner of the residential property does not owe tax on surveying services that are purchased in connection with the construction of a new residential structure. However, this provision for owners expires October 1, 2001.)
The homebuilder knows the nature of the work performed; therefore, it is the homebuilder's responsibility to determine whether the work is to build a new residential structure or perform other qualified residential new construction. In many cases, it may seem obvious that the work is being done in connection with construction of a new residential structure. In other cases, the real property service provider may have no idea whether the work qualifies as a nontaxable service. The real property service provider is not responsible for making this determination. To eliminate any doubt as to the status of the work, the homebuilder should give the real property service provider certification that the work is residential new construction. A homebuilder may issue an exemption certificate as a form of certification.
A homebuilder may issue a certification for real property services purchased as part of a contract to build a new residential structure until the residential structure is sold and occupied and the terms of the sale are complete. For example, a builder may choose not to purchase landscaping for a new home until the home sells. In the contract of sale for the home, the homebuilder promises to provide the landscaping specified by the home buyer. The homebuilder may issue a certification for the landscaping he purchased after the home was completed. After a new home is sold and occupied and the terms of the sale have been satisfied, the homebuilder's purchases of landscaping and other real property services are taxable, including any work performed under a homeowner's warranty.
A homebuilder may not issue a certification for real property services performed on a model home while using it as an office. However, no tax is due on the labor to landscape a new house that was used as a sales office and is now being converted to a house suitable for residential occupancy. In the case of common areas adjacent to residential structures, like a recreation facility and pool in a subdivision, the homebuilder may issue a certification for purchases of real property services until the common-area structure is complete and available for use.
A person who performs real property services should presume that the services are taxable and collect tax on the total charge unless the homebuilder certifies in writing that the service is part of an improvement of real property with a new residential structure or an improvement next to an existing home or residence. The certification may be a completed exemption certificate or a letter from the homebuilder explaining that the service is purchased as a part of residential new construction.
Once a real property service provider gets this certification, its services are no longer taxable services. The service provider owes tax on all materials transferred to the homebuilder and on supplies or equipment used to provide the nontaxable service. However, landscapers are an exception.
Because a landscaper incorporates tangible personal property into realty by planting trees, shrubs, grass, etc., a landscaper becomes a subcontractor. As a subcontractor, the landscaping company's tax responsibilities are determined by the type of contract under which it performs the work. If the contract separates charges for materials from charges for labor, it is a separated contract. If the contract is for one amount, which includes labor and materials, then it is a lump-sum contract.
Under a separated contract, the landscaping company may purchase incorporated materials, such as trees, shrubs, and grass, tax free for resale. The company must then collect tax or a properly completed resale certificate, as applicable, when it sells the plants to the homebuilder. The labor is not taxable. Under a lump-sum contract, the landscaper owes tax on all plants, as well as supplies and equipment used in landscaping the house, and does not collect any sales tax from the homebuilder.
When a contractor builds a custom home, the contractor's responsibility for local tax is affected by the type of contract the contractor has with the customer. A contractor with a lump-sum contract is the consumer of all taxable items incorporated into the real property.
When a contractor with a lump-sum contract purchases taxable items from a supplier who delivers the items from the supplier's place of business inside a taxing city, county, or special purpose district, the taxable items are subject to that city's, county's or special purpose district's sales tax no matter where the items are delivered within Texas. The point of delivery determines the transit sales and use taxes.
When a contractor with a lump-sum contract purchases from a supplier who delivers from a place of business located outside a taxing city, county, or special purpose district and the taxable items are brought, shipped, or delivered directly into a taxing city, county, special purpose district, or transit authority, local use tax is due to that local taxing jurisdiction.
A contractor with a separated contract is considered to be the retailer of the incorporated materials and must collect tax from the customer on those materials. The jobsite is the "place of business" of the contractor. The homebuilder must collect city, county, special purpose district, and transit sales tax based upon the location of the jobsite. If the jobsite is within a taxing city, county, special purpose district, or transit authority, then that city's, county's, special purpose district's or transit authority's sales tax must be collected by the contractor from his customers based upon the agreed contract price of the materials.
The Form 01-339, Texas Resale Certificate, Front, and the Form 01-339, Texas Sales and Use Tax Exemption Certification, Back, are available online.