The Comptroller's office publishes this online newsletter to keep you informed about Texas taxes. Tax Policy News provides general information and is not a substitute for legal or other professional advice.
As a member of the Western States Association of Tax Administrators, Texas is proud to host the annual WSATA conference in Austin, Sept. 23-26, 2018, at the Sheraton Austin at the Capitol.
Visit the WSATA Conference website for more information about the conference and to register to attend.
The Comptroller’s office offers several training resources that provide in-depth information on tax topics that affect your business today. These include live and on-demand training sessions, as well as tax seminars.
Visit our Tax Training Resources page to:
Our next webinar, “Exempt Organizations – Taxable and Non-taxable Sales,” will be held on Thursday, Aug. 30 from 10 a.m. – 11 a.m. Registration is available on our website.
We offer sales and use tax seminars across the state throughout the year. New taxpayers are especially encouraged to attend these overviews of tax responsibilities for buyers, sellers and service providers. For locations, dates and times, visit the Taxpayer Seminars webpage.
On July 20, we mailed "Texas Notice of Intent to Forfeit Right to Transact Business" forms to taxable entities that failed to file the 2018 Franchise Tax report or that failed to timely request an extension of time to file. Reports and extension requests were due May 15, 2018. We will also send this notice to companies that failed to file a complete report or to pay the full amount due.
By law, the right to transact business cannot be forfeited before 45 days from the date that we mail the notice of intent to forfeit. During this period – when the company has received the notice of intent to forfeit, but the forfeiture has not yet occurred – the company's status on the Comptroller's Taxable Entity Search remains as "active."
In this month’s issue, we introduce the first part of a four-part guide about contractors, taxable service providers and related services. Part 1 covers terminology and the taxability of real property improvements in Texas, and provides basic principles for determining the taxability of new construction and real property repair, remodeling and restoration.
If you perform new construction; residential real property repair, remodeling, maintenance, restoration; or nonresidential real property scheduled and periodic maintenance, you are a contractor.
If you repair, remodel or restore nonresidential real property, you are a taxable service provider.
The first step in understanding your tax responsibility is to determine whether an item is incorporated into the real property, a real property improvement, or remains tangible personal property (TPP) after you install it.
To determine if an item is incorporated into the real property, you must consider the following questions:
Note that the third question is considered the most important, with the first two being evidence to support it. Generally, if you would damage the real property, the item or both when removing the item after installation, the item has been incorporated into the real property.
If, in light of the three questions, the item is incorporated into the real property, then you are providing a real property improvement and are considered either a contractor or taxable service provider.
For example, creating a retaining wall is a real property improvement because the materials used in building the retaining wall are intended to remain in the wall permanently.
Examples of real property improvements include:
If you are not incorporating TPP into the real property, then you are delivering or installing TPP and must collect sales and use tax on the total price (including installation labor, materials and all related charges) for the TPP.
For example, attaching a television to a wall mount in a residence is installing TPP because the television is not intended to be a permanent part of the real property. The owner is likely to remove the television and take it with them when selling the home.
Other examples of installing TPP are freestanding appliances (refrigerators, portable* dishwashers, clothes washers and dryers), televisions, telephones and computers.
*Editor’s note: Clarification regarding built-in appliances versus those that are freestanding appliances (04/2020).
Once you have determined that you incorporate TPP into real property, you must determine what type of property the work is being performed on: residential or nonresidential.
Residential property is a building used as a residence, not as a business. Property next to and connected to those buildings is also residential property.
Residential property includes family homes, multifamily apartments or housing complexes (including homeowner and tenant common areas), condominiums, nursing homes and retirement homes.
Nonresidential (commercial) property is property without facilities for people to live in. It includes buildings and other improvements built into, or affixed to, the land such as office buildings, shopping centers, industrial parks, bridges, hotels, motels, etc.
You must take into consideration the type of contract you use to determine your tax responsibilities. You can use either a lump-sum contract or a separated contract. Your tax responsibilities are different for each one.
Lump-sum contracts are also known as “one-fixed-price” or “turn-key” contracts. You bill your customer one amount for both labor and incorporated materials instead of separately stating them. Separated amounts on invoices issued to the customer will not change a lump-sum contract into a separated contract unless the terms of the contract require separated invoices.
Separated contracts are also known as “time and materials” contracts. You bill your customer by separately stating labor and incorporated material charges. As long as you state the charges for the incorporated materials and labor separately, it does not matter if the charges are added together and the total is provided. Cost-plus contracts are considered separated contracts if the cost of labor is separately stated from the cost for incorporated materials.
Your contract with your customer has priority over any bids or invoices you provide them. For example, if you have a lump-sum contract to perform residential repair work for your customer, separated bids or invoices will not change it to a separated contract. If there is no written contract, then the written bid determines the tax responsibilities. If there is no written contract or bid, then the written invoice determines tax responsibilities.
As a contractor or taxable service provider, you use incorporated materials, consumables, and equipment to complete your construction projects. Knowing how to classify the items you use will help you understand if you must pay sales tax.
Incorporated materials are items that are incorporated into, and become a part of, any permanent real property improvement such as construction items (brick, drywall, mortar, lumber), central air conditioning units, lighting fixtures, electrical receptacles, flooring (tile, wood, carpet), paint and shingles.
Consumables are non-reusable, single-use (nondurable) items used for construction projects such as non-reusable drop cloths, disposable latex gloves, barricade tape, electricity, natural gas, chalk or non-reusable concrete forms.
The following are not consumables: machinery, equipment, incorporated materials, durable items, office supplies or rented (or leased) items.
Equipment is any item you use that is not an incorporated material or a consumable item. Equipment includes tools (screwdrivers, hammers), machinery (lathes, saws, drills) and accessories, or repair or replacement parts for machinery.
The type of work you perform for your customer is a primary factor in determining your sales tax responsibilities. You can perform new construction, repair, remodeling, restoration or maintenance work on residential or nonresidential real property.
New construction means building all new improvements to either residential or nonresidential property, and includes adding new usable square footage to a property or performing the initial finish-out of an existing building before its initial occupancy or use.
The initial finish-out refers to completion of the interior or exterior of an unfinished residential or nonresidential real property improvement so that it meets an owner’s or lessor’s requirements.
Some new construction examples are:
Hardscaping is a real property improvement and the first installation of hardscaping (such as retaining walls, ponds, lawn sprinkler systems, etc.) is new construction.
Repairing property means mending or bringing the broken, damaged or defective real property back as near as possible to its original working order.
Remodeling or restoring property means rebuilding, replacing, altering, modifying or upgrading the existing real property.
Some examples of repairing, remodeling and restoration work are:
Each of the following scenarios provides a summary from the contractor’s or service provider’s point of view and explains their tax responsibilities.
The labor for new construction is not taxable. The incorporated materials are taxable. The person or entity responsible for paying the tax depends on the type of contract used.
As a contractor, you can bill your customers using either a lump-sum or a separated contract. Your tax responsibilities are different for each one. If your customer provides the materials, then you are providing labor only. You’re not responsible for tax on the materials.
Under a lump-sum contract, you do not collect sales tax on materials or labor from your customer. You are the consumer of all items purchased to perform the work. You are not a seller.
Under a lump-sum contract, you must:
For items bought tax free, you must accrue state and local use tax based on:
Use our Sales Tax Rate Locator to search for sales tax rates by address. In addition, for exempt contracts tax may not be due on incorporated materials, consumables and certain taxable services. See the “Contracts with Exempt Organizations” section in this article.
Under a separated contract, you are the seller of the incorporated materials. You must collect tax on the incorporated materials billed to your customer, but there is no tax due on labor.
Under a separated contract, you must:
You will collect local sales taxes based on the tax rate at the jobsite location. Use our Sales Tax Rate Locator to search for sales tax rates by address. In addition, for exempt contracts, tax might not be due on incorporated materials, consumables and certain taxable services. See the “Contracts with Exempt Organizations” section in this article.
If you perform both lump-sum and separated contracts, and do not know at the time of purchase which type of contract you will use the incorporated materials under, you may purchase the materials tax-free for resale by issuing Form 01-339, Texas Sales and Use Tax Resale Certificate (PDF) and placing them in a tax-free inventory. You then must:
Local taxes are due based on the jobsite if you remove the items to perform the work under a separated contract. Local taxes are due based on the location where your inventory is stored if you remove the materials to perform work under a lump-sum contract.
Labor to repair, remodel, restore or maintain residential real property is not taxable. Materials incorporated into the real property are taxable. The individual or entity responsible for paying the tax depends on the type of contract used. The taxing responsibilities for residential repair, remodeling and restoration are identical to those for new construction. See the “New Construction” section in this article.
When you repair, remodel or restore nonresidential real property, you are a taxable service provider. Any restoration, repair or remodeling work done after the initial finish-out of an existing nonresidential (commercial) building is taxable.
The total charge for both labor and materials used to repair, remodel or restore nonresidential real property is taxable. It makes no difference whether you use a lump-sum or separated contract to bill your customer.
If your customer provides the incorporated materials, then you are providing labor only, which is taxable. You are not responsible for the tax on incorporated materials, your customer is.
Tax is due on the entire charge to your customer, and you must:
The tax you collect is based on the tax rate at the jobsite location. Use our Sales Tax Rate Locator to search for sales tax rates by address. In addition, for exempt contracts, tax may not be due on incorporated materials, consumables, and certain services. See the “Contracts with Exempt Organizations” section below.
An exempt organization is an entity that is either exempt under state or federal law or approved by our office to be exempt from Texas sales and use tax. Be aware, though, that some exemptions only apply to specific types of exempt entities.
Federal, state and local governments are automatically exempt from Texas taxes.
Many non-profit organizations have been granted Section 501(c) exemption status by the Internal Revenue Service (IRS), which is a federal entity. This Section 501(c) status does not automatically grant the organization tax exemption in Texas.
To be recognized as exempt from Texas sales and use tax, these organizations must apply to the Comptroller’s office for exemption on purchases necessary for an organization’s exempt purpose. You can verify an organization’s exempt status using our Texas Tax-Exempt Entity Search.
Be aware that certain exemptions are available for projects performed for certain Section 501(c) and other nongovernmental exempt organizations. The work you perform, though, must be related to the exempt organization’s primary purpose. If the job is unrelated to that purpose, then the associated exemptions are invalid.
When you do work for an exempt organization, you must get proof showing the contract is exempt. For a qualifying nongovernmental exempt organization, this is a Form 01-339 (back), Texas Sales and Use Tax Exemption Certificate (PDF). For a governmental entity, a written contract or purchase order is also acceptable documentation.
When your contract is with an exempt organization, and you have received proof of exemption from the entity, you can give your suppliers your own exemption certificate referencing the exempt contract and listing yourself as the purchaser instead of paying sales tax on:
For example, a city hires you to repair a city road. You can give an exemption certificate instead of paying tax for taxable items incorporated into the road (such as concrete, asphalt, etc.) and on certain types of consumable items you use to complete the job (such as barricade tape).
If your customer provides the materials, then you are providing labor only. You are not responsible for the tax on the materials.
You must pay tax on items you use to provide your services such as machinery, equipment, accessories or repair and replacement parts for your equipment and machinery used at the job site, office supplies, furniture and computers.
Note, your machinery and equipment are specifically excluded from the exemption discussed above. For example, if you need to rent a backhoe to complete the road job, you owe tax on the backhoe rental. This is true even if the exempt entity reimburses you for the tax.
In conclusion, to properly apply and collect or pay the appropriate taxes, contractors and services providers should analyze their transaction by answering five key questions:
This month’s article presented general terminology and tax treatment of real property improvements. In next month’s issue, we will break down demolition services as they relate to contractors and taxable service providers.
The Comptroller's office filed the following rules for adoption with the Secretary of State:
Rule 3.15 – Penalty for Fraud, Intent to Evade Tax or the Alteration, Destruction, or Concealment of Records
Publication date – Aug. 31, 2018
Effective date – Sept. 4, 2018
The Monthly Updates Search Form defaults to the current month and “All Taxes.” Use the pull-down menu to choose a different month or a particular tax. Selecting “All Taxes” brings up the documents organized by tax type.
On Aug. 1, we updated our STAR system search function from a Google platform to an Amazon Cloud-based platform. While this update has minimal effect on the user, we have highlighted some of the changes and included some helpful hints below.
Update your bookmarks! The new web address is star.comptroller.texas.gov.
Microsoft Edge, Firefox, Safari or Google Chrome work the most efficiently with the new STAR search platform. Internet Explorer produces less efficient search results.
When searching for a specific hearing on STAR, you must include a comma. Example: Hearing No. 113,845
When searching for phrases in the Simple Query or Advanced Query, enclose your search criteria in quotation marks. Example: “computer software”
The Advanced Query Screen looks a bit different to STAR users. It includes three search filters – see lines A, B and C in the graphic below.
A – This search filter assumes an “and” operator.
B – This search filter assumes an “or” operator; at least one of the words or phrases must be included with terms selected in filter “A.”
C – This search filter excludes specific words or phrases.
Example: In the Advanced Query Screen, we have entered “cardboard” on line A, “box packaging” on line B and “P.O.” on line C (see graphic below)
These entries produce the following results:
We are updating the STAR Users Guide and adding STAR FAQs.
Please contact us with any questions you have about the STAR system.
Help is just a click away! Use our website to take care of business.
The Taxes webpage has links to
The Practitioners’ Corner is a one-stop resource for information about filing and paying taxes, links to tax research sources and searchable databases.
In 2015, the Texas Legislature passed House Bill 855, which requires state agencies to publish a list of the three most commonly used Web browsers on their websites. The Texas Comptroller’s most commonly used Web browsers are Google Chrome, Microsoft Internet Explorer and Apple Safari.