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Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts

taxes

Tax Policy News

September 2018

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.

In This Issue...

Western States Association of Tax Administrators (WSATA)

Join Us for the 2018 WSATA Conference in Austin

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.

Tax Training Resources

Podcasts, Webinars, Videos and Seminars

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:

  • find out more about our training resources;
  • listen to current podcasts;
  • register for upcoming webinars; and
  • view the Podcast and Webinar Archive sections for previous recordings.

Podcasts

Listen to our quarterly podcast highlighting exempt organizations, including religious, charitable and educational organizations. The segment highlights the application process and exempt purchases and sales for qualified organizations in Texas.

Webinars

Our latest webinar covers sales by nonprofit organizations. The one-hour webinar highlights the sales tax responsibilities of nonprofit organizations and helps them identify their taxable and nontaxable sales.

The recording of this webinar will soon be available on our Tax Training Resources webpage.

Videos

Our current video series covers contractors, repairpersons and Texas Sales Tax:

Our office also offers video tutorials on filing and paying sales tax though Webfile. To view these videos visit the Video Tutorials webpage.

Seminars

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.

Sales and Use Tax

Contractors and Related Services

In this month’s issue, we continue our series that takes a close look at the sales tax treatment for specific contractors, repairmen and other service providers.

Part 2 - Breaking Down Demolition Services

Demolition involves tearing down buildings and other man-made structures by implosion or using non-explosive methods such as a wrecking ball.

The complete demolition of a real property improvement (such as a building or parking lot) is not taxable. Any partial demolition is considered real property remodeling and the taxability depends on whether the work performed is on residential or nonresidential property.

Complete demolition of a real property improvement means to destroy the improvement down to the slab or bare ground. Total demolition of a building means the entire structure is removed except for the slab. Note that parking lots are separate real property improvements from buildings.

For example, the complete demolition of a parking lot means to demolish the lot down to the dirt. Retaining any portion of the previous real property improvement such as a sidewall, steel columns or joists, or a section of the parking lot, etc., is partial demolition and considered remodeling.

If a company only performs complete demolition services, it is not required to have a sales tax permit or collect tax on this nontaxable service. If, however, the company performs partial demolition or other services (such as debris removal, new construction or remodeling services, etc.), then it may be required to have a sales tax permit and collect tax.

A provider of a demolition service owes tax on all materials and equipment bought, leased or rented to provide the service.

Waste Removal (Real Property Services)

Waste removal services are taxable real property services. Real property service providers must collect tax on their services and pay tax on all materials and equipment bought, leased or rented for use in providing the waste removal services.

If a company bills its customer separately stated charges for both complete demolition and waste removal services, it only collects tax on the taxable waste removal services.

For example, a company charges its customer $40,000 for its services: $27,000 for complete demolition and $13,000 for debris removal services. The assumed sales tax rate is 8.25 percent.

Separated Contract
Item Amount
Complete Demolition $ 27,000
Waste Removal $ 13,000
State and Local Sales Tax (8.25% x $13,000) $ 1,072.50
Total $ 41,072.50

If the company bills its customer a lump-sum charge for both the complete demolition and waste removal services, and the waste removal charges are more than 5 percent of the entire bill, then it must collect tax on the entire charge to its customer.

Using the same charges from the previous example:

Lump-Sum Contract
Item Amount
Complete Demolition and Waste Removal $ 40,000*
State and Local Sales Tax (8.25% x $40,000) $ 3,300
Total $ 43,300

*A single charge for complete demolition and waste removal services, when the waste removal services are more than 5 percent of the single charge, is taxable. If the service provider separately states the charges, they only need to collect tax on the taxable waste removal services.

Real Property Improvements After Demolition Services
Complete Demolition

Making new real property improvements following complete demolition services is new construction. A company performing new construction is considered a contractor.

For example, if a company destroys an entire parking lot down to the dirt, the new parking lot it builds is new construction. Likewise, for the construction of a building on an existing site to qualify as new construction, a company would need to demolish the existing building to its slab or foundation, with no remaining walls or ceilings above the ground floor slab or foundation.

For new construction, the construction labor and demolition services are not taxable, but the incorporated materials and waste removal services are taxable. The party responsible for paying the tax on the incorporated materials and the waste removal services depends on the type of contract used.

Contractors performing new construction contracts under a lump-sum contract (a lump-sum amount that does not separate the charges for incorporated materials or labor) are consumers of all materials, consumable items and equipment used or incorporated into a customer's property.

As a consumer, a lump-sum contractor must pay tax to suppliers when buying the materials. If the materials are purchased from an out-of-state seller, a contractor must accrue and remit use tax on the materials, unless Texas use tax was collected by the out-of-state seller. A contractor must not collect tax from a customer on a lump-sum charge or on any portion of the charge.

Contractors performing separated contracts (the charges for incorporated materials and labor are separately stated) are the retailers of all materials physically incorporated into the real property improvement. As a retailer, a contractor may issue a resale certificate and must collect tax from the customer based on the agreed contract price of the incorporated materials and other taxable services provided.

Here are some examples of how the type of contract affects tax collection and payment responsibilities. In these examples, a company charges its customer $340,000 for its services: $27,000 for the complete demolition, $13,000 for waste removal and $300,000 for the new construction. The assumed sales tax rate is 8.25 percent.

Lump-Sum Contract
Item Amount
Complete Demolition, Waste Removal, and New Construction $ 340,000**
State and Local Sales Tax (8.25% x $340,000) $ 28,050
Total $ 368,050

**Again, because the waste removal service exceeds 5 percent of the single charge (i.e., is not separately stated), the entire service is presumed to be for taxable waste removal services. However, the service provider may separate the charges under Rule 3.356(i)(2) and charge tax only on the $13,000 charge for waste removal services.

Separated Contract
Item Amount
Complete Demolition $ 27,000
New Construction (Incorporated Materials) $ 110,000
New Construction (Labor) $ 190,000
Waste Removal $ 13,000
State and Local Sales Tax (8.25% x $123,000)*** $ 10,147.50
Total $350,147.50

***$110,000 for incorporated materials + $13,000 for waste removal

Partial Demolition

Partial demolition of existing realty and any real property improvements made following partial demolition services is remodeling. The taxability of remodeling depends on the type of property (residential or nonresidential).

If you perform residential remodeling, you are a contractor. For residential remodeling, the remodeling labor and demolition services are not taxable, but the incorporated materials and waste removal services are taxable. The party responsible for paying the tax on the incorporated materials and waste removal services depends on the type of contract used.

If you perform nonresidential remodeling, you are a taxable service provider. For nonresidential remodeling, the taxable service provider must collect tax on the total charge (including the demolition services). It makes no difference what type of contract is used.

Looking Ahead

In the next part of our series, we will revisit topics from a previous Tax Policy News article, “Caught in the Middle - Contracts With Exempt Entities: Purchases of Taxable Services, Supplies and Rental Equipment by the ‘Middleman.’

More Information
Qualifying Exempt Organizations and Real Property Improvements: Understanding When Incorporated Materials Can Be Purchased Tax Free

This article will provide guidance on the exemption for incorporated materials used in performing real property improvements for a governmental entity or qualified religious, educational and public service nonprofit organization.

Buying Incorporated Materials

Certain incorporated materials can be purchased tax free when performing a real property improvement for governmental entities (under Section 151.309) or qualifying religious, educational and public service nonprofit organizations (under Section 151.310). This exemption applies even when the contract is between a nonexempt entity (such as a subcontractor) and a contractor if the contract is an “exempt contract.”

An exempt contract is a contract to improve real property for an exempt organization’s primary use and benefit as long as the improvements relate to the organization’s purpose. When the job’s primary use and benefit does not fulfill the exempt entity’s primary purpose, the exemption is lost.

Exempt Example

A Texas public university, which is an exempt governmental entity, decides to lease property to a for-profit entity to build a dormitory for its students. The for-profit entity will purchase the construction materials under a construction contract with a contractor. The university will have control over the dormitory. Because the dormitory enhances the university’s educational operations, the dormitory fulfills the university’s exempt purpose. The for-profit entity may issue a properly completed exemption certificate to the contractor building the dormitory. The contractor can then provide an exemption certificate to their vendor instead of paying sales tax on the incorporated materials, qualifying consumables and qualifying taxable services.

Taxable Example

A Texas private university that qualifies as an exempt organization decides to lease property to a for-profit entity to build retail space to lease to other businesses. The for-profit entity will purchase the construction materials under a construction contract with a contractor. The private university will have limited control over the property for the duration of the lease. The for-profit entity allows any patrons to shop at the retail space, and the businesses are able to use the retail space for their own general business needs such as rental revenue or selling items or services. Because the university will not primarily benefit from the retail space’s operation, the retail space is not for the primary use and benefit of the private university. The for-profit entity cannot give an exemption certificate to the contractor.

Leases

An exempt organization is not required to own the real property improvement, and the exemption can apply when the exempt organization leases the real property. If a taxable entity owns an improvement, such as a building, which is leased to an exempt entity, the exemption applies if the life of the lease equals or exceeds the expected useful life of the real property improvement.

If the life of the lease is less than the expected useful life of the real property improvement, then the exemption does not apply. If a lease between the owner and the exempt entity is for a specific period and the exempt entity has the option, but is not contractually obligated to renew the lease, the option is not considered when determining if the exemption applies.

For example, a Texas tax-exempt educational organization decides to lease an entire campus from a nonexempt entity. Under the lease, the property owner (lessor) acquires a site, constructs new facilities and leases the campus for 25 years. The planned improvements have an expected useful life of 22 years.

Because the lease is greater than the real property improvement’s expected useful life, the contract is making a real property improvement for the exempt entity and qualifies as an exempt contract. The educational organization can issue a properly completed exemption certificate to the contractor building the campus. The contractor can then provide an exemption certificate (PDF) to their vendor instead of paying sales tax on the incorporated materials, qualifying consumables and qualifying taxable services.

More Information

Rules

Proposed

The Comptroller's office proposed the following rule for public comment through the Texas Register:

Automotive Oil Sales Fee

Rule 3.701 – Automotive Oil Sales Fee Reporting Requirements
Publication date – Sept. 14, 2018
Comment period end date – Oct. 14, 2018

Adopted

The Comptroller's office filed the following rules for adoption with the Secretary of State:

Cigar and Tobacco Tax

Rule 3.121 – Definitions, Imposition of Tax, Permits, and Reports
Publication date – Sept. 14, 2018
Effective date – Sept. 19, 2018

Cigarette Tax

Rule 3.102 – Applications, Definitions, Permits, and Reports
Publication date – Sept. 14, 2018
Effective date – Sept. 19, 2018

STAR Watch

Monthly Updates

To see the latest items added to our State Tax Automated Research (STAR) system, use the New Documents link on the STAR home page in the right-hand column. This will access the Monthly Updates Search Form

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.

More Information

Help is just a click away! Use our website to take care of business.

Taxes

The Taxes webpage has links to:

  • all Texas taxes and fees
  • resources for taxpayers
  • filing and paying taxes
  • tax laws and rules
Taxpayer Seminars and Videos

We host free taxpayer seminars across the state about the tax responsibilities of buyers, sellers and service providers.

Our Video Library has online tutorials on tax-related topics as well as information about our office.

Practitioners’ Corner

The Practitioners’ Corner is a one-stop resource for information about filing and paying taxes, links to tax research sources and searchable databases.

HB855 Browser Statement

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.

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