When is a portable building, prefabricated steel shelter, or similar item like playground equipment or picnic tables just taxable tangible personal property, and when does installing it turn the deal into a real-property improvement contract instead?

Plain-English summary

A seller of items like playground equipment, picnic tables, benches, outdoor athletic equipment, and prefabricated steel shelters and restrooms asked the Comptroller to clarify when it should charge sales tax on installation labor.

The Comptroller drew a clear starting line: tangible personal property that is sold free-standing, or that requires only above-ground mounting or anchoring, stays tangible personal property, and the entire sales price is taxable — you cannot deduct the cost of materials, labor, or transportation from the taxable price (Tax Code § 151.007). Playground equipment, picnic tables, benches, and outdoor athletic equipment fall into this category as examples.

But items like prefabricated steel shelters and restrooms might instead be improvements to realty, which changes the tax treatment entirely. Whether something crosses that line is governed by the century-plus-old three-part test from Hutchins v. Masterson, 46 Tex. 551 (1877): (1) was there a real or constructive annexation of the item to the land, (2) was the item fitted or adapted to the purposes of the real property it's attached to, and (3) did the parties intend the item to become a permanent part of the property. As practical markers: foundations, floors, and walls of a building count as improvements; items merely bolted to a foundation do not. If the installer itself builds the foundation and embeds the equipment into the concrete, the installer is a contractor improving realty, not just an installer of TPP (see Rule 3.347).

Once something is an improvement to realty, an entirely different set of rules kicks in. New construction (residential or nonresidential) under a lump-sum contract means the contractor pays tax on its own material costs and does not collect tax on the lump-sum price. Under a separated contract, the contractor collects tax on the separately stated materials price (not on labor) and can buy those materials tax-free with a resale certificate. Residential repair/remodel follows the same lump-sum-vs-separated logic as new construction. But nonresidential repair or remodeling is itself a taxable service — the provider collects tax on the total charge (materials, labor, expenses, etc.) and can use a resale certificate to buy the incorporated materials tax-free (see Rule 3.357).

Separately, the letter also clarifies who's responsible when a third party installs TPP that you sold: if the installation involves taxable assembly labor, you give that installer a resale certificate; if the installer merely installs (no assembly) and doesn't sell the property itself, the installer doesn't collect tax on its labor and doesn't need a resale certificate — as long as the invoice clearly shows the charge is for installation only.

What this means for you

Sellers of portable buildings, shelters, and similar site-installed items

Don't assume all "installed" items are simple TPP sales. Whether your product becomes an improvement to realty (with a completely different tax framework) depends on annexation, fitness/adaptation, and intent under the Hutchins v. Masterson test — and specifically whether you or your installer build the foundation and embed the item, versus just bolting it down.

Contractors and installers

If you install TPP without doing assembly labor and don't sell the item yourself, you don't collect tax on your installation labor and don't need a resale certificate — but say so clearly on the invoice ("installation only"). If your work crosses into building foundations or embedding equipment, you become a contractor improving realty, subject to the lump-sum/separated-contract framework instead.

Accountants and tax professionals

This letter is a useful compact reference tying together TPP taxation (§ 151.007, full price taxable, no deductions), the improvement-to-realty test (Hutchins), and the residential/nonresidential, lump-sum/separated contract matrix (Rules 3.347, 3.357) — all triggered by the same underlying products depending on how they're installed.

Common questions

Q: Is the labor to install free-standing equipment like picnic tables or playground equipment taxable?
A: Yes — that item is tangible personal property, and the entire sales price (including labor, materials, and transportation) is taxable, with no deduction allowed.

Q: How do I know if my product becomes an "improvement to realty" instead of staying TPP?
A: Apply the three-part Hutchins v. Masterson test: real or constructive annexation, fitness/adaptation to the realty's purpose, and intent to make it a permanent part of the property. Bolting to a foundation generally isn't enough; building the foundation and embedding the item generally is.

Q: If my product is an improvement to realty, how is tax handled differently?
A: It depends on whether the job is lump-sum or separated, and whether the property is residential or nonresidential. Lump-sum contractors pay tax on their own material costs; separated contractors collect tax on the stated materials price and can buy materials tax-free; nonresidential repair/remodeling is a fully taxable service on total charges.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007 (Sales Price — full price taxable, no deductions)
• 34 Tex. Admin. Code Rule 3.347 (Improvements to realty)
• 34 Tex. Admin. Code Rule 3.357 (Nonresidential repair and remodeling services)
• Hutchins v. Masterson, 46 Tex. 551 (1877) (three-part improvement-to-realty test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006393L

Original ruling text

June 9, 2000

From: Emilio Lerma

To:

Subject: Reply: Please Clarify When We Should Charge Sales Tax on Labor

Dear **:

Thank you for your e-mail regarding various items you sell.

Tangible personal property sold free standing or that requires only above
ground mounting or installation (anchoring) is tangible personal property and
the total price is taxable. The sale of playground equipment, picnic tables,
benches, out door athletic equipment, is considered the sale of tangible
personal property. The sales price of a taxable item includes the total amount
of the item without deduction for the costs of the taxable item, the materials
used, the labor or service employed, or transportation of the tangible personal
property. See Texas Tax Code 151.007 on Sales Price.

If a third party installs tangible personal property that you sell, you should
give a resale certificate if the installation involves assembly labor that is
taxable. An installer who does not sell tangible personal property would not
collect sales tax on their installation labor and does not need a resale
certificate as long as the invoice clearly shows the labor is for installation
only without assembly.

Prefabricated steel shelters and restrooms and perhaps the above referenced
items could be considered tangible personal property or improvements to realty.
Whether an item is an improvement to realty or retains its identity as tangible
personal property for Texas sales and use tax purpose is generally based upon
the three-part test from Hutchins v. Masterson, 46 Tex. 551 (1877):

1) Has there been a real or constructive annexation of the article in question;
2) was there a fitness or adaptation of such article to the uses or purposes of
the realty to which it is connected; and
3) was the intention of the parties that the chattel (property) becomes a
permanent accession to the free hold

Foundations (concrete base) and the floors or walls of a building are
considered improvements. Items that are merely bolted to foundations are not
improvements to realty. If the company that installs the items constructs the
foundations and embeds the equipment into the concrete, then it is a contractor
improving realty. See Rule 3.347 for information on improvements to realty.

The taxability of contracts to improve real property is handled differently
than the sale and installation of tangible personal property. Contracts to
build new improvements to realty for residential and nonresidential real
property are new construction. If the new construction is lump sum, the
contractor or subcontractor does not collect tax on the lump sum price.
Instead, the contractor pays tax on his costs of the materials. If a third
party installs the item that is attached as an improvement to the realty, the
third party installer is a subcontractor and the handling of the tax will
depend on whether the subcontractor is a separated or lump sump contract.

If the new construction is separated, the contractor or subcontractor collects
tax on the separately stated price of the materials, but not for labor charges.
The contractor may give a resale certificate to the suppliers to purchase the
materials incorporated into the realty tax-free.

If residential realty is repaired or remodeled, the contract is treated like
the contract for new construction explained above. The type of contract (lump
sum or separated) determines how tax is paid on incorporated materials.

If nonresidential realty is repaired or remodeled, the service is taxable. The
service provider collects tax on the total charges for materials, labor,
expenses, etc. The service provider may give a resale certificate to suppliers
to purchase materials incorporated into realty tax-free. See Rule 3.357 on
nonresidential repair and remodeling services.

To view or down load Rules 3.347 and 3.357, please go to our web site address
at
http://www.window.state.tx.us/taxinfo/rulendx/rulelist3.html#sst and scroll to
the specific rule.

This opinion is rendered based on the facts presented. Other facts though
similar, may yield different results.

If you have any questions or require additional information, you may call
1-800-531-5441, extension 6-5809. You may write to Tax Policy Division, P. O.
Box 13825, Austin, Texas 78711-3825. You may also submit inquiries to our tax
help Internet address at .

Sincerely

Emilio S. Lerma
Tax Policy Division