Is a building owner's payment to a property management company for supervising a construction contractor taxable, and if the owner mistakenly paid sales tax on that service in the past, how does the owner get it back?

Plain-English summary

A statewide association of office-building owners and managers wrote to the Comptroller with a four-part question about a common arrangement: a building owner hires a third-party construction contractor for major renovation or tenant finish-out, and separately pays the building's day-to-day property management company to oversee that contractor on the owner's behalf — checking the work is done correctly, on time, and per plans, with limited authority to issue stop-work orders and approve change orders, reporting only to the owner, and doing none of the actual renovation work or materials/labor arranging itself.

The Comptroller answered all four questions. First, this construction-supervision service is not subject to Texas sales and use tax — the manager's role here is functionally identical to the oversight services architects and engineers commonly perform, and management-company employees aren't touching the renovation work directly. Second, if an owner had mistakenly paid sales tax on such services in the past, a refund is available. Third, the refund window is four years, per Tax Code § 111.107, which lets a taxpayer request a refund or credit for overpaid tax any time before the period during which the Comptroller could still assess a deficiency on that tax expires. Fourth, the letter lays out three distinct paths a permitted taxpayer can use to recover an overpayment: (1) take a credit directly on a future sales/use tax return by reducing reported taxable sales or purchases (with supporting documentation kept on file); (2) request a refund directly from the Comptroller, identifying the seller who collected the tax (no Vendor Assignment Form needed from the seller, but the refund is delayed until the seller is properly identified; expect 4-6 weeks processing); or (3) request a refund from the seller who originally collected the tax, who then either takes its own credit or seeks its own refund from the Comptroller.

What this means for you

Building owners and property management companies

A property manager's fee for supervising a third-party renovation contractor — without doing the renovation work itself or handling materials/labor procurement — is a nontaxable service, similar to architect/engineer oversight. If you've been paying (or charging) sales tax on this kind of pure-oversight arrangement, you may be entitled to a refund.

Businesses correcting a past sales-tax overpayment

You have three practical routes to recover overpaid tax: self-credit on a future return, request directly from the Comptroller (identify the seller who collected the tax to avoid delay), or ask the original seller to refund you and handle its own credit/refund with the Comptroller. All are subject to a four-year limitations window under § 111.107.

Accountants and tax professionals

This letter is a clean, complete walkthrough of Texas's refund mechanics for permitted taxpayers — worth keeping as a reference whenever a client discovers a multi-year sales tax overpayment and needs to choose among the three recovery options.

Common questions

Q: Is a property manager's fee for overseeing a construction contractor taxable?
A: Not when the manager only supervises — checking quality, timeliness, and plan compliance, with limited stop-work/change-order authority — and does no renovation work or materials/labor arranging itself.

Q: Can an owner get back sales tax mistakenly paid on this kind of nontaxable service?
A: Yes, subject to a four-year statute of limitations under Tax Code § 111.107.

Q: What are the ways to claim a refund of overpaid sales tax?
A: Take a credit on a future return, request a refund directly from the Comptroller (identifying the seller who collected the tax), or request a refund from the seller who collected it.

Q: How long does a Comptroller refund request typically take?
A: About four to six weeks, assuming no additional facts or legal issues need resolving.

Q: Can other building owners or associations rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Statutes:

• Tex. Tax Code § 111.107 (refund or credit for overpaid tax; four-year limitations period)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200009664L

Original ruling text

September 7, 2000

Dear **:

Thank you for your recent letter on behalf of the ASSOCIATION. This is an
association of owners and managers of high-rise, mid-rise, and low-rise office
buildings throughout Texas.

Question 1: Are sales taxes owed by a building owner for construction
supervision services provided to the owner by a third-party management company
under the following fact scenario?

Major, costly renovation (including remodeling and/or tenant finish-out) is
being done to all or part of an owner's building by a third-party construction
contractor;

To make sure the contractor is doing the job correctly, timely, and in
accordance with plans and specs, the owner contracts with the management
company (which manages the day-to-day operation of the building) to oversee the
construction on behalf of the building owner;

The management company is paid exclusively by the owner for such oversight
services;

The management company's fiduciary duty and reports are made to the owner;

The owner may give the management company limited authority to issue work stop
orders to the contractor if the contractor is violating the construction
contract;

The owner may give the management company limited authority to approve change
orders on behalf of the owner in the contract;

The management company serves as the owner's liaison to the contractor;

The construction supervision services being performed by the management company
for the owner are virtually identical with the same oversight services often
performed by third-party architects and engineers; and

The management company employees do not do any of the renovation work. The
management company does not arrange for purchasing of construction materials or
furnishing or supervising construction laborers or building trade personnel.

Response. The services by the property management company to supervise work
under the above fact situation are not subject to sales and use taxes.

Question 2: If your answer to Question No. 1 is that no sales taxes are due for
the above described management company services to a building owner, and if the
owner has in the past paid sales taxes on such services, is the owner entitled
to a refund of such sales tax remittances, subject to any statute of
limitations?

Response. Yes.

Question 3: What is that statute of limitations period?

Response. Four years. Texas Tax Code 111.107 allows a person to request a
refund or a credit for the overpayment of a tax imposed at any time before the
expiration of the period during which the comptroller may assess a deficiency
for the tax.

Question 4: If a sales tax refund is due to the building owner, how much time
does it take in general terms for the owner to obtain the refund after the
application for refund is made, assuming that no time is needed by the
Comptroller for getting additional facts or resolving other legal issues?

Response. A permitted taxpayer who has paid tax in error on an exempt item has
the following three options to pursue a refund or credit:

Option 1: The permitted taxpayer can take a credit when filing their sales and
use tax return. The credit is taken by reducing the amount of "taxable sales"
or "taxable purchases" reported on the return. The taxpayer must keep
documentation supporting the credit in his records.

Option 2: The permitted taxpayer can request a refund of the tax directly from
the Comptroller. A Vendor Assignment Form is not required from the seller who
collected the tax. However, the permitted taxpayer must identify the seller who
collected the tax when submitting the refund request. Without the seller's name
and taxpayer number, the processing of the refund will be delayed until the
seller who collected the tax is identified to the Comptroller's satisfaction.
Except for the Vendor Assignment Form, the permitted taxpayer is required to
submit the same documentation to obtain a refund as previously (i.e., a written
statement of the specific grounds for the refund and the amounts broken down by
tax type and reporting period). Our refund section informs me that they
currently have a turnaround of four to six weeks in processing these types of
refunds.

Option 3: The permitted taxpayer can request a refund of the tax from the
seller who collected the tax. Once the tax is refunded, the seller may then
either take a credit for the refunded tax on a return or request a refund from
the Comptroller. A Vendor Assignment Form is not applicable to this option.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division