When did Texas treat drapery installation as an improvement to realty, and which related labor charges were taxable?

Plain-English summary

The Texas Comptroller said draperies were usually tangible personal property, so their sale and installation ordinarily remained a sale of property. Drapery work instead qualified as an improvement to realty in either of two circumstances:

• the draperies were so permanently attached and integrated that removal would substantially damage the realty; or
• installation occurred in a construction or remodeling project and the contractor was responsible for installation as part of the contract.

For a lump-sum realty-improvement contract, the installer was the consumer of the materials, paid tax to the supplier, and did not tax the customer charge. For a separated contract with the customer, the installer collected tax on the separately stated materials incorporated into the realty. A subcontractor working for a prime contractor collected tax on materials when the prime contract was lump-sum, but could accept a resale certificate when the prime contract was separated. Tools and consumables that did not become part of the realty remained taxable to the installer.

The Comptroller also said fabrication and installation labor under either kind of realty-improvement contract was not taxable. In contrast, labor to lengthen, shorten, or otherwise rework draperies, cornice boards, or tracks was taxable, as was cutting an existing blind to fit a new opening.

Wall upholstery made from fabric, padding, and labor was an improvement to realty. Its labor was not taxable as repair or remodeling labor, although separately stated materials and supplies were taxable.

Finally, billing an out-of-state company did not remove Texas tax from an otherwise taxable item sold, delivered, and installed in Texas.

What this means for you

Drapery and blind businesses

Classify the transaction before invoicing. Ordinary drapery sales differ from permanent or construction-project installations, while later alteration or resizing labor was taxable under the letter.

Contractors and subcontractors

The tax treatment of materials depended on whether the relevant realty-improvement contract was lump-sum or separated. Consumables not incorporated into the property remained taxable in every case.

Accountants and tax professionals

The signed acceptance box on the company's quotation form did not by itself create an improvement-to-realty contract. The letter did say the signature secured the tax rate or taxability in effect at signing throughout performance of the agreement.

Common questions

Q: Were all drapery installations improvements to realty?
A: No. That treatment applied only when the draperies were permanently integrated so removal would substantially damage the realty, or when installation was part of a contractor-led construction or remodeling project.

Q: Was labor to install draperies under a realty-improvement contract taxable?
A: No. The letter says fabrication and installation labor was not taxable under either lump-sum or separated improvement contracts.

Q: Was labor to shorten drapes or cut down an existing blind taxable?
A: Yes.

Q: Did billing an out-of-state company avoid Texas tax?
A: No. If the taxable item was sold, delivered, and installed in Texas and no exemption applied, Texas sales tax was due.

Citations and references

• Comptroller Rule 3.292 — repair, remodeling, maintenance, and restoration of tangible personal property (enclosed with the letter)
• Comptroller Rule 3.347 — improvements to realty (enclosed with the letter)
• Comptroller Rule 3.291 — contractors (a newly revised draft was enclosed with the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8412L0609D12

Original ruling text

December 10, 1984

Dear ***:

Thank you for your letter of November 16, 1984, regarding various charges
made by your company related to improvements to realty and services on
draperies, blinds and upholstery.

Draperies are usually not regarded as improvements to realty, but rather
the sale and installation of tangible personal property.

Drapery sale and installation is regarded as improvement to realty when:

1. The draperies are so permanently attached and integrated into the
   realty that removal would substantially damage the realty.

For example: motorized drapes in an office building that would require
dismantling the wall to remove.

2. The installation of draperies is taking place in a construction
   context with the contractor being responsible for installation as
   a part of the contract. This could be new construction or remodeling
   of a building or house.

For example: A homeowner hires a contractor to add two rooms to an
existing house and totally remodel the interior. During the course
of remodeling, the contractor hires a third party (subcontractor)
to fabricate and install draperies.

When you sell and install draperies as improvements to realty, you are
required to operate under the sales tax rules that apply to contractors
and the following applies.

Your contract with the customer or with the prime contractor will either
be a lump-sum or a separated contract.

Under a lump-sum contract, you are the consumer of all materials and pay
tax to the supplier at the time of purchase. The charge to your customer
or the contractor is not taxable.

Under a separated contract you have with a customer you must collect
sales tax from the customer on the separately stated charge for materials
that are incorporated into the realty. If your separated contract is
with the prime contractor, you must collect tax from the contractor on
these materials if the contract between the prime contractor and the
customer is a lump-sum contract. You may accept a resale certificate in
lieu of tax from the contractor if the prime contract is a separated
contract.

In all cases you are required to pay tax at the time of purchase on items
that will be used or consumed in performance of the job, but that will
not become incorporated into the realty.

1. The acceptance of quotation area in the lower left hand corner of your
   company's customer quotation form does not constitute an improvement to
   realty contract. However, the signature in this box does secure for the
   signer the tax rate, or taxability, that is in effect at the time of
   signature which continues throughout the fulfillment of the agreement.

2. Under a separated contract to improve realty, fabrication and/or labor
   to install is not taxable.

3. Under a lump-sum contract to improve realty, fabrication and/or labor
   to install is not taxable.

4. The labor to rework (lengthen, shorten, cut down, etc.) a drapery,
   cornice board or track is taxable.

5. Labor to cut down an existing window blind to fit a new opening is
   taxable.

6. The installation of wall upholstery that includes fabric, padding and
   labor is considered an improvement to realty. It is not taxable as
   repair or remodeling labor. However, if a separate statement to your
   customer is made for materials and supplies, that charge would be taxable.

7. If we deliver and install in Texas but billed a company out of state
   and this company does not have a valid Texas tax permit, what do we do?"

Answer: Texas sales tax is due on taxable transactions occurring in
Texas. The fact that an out-of-state company is billed does not change
the tax liability. The transaction you describe occurs in Texas. If the
item sold, delivered and installed is a taxable item, and there are no
exemptions claimed by the purchaser, then Texas sales tax is due, even if
billed to an out-of-state party.

I have enclosed the following administrative rules for your information.

3.292 Repair Remodeling, Maintenance and Restoration of Tangible Personal
Property

3.347 Improvements to Realty

3.291 Contractors - (draft) newly revised (capitalized text has been added
or replaces text in brackets)

This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.

Sincerely,

Tax Policy
Tax Administration Division