When was subcontracted drapery fabrication labor taxable, and how did Texas treat materials and installation when draperies were or were not improvements to realty?

Plain-English summary

Draperies generally were not improvements to realty. They qualified only when permanently integrated so removal damaged the realty or when installed in a construction context.

Assuming that realty treatment applied, fabrication labor subcontracted to an unrelated third party was taxable if that party did not install the draperies. If the same third party fabricated and installed them, the fabrication labor was not taxable. Materials were taxable to the seller when the customer received a lump-sum bill, or to the customer when materials were separately stated from labor.

For draperies that were not improvements to realty, separately stated installation had been nontaxable before October 1, 1987; from that date, installation labor was taxable whether or not separately stated. The letter also said real-property repair and remodeling labor would become taxable January 1, 1988 except for residences, and that drapery installation within remodeling construction would be taxable.

What this means for you

The historical result depended on realty status, whether the fabricator also installed, and whether materials were separately billed. The letter's residence exception and effective dates should not be applied as current law without verification.

Common questions

Was fabrication-only subcontract labor taxable? Yes, under the assumed realty facts.

What if the subcontractor fabricated and installed? The fabrication labor was not taxable.

Who paid tax on materials? The seller on a lump-sum client bill, or the client when materials were separately stated from labor.

Citations and references

• No statute or administrative rule is cited by number in the letter text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0850G09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 16, 1987

Dear ****:

Thank you for your recent letter regarding drapery fabrication labor.

You stated that you are an independent contractor engaged in the sale of
custom draperies for both residential and commercial customers. You will be
subcontracting the fabrication and installation labor for such jobs.

You asked about a taxability of your drapery fabrication labor given
exception #3 on page 3 of our publication, "Texas Sales and Use Taxes Interior
Decorators and Designers", April 1986.

Generally, draperies are not an improvement to realty. Only when they
are so permanently attached and integrated into the realty that removal results
in damage to the realty or when installed in a construction context are they
considered an improvement to realty. Assuming the draperies are an improvement
to realty as outlined in the publication the following would apply to the
fabrication labor.

When you subcontract the fabrication labor to an unrelated third party
and the third party is not required to install the draperies, the fabrication
labor is taxable. If the third party fabricates and installs the draperies, the
fabrication labor would not be taxable. The cost of materials are taxable to
you if the billing to your client is a lump sum amount or taxable to your
client if the charge for materials is separated from the charge for labor.

Effective January 1, 1988, real property repair and remodeling labor will
be taxable except for residences. The total charge for drapery installation
that is part of remodeling construction (Item 3 of the publication) would be
taxable.

Prior to October 1, 1987, a lump sum charge for the sale and installation
of draperies (not an improvement to realty) was taxable in total. The
installation labor was not taxable if separately stated. Effective October 1,
1987, installation labor is taxable whether or not separately stated from the
sales price of the draperies.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
(Mrs.) Jo Ann Dieck
Tax Policy Division