How did Texas treat HVAC and ventilation repair labor and maintenance contracts for residential and commercial property, and when was tax reported?

Plain-English summary

The Comptroller confirmed that repair labor on commercial property would become taxable on January 1, 1988, while repair labor on a personal residence's central heating, air-conditioning, and ventilation system was nontaxable.

Residential HVAC maintenance contracts were nontaxable, but additional charges for parts or materials incorporated into the property were taxable. Nonresidential HVAC maintenance contracts were also nontaxable if they covered only maintenance as defined in Rule 3.357, with additional parts or materials taxable. Repairs did not convert such a maintenance contract into a repair contract if repair-attributable charges were 5% or less of the overall charge.

Tax was reported according to the taxpayer's books: when invoiced under accrual accounting and when payment was received under cash-basis accounting.

What this means for you

The historical answer distinguished residential repair labor, commercial repair labor, true maintenance contracts, additional materials, and the taxpayer's accounting method. It does not decide the captioned treatment of painting, sealing, or cleaning air ducts.

Common questions

Was commercial HVAC repair labor taxable? Yes, effective January 1, 1988 under the letter.

Was residential central-HVAC repair labor taxable? No.

Were maintenance contracts taxable? Residential contracts were nontaxable. Nonresidential contracts were nontaxable if limited to maintenance as defined in Rule 3.357.

What about additional parts and materials? The letter said additional customer charges for them were taxable.

Could incidental repairs change a maintenance contract into a repair contract? Not if charges attributable to repairs were 5% or less of the overall charge.

When was tax reported? When invoiced on accrual-basis books, or when payment was received on cash-basis books.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 — historical real-property repair and remodeling rule 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/8712L0852G07

Original ruling text

December 11, 1987

Dear Ms. **:

Thank you for your letters regarding the sales tax responsibilities of your
client, COMPANY A

You stated that your client is in the business of commercial and residential
heating, air conditioning and ventilation repairs. The client also has
maintenance contracts with some of its customers.

It is correct that effective January 1, 1988, your client will be required to
charge sales tax on labor if the service work is done on commercial property.
It is also correct that repair labor on a personal residence's central heating,
air conditioning and ventilation system is not taxable.

Maintenance contracts on residential heating and air conditioning systems are
not taxable. However, any additional charge to the customer for parts or
materials incorporated into the property would be taxable.

Maintenance contracts on non-residential heating and air conditioning systems
would not be taxable if the contract is only for maintenance as defined in
3.357, Real Property Repair and Remodeling. Any additional charge to the
customer for parts or materials would be taxable. Repairs performed under a
maintenance contract will not change a maintenance contract into a repair
contract as long as the charges attributable to repairs are 5.0% or less of the
overall charge.

Any tax charged would be reported using the method recorded in your books. If
your books are on the accrual basis, you should report the tax when invoiced.
If your books are on the cash basis, you should report the tax when payment is
received.

Rule 3.357, Real Property Repair and Remodeling, is enclosed for your
reference.

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

October 5, 1987

Comptroller of Public Accounts
State of Texas
Austin, Texas 78774

ATTENTION: State Sales Tax Policy Office

REFERENCE: COMPANY A **, Texas

Gentlemen:

As a supplement to our letter of September 30, 1987, on the above referenced
client, we are writing for additional clarification of the new State Sales Law
and the effects of theses changes.

As explained In our previous letter, COMPANY A is in the business of Commercial
and Residential Heating, Air Conditioning and Ventilation repair.

COMPANY A periodically has one, two or three year maintenance contracts with
owners of apartment complexes and other Commercial type businesses. These
maintenance contracts are usually billed in installments; either monthly,
quarterly or semi-annually.

QUESTION
1) Will the tax on Labor and Material become due on the date the Maintenance
contract is signed; or will the tax be due as it is billed and collected?

Thank you in advance for your assistance in this matter and your expedient
reply to this request.

Sincerely,

Certified Public Accountants
(Ms.) **

cc: **

September 30, 1987

Comptroller of Public Accounts
State of Texas
Austin, Texas 78774

ATTENTION: State Sales Tax Policy Office
REFERENCE: **, **, Texas

Gentlemen:

Our client, referenced above, has requested that we assist in obtaining the
provisions of the new State Sales Tax Law that effects his particular line of
business.

COMPANY A is in the business of commercial and residential heating, air
conditioning and ventilation repairs.

It is our understanding that effective January 1, 1988, COMPANY A will be
required to charge State and City Sales Tax on labor if the service work is
done on commercial property. We also understand that if the repairs are to a
personal residence on Central Heating, Air Conditioning and Ventilation Systems
the labor is not taxable.

We respectfully request that you respond to our conclusions stated in the
preceding paragraph as to whether or not our understanding of the new State
Sales Tax Law is correct or incorrect.

Thank you in advance for your assistance in this matter and your expedient
reply to this request.

Sincerely Yours,

Certified Public Accountants
(Ms) **

cc: **