How did Texas distinguish nontaxable real-property maintenance from taxable repair, remodeling, sign, lighting, elevator, and air-conditioning work?

Plain-English summary

The Comptroller agreed that maintenance of real property was not taxable under Rule 3.357(c)(2), then applied that distinction to several businesses.

Elevators

• Designing and installing an elevator in a building under construction was nontaxable.
• Designing and installing one in an existing office building was taxable remodeling.
• Repairing an existing elevator was taxable.
• Scheduled, recurring, or periodic oil-and-grease maintenance was nontaxable.
• A lump-sum contract combining repair and maintenance was fully taxable unless repair charges were 5% or less of the total.
• Under separate contracts, repair was taxable and maintenance was not.

Signs and building lighting

A sign was an improvement to realty only if it was part of a prime realty-improvement contract or was essential to the building, intended as part of the realty, and not removable without substantial damage or destruction of the realty's intended usefulness. The letter said a sign bolted to a concrete foundation was not an improvement.

Because most signs were treated as tangible personal property, labor and materials to repair them—including related facing, ballast, lamp, mileage, and other charges—were taxable under Rule 3.292.

A lump-sum contract to maintain and replace building bulbs and fixtures was taxable. Furnishing and installing bulbs made the whole charge taxable; replacement-only labor was taxable under Rule 3.356(a)(1). Replacing fixtures was taxable repair or remodeling beginning January 1, 1988. The business could collect tax on the lump sum or state that tax was included, and could buy repair materials with a resale certificate.

Air conditioning, filters, and belts

Central air-conditioning systems were improvements to real property. A separately stated maintenance check was nontaxable, while the repair charge was taxable.

For a subcontractor replacing filters and drive belts as regular maintenance, a lump-sum charge could qualify as maintenance if documented under Rule 3.357, with the subcontractor paying tax on the filters and belts. If the subcontractor separately stated the charge, it had to collect tax on the filters-and-belts charge.

What this means for you

The historical result depended on the nature of the asset, whether work was recurring maintenance or repair, whether charges were combined, and how a subcontractor billed parts replacement.

Common questions

Was real-property maintenance taxable? No, under the historical rule.

Was repair taxable? Yes.

What happened to a mixed elevator contract? The entire charge was taxable unless repair was 5% or less of the overall charge.

Could separately stated HVAC maintenance remain nontaxable? Yes, while separately stated repairs were taxable.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(c)(2) — historical real-property maintenance provision.
• 34 Tex. Admin. Code Rule 3.292 — repair of tangible personal property.
• 34 Tex. Admin. Code Rule 3.356(a)(1) — historical real-property service provision for bulb and fuse replacement.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8802L0862D01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

Dear **:

On behalf of Mr. Bullock, I hope you'll accept my apology for the delay
in
answering your question involving changes in the sales tax law. This
isn't
the way we normally do business.

Our people were, and still are, swamped by a deluge of inquiries as they
attempted to interpret provisions of the new law and draft rules which
would
not adversely impact businesses. In many instances, an answer to a
question
just wasn't available when the question arrived.

You state and ask the following:

The purpose of this request is to clarify the significance of the failure
to
include "maintenance" of improvements to real property in the 1987
amendments. Since 1984, there has been a tax on the "repair, remodeling,
maintenance, and restoration of tangible personal property" however, the
1987 amendment imposes a tax only on "real property repair and
remodeling."
It is our opinion that the maintenance of real property, as contrasted to
repair, is not taxable service. In addition, it is our opinion the
definition of "real property services" does not readily include many of
the
fact situations we describe. As such, it is our belief that a member of
these services remain untaxed under the state sales tax.

Your statement is correct in that maintenance of real property is not
taxable, Rule 3.357 (c)(2).

Your specific questions are as follows:

Elevator Service
A firm enters various contracts relating to elevators installed in
multi-story office buildings.

Question 1: The firm enters a contract to design and install an elevator
in
an office building to be constructed. Is the firm providing a taxable
service?

Answer: No.

Question 2: The firm enters a contract to design and install an elevator
in
an existing office building. Is the firm providing a taxable service?

Answer: Yes, remodeling.

Question 3: The firm enters a contract to repair an elevator in an
existing
office building. Is the firm providing a taxable service?

Answer: Yes, Rule 3.357.

Question 4: The firm enters a contract to maintain an elevator in an
exiting office building by providing oil and grease services for the
elevator system. Is the firm providing a taxable service either as a
real
property repair and remodeling or as a real property service?

Answer: To oil and grease elevator would be scheduled, recurring, or
periodic maintenance, therefore not taxable. Rule 3.357 (c)(2).

Question 5: The firm enters a lump sum contract to repair and also to
maintain (as described in Question 3 and 4) an elevator in an existing
office building. Are either of the service and charges described not
taxable?

Answer: The total charge would be taxable unless the repair charges are
five percent or less of the overall charges. Rule 3.357 (c)(2).

Question 6: Would the answer to Question 5 be different if the firm
enters
separate contracts, one to maintain and the other to repair the
elevators?

Answer: Repair contract is taxable. Maintenance contract is not
taxable.

Sign and Light Bulb Service
A firm enters contracts to maintain and repair large neon signs, such as
a
sign for a service station logo. In addition, the firms enters contracts
to
maintain, repair and replace interior lighting in various buildings.

Question 7: Are the neon signs "improvements" to real property?

Answer: In order for the sign to be considered an improvement to realty,
the sign must (1) be part of a prime contract for the improvement of
realty
or (2) be essential to the building and intended to become a part of the
realty and not an attachment which could be removed without substantial
damage to the unit or to the realty or without destroying the intended
usefulness of the realty. Therefore, a sign bolted to a concrete
foundation
is not considered an improvement to real property.

Question 8: The firm replaces internal bulbs that illuminate the signs
which have burned out. IS the firm providing a taxable service?

Answer: Most signs are not considered to be improvements to realty even
though they may be bolted to a steel pole which is set in concrete.
Therefore, both labor and materials to repair these signs would be
taxable.
If the repair labor is taxable, all the associated charges such as labor
to
remove a damaged facing, ballast or fluorescent lamp, mileage and other
charges would also be taxable. Rule 3.292.

Question 9: The firm enters a lump sum contract to maintain and replace
light bulbs and related fixtures in an office building. Is the firm
providing a taxable service?

Answer: The services covered under such a contract are taxable.
Effective
October 1, 1987 installation charges charge are included in the sales
price of a
taxable item. So, if you furnish and install the bulbs the entire charge
is
taxable. If under the contract you do not furnish the bulbs but only
replace them, the charge is taxable as a real property service. Rule
3.356
(a)(1) specifically includes bulb and fuse replacement as a taxable
service.

Replacing of the light fixtures is either repair or remodeling of the
real
property and is taxable as of January 1, 1988.

Question 10: If the answer to Question 9 is yes, how should the firm
charge
and collect the sales tax?

Answer: The firm will collect tax on the lump sum contract amount or
state
in the contract that the lump sum charge includes tax.

Materials used in the repair may be purchased tax free by issuing a
resale
certificate to the supplier.

Question 11: Would the answers to Question 9 and 10 be different if the
firm enters separate contracts, one to maintain and the other to replace
the
light bulbs and related fixtures?

Answer: They could be different. You don't say what activities you
include
under the term "maintain." Carefully look over the various definitions
in
both rules (3.356 and 3.357) to see if the activities you have in mind
are
taxable under either rule.

Air Conditioning Services
A firm enters a lump sum contract to maintain and repair air conditioning
systems installed in a multi-story office building.

Question 12: Is the air conditioning system an improvement to real
property?

Answer: Central air conditioning systems are improvements to real
property.

Question 13: Is a maintenance check, the firm must also repair
or replace parts of the air conditioning system. The firm bills the
customer with a single invoice but segregates the maintenance charge from
the repair charge. Is the firm responsible for charging and collecting
the
sales tax on the maintenance charge?

Answer: A separate charge for the maintenance check would not be
taxable.
The charge for repairs is taxable.

Question 15: The contract provides that as part of the regular
maintenance, the firm will replace air filters and drive belts. The firm
subcontracts with an unrelated entity to replace the filters and belts.
What is the tax treatment of the maintenance and replacement?

Answer: The subcontractor actually doing the replacement will bill the
firm
either a lump sum or separated amount. If the charge is lump sum, the
subcontractor must be able to show that the work qualifies as
"maintenance"
under Rule 3.357 and only pays tax on the filters and belts. If the
charge
to the firm is separated, then tax must be collected on the charge for
the
filters and belts.

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 our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may
write me
at the Tax Policy Division.

Sincerely,
Tom Soto
Tax Policy Division