How did Texas's 1988 rules treat HVAC maintenance contracts, repairs, residential and commercial installations, freight, tools, refunds, and window units?

Plain-English summary

The Comptroller answered fourteen questions about central and window air-conditioning work.

Routine real-property maintenance was nontaxable when it met Rule 3.357's definition and repairs did not exceed 5% of the maintenance contract. The provider paid tax on maintenance materials. If commercial repair exceeded the 5% limit, the total customer charge was taxable and job materials could be bought for resale. Residential real-property repair was nontaxable to the customer, with the provider paying tax to suppliers.

For residential or commercial new construction under a lump-sum contract, the contractor paid tax to the material supplier under Rule 3.291. A direct-payment exemption could not be accepted for the subcontractor's lump-sum contractor transaction. Freight and out-of-town mileage followed the taxability of the related sale or service.

Consumable grinding wheels and expendable tools used on a U.S. government installation were taxable; only materials incorporated into the real property received the stated exemption. Tax charged to customers in error had to be credited to them before the provider could reduce taxable sales on a later return.

Installing central air conditioning during pre-occupancy finish-out was new construction. Installing it during remodeling or replacing an existing system was taxable on the total charge. Window units remained tangible personal property, so their sale, installation, and maintenance contracts were taxable under Rule 3.392.

What this means for you

The 1988 letter used the nature of the property, the timing and purpose of the installation, the repair percentage inside a maintenance contract, and the contract format to determine taxability. It also distinguished incorporated materials from tools consumed by the contractor.

Common questions

Was routine HVAC maintenance taxable? No, if it met the rule and repairs stayed at 5% or less.

Was commercial repair over the limit taxable? Yes, on the total charge.

Was repair labor on a rent house or apartment complex taxable? No.

Was a replacement central system in an existing commercial building taxable? Yes, as remodeling or replacement.

Were window-unit installation and maintenance taxable? Yes.

Citations and references

• 34 Tex. Admin. Code Rule 3.357, including subsections (a)(3), (a)(8), and (c)(2), applied to maintenance and repair.
• Rule 3.291, applied to contractors and new construction.
• Rule 3.392, applied to window-unit maintenance contracts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8803L0866B04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

March 1, 1988

Dear **:

Thank you for your recent letter requesting clarification of new sales
tax
rules which are applicable to your business. The following outlines your
company's Texas sales and use tax responsibilities for the numbered items
in
your letter dated February 6, 1988.

Question 1: A charge for labor to "maintain" real property is not
taxable.
If during the normal course of our maintenance work ( as outlined in the
enclosed maintenance contract) we change/clean filters, acidize units, or
change worn or broken belts, does the labor portion of the maintenance
be-
come taxable?

Answer: The labor is not taxable as long as the repairs do not exceed 5%
of the total maintenance contract and the definition in subsection (a)(3)
of Rule 3.357 is met.

Tax must be paid to your supplier at the time of purchase on the cost of
materials used in the maintenance contract. No tax will be charged to
your customer, including only "defined routine", as long as the mainte-
nance contract meets the previously noted definition.

Question 2: If labor/material is taxable on monthly maintenance for
a
customer who holds a Direct Pay Certificate, do we charge that customer
sales tax, or do we honor his Direct Pay Certificate?

Answer: Since maintenance is not taxable to the customer, no tax will be
charged. However, if you make separate sales of materials or perform
taxable work under Rule 3.357, the total charge is taxable and you may
honor the Direct Payment Exemption certificate. Work of this type would
be as shown on page 2, item 3 of your Full Maintenance Contract.

Question 3: Full Maintenance Contract (FMC) (copy enclosed):
a) If during the course of the month, the only work performed is as
outlined under the regular monthly maintenance, is the labor taxable?

Answer: No.

b) Is actual repair work done under a FMC contract taxable?

Answer: Please refer to Rule 3.357, subsection (c)(2) in reference to
the repair charges being 5% or less of the overall charge.

c) If repair work is taxable under the FMC and the contract is for
$1,500.00, do we charge the customer tax on the $1,500.00 and pay
tax on our cost of labor and material which might exceed the
$1,500.00 contract price?

Answer: The repair total apparently exceeds the 5% limit previously
noted. If this repair is performed on commercial real property, the
total charge would be taxable to the customer and materials purchased
specifically for this job would be purchased tax-free under a resale
certificate.

If this repair is performed on residential real property, tax should
be paid to the supplier and no tax will be charged to the customer.
Please refer to Rule 3.291 for contractors.

Question 4: On a residential air conditioning installation (lump
sum
contract), do we pay tax on cost of material? If so, do we pay at the
time of purchase from the supplier or can we pay it direct to the state
along with the rest of our state sales tax?

Answer: Please refer to Rule 3.291-Contractors. Tax must be paid on
supplier at time of purchase.

Question 5: On a commercial lump sum contract for a new
installation,
does the customer pay tax on the selling price of material or do we
pay tax on the cost of material? If we pay on the cost of material,
do we have to pay it to the supplier at the time of purchase, or can
we pay it to the state with the rest of our state sales tax?

Answer: Same as answer to question 4 if the job is new construction.

Question 6: If we have a lump sum contract with a general
contractor as
a sub-contractor, do we charge the general contractor tax? If the
general contractor has a Direct Pay Certificate can we honor that?

Answer: Please refer to Rule 3.291. A Direct Payment exemption may not
be accepted.

Question 7: Can you send us an example of an acceptable a) Resale
Sales
Tax Certificate b) Exempt Sales Tax Certificate and c) Direct Pay Sales
Tax Certificate?

Answer: Examples attached.

Question 8: Is freight taxable?

Answer: Freight is taxable if in connection with a taxable sale or
service.

Question 9: Is out of town mileage taxable?

Answer: Same as Question 8.

Question 10: Would the purchase of a grinding wheel totally consumed
during the process of putting a system in for the US Government be
taxable?

Answer: Yes. Only materials which are incorporated into and become part
of the real property are exempt.

Question 11: Would the purchase of expendable tools used during the
process
of putting in a system for the US Government be taxable?

Answer: Same as Question 10.

Question 12: If tax was charged in error to customers in January and paid
to
the State in February, should we issue credit to our customers and apply
for credit from the State? If so, how do we apply for credit from the
State?

Answer: Credit must first be issued to customer and then credit may be
taken on a subsequent return by reducing taxable sales for the period
in which the credit is issued.

Question 13: If we make repairs on a rent house or apartment complex and
bill
the owner of that rental property, is labor taxable?

Answer: No. Please refer to Rule 3.357, subsection (a)(8).

Question 14: Would the labor for the installation of a new air
conditioning
system in an existing commercial building be considered "new
installation"
and not be taxable, or would it be considered "remodel" and taxable?

Answer: If the air conditioning is installed as part of finish-out prior
to initial occupancy, the work is new construction subject to Rule 3.291.
If the system is installed as part of remodeling of an existing building
or replacement of a system, the labor (total charge) is taxable under
Rule 3.357.

If you also sell and install window unit type air conditioners, either
commercial or residential, the total charge to your customer is taxable.
Window air conditioners remain tangible personal property after installa-
tion. Maintenance contracts for these type units are also taxable under
Rule 3.392.

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,
(Mrs.) Jo Ann Dieck
Tax Policy Division