How did Texas tax reroofing an apartment building that also contained an insurance office or other commercial space?

Plain-English summary

An apartment building used as a family dwelling was residential property, and repair labor on residential property was not taxable. The building at issue also contained an insurance office, so the Comptroller applied a mixed-use rule.

If the nonresidential space was 5% or less of the structure's total space, the entire building was treated as residential and the repair or remodeling labor was not taxed. If the nonresidential space exceeded 5%, the contract was treated as nonresidential and taxable unless the nontaxable labor on the residential portion was separately identified.

Materials were taxable in either case. A contract mixing taxable and nontaxable labor was taxable in full unless the nontaxable portion was separately stated, and both parties had to keep documentation clearly defining the work.

What this means for you

Under this 1988 guidance, the amount of commercial space and the invoice detail both mattered. A small commercial area at or below the 5% threshold did not change the residential treatment; above that threshold, separately stating residential labor preserved its nontaxable treatment.

Common questions

Were roofing materials taxable? Yes, regardless of the building's classification.

What if commercial space was 5% or less? The entire structure was residential, and repair or remodeling labor was not taxed.

What if commercial space exceeded 5%? The contract was treated as nonresidential, but separately identified residential labor was not taxed under the letter's mixed-labor instructions.

Who had to keep documentation? Both parties to the contract.

Citations and references

The letter referred to an enclosed rule for mixed residential and commercial real-property work but did not identify the rule number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8804L0879C05

Original ruling text

April 28, 1988

Dear ***:

Your letter requesting confirmation of information received by a telephone
conversation with Lonnie Cantu was forwarded to me for response. You stated
that you re-roofed an apartment building that has an insurance office
downstairs. You were told that the total contract price would be exempt
from sales tax, and that the answer you received had been confirmed with
Mona Shoemate of the sales tax policy section.

An apartment building used as a family dwelling is a type of residential
property. Repair to residential property is not taxable. Because you
explain that the building also has an insurance office downstairs
(non-residential) then you must look further into the rule for the answer.
Repair, restoration, or remodeling performed upon a structure which is
used both for residential and commercial purposes will be taxable in total
unless the labor on the residential portion is separately identified. If the
labor to repair the residence is separately stated, then it is not taxed.
Materials are taxable in either instance. If the non-residential space (insurance office,
apartment manager's office, etc.) is 5.0% or less of the total space of the residential
structure then the entire structure is considered residential; the total repair or
remodeling contract is treated as residential and the labor is not taxed.
However, if the non-residential space is more than 5.0% of the structure
then the total contract is considered to be the repair or remodeling of
non-residential property and is taxable.

Contracts that contain both taxable labor and non-taxable labor will be
taxed in total unless the charge for the non-taxable portion(s) is
separately stated. It is the responsibility of both parties to the
contract to retain documentation that clearly defines the work being performed.
Examples of proper documentation is included in the rule.

I hope this explanation is helpful to you and I am including the rule for
your reference. Because I am not privileged to the specific information
relayed in the aforementioned telephone conversation, I have responded in a
general manner. If the circumstances surrounding this specific contract
meets the qualifications so that the total contract is nontaxable, then
your previous answer is correct. If not, please call or write for specific
clarification.

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

You may write me at the Tax Policy Division.

Sincerely,
Tax Policy Division