How did Texas tax a separated contract containing both new construction and repair or remodeling work?

Plain-English summary

A contractor asked how to handle a contract covering both new construction and repair or remodeling. The Comptroller said the percentage assigned to repair or remodeling could not simply be applied to the total contract price.

The letter said this treatment applied only to a separated contract. Materials were always taxable because the contract separated materials from labor, and the repair-or-remodeling percentage applied only to the labor charge. The letter described lump-sum contracts as totally taxable under the rule then in effect.

Each subcontractor also had to determine what percentage of its own labor was taxable. The contractor then combined the taxable labor from the subcontracts; it could not assume that every subcontract had the same taxable-labor percentage.

What this means for you

For a mixed construction job under the 1988 rule, separating materials and labor did not permit a contractor to pay tax on only a percentage of the materials. The letter treated all materials as taxable and limited the percentage calculation to labor.

The letter also distinguished local-tax sourcing for the two parts of the job. It said new-construction local tax followed the job site, while repair-and-remodeling tax was allocated from the permitted place of business where three or more orders were taken. It directed the taxpayer to use Rules 3.374 and 3.375 for county tax by substituting “county” for “city” and using the applicable county rates.

Common questions

Could the contractor tax the repair percentage of the entire job? No. The letter said the percentage applied only to labor, not to the total charge including materials.

Were materials taxable? Yes. Under the separated-contract treatment described in the letter, the materials were always taxable.

Could the contractor give every subcontractor the same taxable percentage? No. Each subcontractor had to determine the taxable-labor percentage for its own subcontract.

Citations and references

• 34 Tex. Admin. Code Rules 3.374 and 3.375, cited for the then-current city and county sales-and-use-tax allocation procedures.
• The letter stated that Rule numbers 3.252 and 3.253 had not been assigned and that no rules then carried the requested county-allocation titles.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8805L0902D07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller May 17, 1988

Dear **:

First of all I want to apologize for taking so long to respond to your
letter
requesting clarification on the Real Property Repair and Remodeling rule
of
December 10, 1987.

This rule has been revised. I am sending you the most current version.
Your
questions dealt with the provision concerning jobs that involve both new
construction and repair or remodeling. Following are your questions and
an
explanation of the rule.

Does this mean that once it has been determined what percentage of
the work is remodel or repair and it is set forth in the contract,
all the Contractor needs to do is pay the tax on the percentage of
the total job that corresponds to the remodel or repair? Or does
the Contractor have to break out each invoice and determine whether
it is for the new construction or remodel?

If all suppliers and subcontractors on the project are given Tax
Resale Certificates and tax is paid on the percentage of the bottom
line, doesn't this mean we would only be paying tax on part of the
material. Although the labor on new construction might be tax
exempt, the materials on most jobs is taxable. Do you have any
guidelines or suggestions to help us comply with the new
regulations?

In answer to your first question, no. It would not be correct for the
contractor to pay or collect tax on the percentage of the total job that
corresponds to the remodel or repair. Don't forget that this provision
applies only to separated contracts. Lump-sum contracts are totally
taxable
as explained in paragraph (b)(3) of the rule. Because the contract must
separate materials and labor before this provision applies, the materials
will always be taxable. The percentage applies only to the labor and not
to
the total job including materials.

The remaining questions involve supplies and subcontractors. As
explained
before, the percentage does not apply to the bottom line, only to the
labor.
Each subcontractor is a contractor and each one would have to comply with
the
provision and determine what percentage of the subcontract is taxable
labor.
That same percentage of the labor for each subcontract would then be
taxable
to the customer. When all the taxable labor for all subcontracts is
added
together, a new percentage to the total labor will result unless each
subcontract contains the same percentage of taxable labor.

Enclosed are the rules you requested except for rule numbers 3.252 and
3.253.
Those two rule numbers have not yet been assigned to any rules, nor are
there
rules by the titles "Collection and Allocation of County Sales Tax or
Collection and Allocation of County Use Tax". However, the county sales
and
use tax is allocated in the same way as the city sales and use tax. You
should use the same procedures for county tax allocation as you do for
city
tax allocation, the same rules (3.374 and 3.375) apply if you substitute
"county" for "city" and use the applicable county rates.

Incidentally, although you did not ask, I want to mention that the local
tax
on repair and remodeling is not allocated the same as for new
construction
under separated contracts. Local taxes for the new construction or job
site,
as in the past, but the repair and remodeling is allocated based on the
place
of business where three or more order are taken and for which a sales tax
permit has been issued.

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