Is testing and balancing air-conditioning and heating systems taxable in Texas, and does separately stating the testing matter?

Plain-English summary

A contractor that tests and balances air-conditioning and heating systems — measuring airflow room to room and temperature changes, then adjusting the valves that control water flow through the coils so the system runs efficiently — asked how Texas sales tax applies. The contractor explained its billings are all labor, billed lump-sum covering both testing and balancing (roughly 20% testing, 80% balancing), that essentially all systems need balancing, and that balancing provides either the initial setting during new construction or re-setting during renovation.

The Comptroller drew two lines:

• Balancing the system is treated as real-property repair/remodeling. It is not taxable when performed in connection with new construction or residential renovations (remodeling or repairs). It is taxable in total when done in connection with non-residential renovations (remodeling or repair).
• Testing services are not taxable on any type of contract — but only if they are separately stated and identified as testing on the contract or billing. (The letter enclosed Rule 3.357 on real property repair and remodeling.)

What this means for you

HVAC test-and-balance contractors

Whether your balancing work is taxable follows the property and job type: nontaxable for new construction and residential renovations, but fully taxable for non-residential renovations. Since balancing is 80% of a typical lump-sum charge here, the property type drives most of the tax result.

Separately state your testing

Testing is never taxable — if you break it out. Bundled into a lump-sum balancing charge on a non-residential renovation, the whole thing is taxable. Identify the testing portion as its own separately stated line to keep it nontaxable on any contract.

Common questions

Q: Is balancing an HVAC system taxable in Texas?
A: It depends on the job. It is not taxable for new construction or residential renovations, but it is taxable in total for non-residential renovations (remodeling or repair).

Q: Are the testing services taxable?
A: Not if they are separately stated and identified as testing on your contract or billing — then testing is nontaxable on any type of contract.

Q: What happens if I bill testing and balancing together in one lump sum?
A: On a taxable (non-residential renovation) job, the entire lump-sum charge is taxable. Separately stating the testing is what preserves its nontaxable treatment.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 — real property repair and remodeling; enclosed with the letter as the basis for taxing non-residential renovation work while exempting new-construction and residential work.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8807L0888G11

Original ruling text

July 25, 1988

Dear ***:

Thank you for your recent letter regarding the taxability of tests and
services you perform on air conditioning/heating systems.

Your letter explains that you measure the amounts of air moving from room
to room and the temperature increase and decrease caused by the air
conditioner/ heating systems. You will then adjust the valves that control the
water flowing through the coils of these systems. This adjustment (balancing)
causes the system to operate in the more efficient capacity to maintain the
desired temperature for your client. During our telephone conversation on July
22, 1988, you provided the following additional information:

1. Billings are all for labor.
2. Billings are lump-sum, including both testing and balancing.
3. You estimated 20% of this lump-sum charge is for testing and 80% is
   for balancing.
4. Generally all systems require balancing.
5. The balancing provides either initial setting of the system during
   new construction or re-setting of the system during renovation.

Your services are non-taxable when performed in connection with new
construction and residential renovations (remodeling or repairs). Your
services are taxable in total when done in connection with non-residential
renovations (remodeling or repair).

Testing services on any type contract are not taxable if separately
stated and identified as testing on your contracts/billings. Enclosed is Rule
3.357 RE: Real Property Repair and Remodeling.

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

You may write at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence