In a nonresidential remodeling job, which installation, freight, and service charges are taxable, and which stand-alone services can be excluded?

Plain-English summary

The owner of a Texas hotel undergoing renovation asked how sales tax applies to the various costs of the job. The Comptroller walked through the rules for installation charges, freight and warehousing, and "unrelated" services that can be carved out of the tax base.

Installation charges follow the date they were performed:

• Since October 1, 1987, the charge for all installation connected with the sale of tangible personal property is taxable, except for items that become a permanent improvement to real property.
• Since January 1, 1988, installation of TPP that becomes a permanent improvement to realty is taxable when it is part of the charge to repair or remodel nonresidential real property. Installation that is part of repairing/remodeling residential real property, or part of new construction (residential or nonresidential), remains nontaxable.
• If someone other than the seller of the furniture, fixtures, or equipment does the installation, that third party's installation charge is not taxable.

Warehousing of construction materials and freight billed by the renovator are taxable. The renovator charges tax on the total contract price less any separately stated unrelated services.

A service is unrelated (and excludable) only if it meets all three tests: (A) it is not a service involving the repair, remodeling, or restoration of real property, nor otherwise taxed under Tax Code Chapter 151; (B) it is of a type commonly provided on a stand-alone basis; and (C) its performance is distinct and identifiable. Examples include engineering plans or architectural designs. The Comptroller also concluded that a construction manager's fee — for arranging contracts and overseeing the renovation, where the manager does not pay the contractors and is not responsible for their work — is a nontaxable service. The letter enclosed Rule 3.357 (repair/remodeling of nonresidential real property).

What this means for you

Owners and renovators of nonresidential property

Expect installation tied to a nonresidential repair or remodel to be taxable, along with the renovator's freight and material-warehousing charges. Tax is computed on the full contract price, so plan your invoicing around what can legitimately be separated out.

Separating out unrelated services

You can exclude a service from the tax base only if it truly stands alone — it is not itself a taxable real-property or Chapter 151 service, it is commonly sold on its own, and it is distinct and identifiable. Engineering and architectural design work are classic examples. Separately state these charges.

Construction managers

A construction manager who only arranges and oversees the contracts — without paying the contractors or being responsible for their work — is providing a nontaxable service. If the manager takes on the contractors' work or payment, the analysis could change.

New construction and residential work

Installation that is part of new construction (residential or nonresidential) or the repair/remodel of residential real property is not taxable — the January 1, 1988 rule taxes installation only in the nonresidential repair/remodel context.

Common questions

Q: Is installation taxable in a nonresidential hotel remodel?
A: Yes. Since January 1, 1988, installation of items that become permanent improvements to realty is taxable when it is part of repairing or remodeling nonresidential real property.

Q: Are freight and material warehousing taxable?
A: Yes, when billed by the renovator as part of the job, freight and the warehousing of construction materials are taxable.

Q: Can I exclude design or engineering fees?
A: Yes, if separately stated. Engineering plans and architectural designs are examples of unrelated services that can be excluded from the tax base.

Q: Is a construction manager's fee taxable?
A: No, where the manager only arranges and oversees the contracts and does not pay the contractors or take responsibility for their work — that fee is a nontaxable service.

Q: What about new construction or residential remodeling?
A: Installation that is part of new construction (residential or nonresidential) or the repair/remodel of residential real property remains nontaxable.

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

Rule enclosed: 34 Tex. Admin. Code § 3.357 — repair, remodeling, and restoration of nonresidential real property (governs the renovator's treatment). The letter also references the effective dates of the installation rules (October 1, 1987 and January 1, 1988) and the three-part "unrelated service" test.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8809L0897G05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller September 7, 1988

Dear ****:

Thank you for your letter of August 25, 1988 regarding the taxability of
costs associated with the renovation of your hotel in Texas.

Concerning installation charges:

A) Effective October 1, 1987, the charge for all installation connected
with the sale of tangible personal property is taxable, except for items that
become a permanent improvement to real property when installed.

B) Effective January 1, 1988, the charge for installation connected with
the sale of tangible personal property that becomes a permanent improvement to
realty, is taxable when it is a part of the charge to repair or remodel
nonresidential real property. Installation which is part of the charge for the
repair and remodeling of residential real property or new construction (both
residential and nonresidential) remains nontaxable.

C) If someone other than the seller of the furniture, fixtures, or
equipment does the installation, then the installation charge by that third
party is not taxable.

The warehousing of construction materials and any freight charges
associated with the sale of tangible personal property billed by the renovator
are taxable. The renovator should charge tax on the total price of the
contract less any separately stated unrelated services. Services are
considered unrelated if:

(A) it is not a service involving the repair, remodeling, or restoration
of real property, nor a service taxed under other provisions of the Tax Code,
Chapter 151,

(B) it is of a type which is commonly provided on a stand-alone basis,
and

(C) the performance of the unrelated service is distinct and
identifiable. Examples of an unrelated service which may be excluded from the
tax base include engineering plans or architectural designs.

In a phone conversation on August 31, 1988, * stated that the
* Hotel intends to engage a construction manager who will receive a fee
for arranging contracts between the ** and various contractors, and
oversee the, completion of the renovation. The construction manager will not
pay the contractors, nor will he be responsible for their work. In this
situation, the fee paid to the construction manager will be considered a
nontaxable service. Enclosed is Rule 3.357 which is to be followed by
repairmen/remodelers of nonresidential real property.

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
Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Julie Pesl
Tax Correspondence