How did Texas tax fire-protection systems installed in new, residential, and existing nonresidential buildings?

Plain-English summary

Installing a fire-protection system as part of a building's initial construction was new construction. Finish-out qualified only when the structure was not ready for occupancy before the finish-out. Labor for new construction was nontaxable.

Under a lump-sum new-construction contract, the contractor was the consumer and paid tax on incorporated materials. Under a separated contract, the contractor acted as a retailer, could buy incorporated items for resale, and collected tax on the agreed material price. Supplies and equipment not incorporated into the realty remained taxable to the contractor.

Adding a new system after a nonresidential building was ready for occupancy was remodeling, making the total customer charge taxable. Labor to repair, remodel, or upgrade residential real property was nontaxable under the historical rules described.

Texas allowed credit against use tax on the contractor's own-use property for legally imposed Louisiana state and local tax paid on the same property. The credit did not offset sales tax the contractor had to collect from customers, and generally did not apply to incorporated materials except in lump-sum new construction.

Common questions

Was a new system in an existing nonresidential building new construction? No. It was taxable remodeling.

Who paid tax under a lump-sum new-construction contract? The contractor paid tax on materials and did not tax the labor charge.

Could a separated contractor buy incorporated materials for resale? Yes.

Could Louisiana tax always offset Texas tax? No. The credit was limited to use tax on the contractor's own-use property under the conditions stated.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8904L0934F01

Original ruling text

April 5, 1989

Dear **:

I am responding to your letter requesting clarification on your
responsibilities regarding sales and installation of fire protection systems.
Again, I apologize for the delay in providing this response.

It appears from your statements that you have some misunderstanding regarding
your responsibilities as a new construction contractor versus those as a
repair-person or remodeler. I will restate your sales tax responsibilities for
Texas in each of these aspects of your work.

First of all, the sale and installation of fire protection equipment that
becomes an improvement to realty when installed falls into two distinct
taxability categories even though the "job" may be identical. Also, each
category has specific responsibilities relative to Texas taxes. The first
category is "new construction". New construction includes the installation of
fire protection equipment into the initial building of both residential or
non-residential real property. "New construction" is defined in Rule 3.357,
enclosed, and also includes any repair or remodeling of residential real
property. Finish out may be included as new construction only when the building
or structure was not ready for occupancy before the finish out was completed.

As I explained in previous letters, the responsibilities of a contractor
performing new construction are explained in Rule 3.291, enclosed. The
responsibilities are based upon whether the contract to improve the realty is
lump-sum or separated. Under the terms of a lump-sum contract, the contractor
is the consumer and owes Texas taxes on the materials used in Texas. Under the
terms of a separated contract, the contractor is a retailer and must collect
and remit Texas sales or use taxes based upon the agreed contract price of the
materials. The charge for new construction labor is not taxable. In either
case, the contractor is the consumer of supplies, materials, and equipment used
in Texas to perform the contract when these items are not physically
incorporated into the realty being improved.

Most changes/upgrades (other than repair or restoration) made to the building
once it is ready for occupancy are considered remodeling. This includes the
addition of a new fire protection system after the building is completed, i.e.
the sale and installation of a new fire protection system into an existing
building is remodeling the existing building. The total charge to the customer
for remodeling non-residential real property is taxable.

The information presented thus far serves as a correction of statements 2 and 3
in your letter dated February 10, 1989. Item 3 is correct except for the
clarification that the total charge to repair, remodel, or upgrade existing
non-residential real property is taxable. The labor to repair, remodel, or
upgrade residential real property is not taxable.

The following information is in response to question 4. As a member of the
multistate compact, Texas will allow a credit, against Texas use tax due, for
combined amounts of any legally imposed sales or use taxes paid on the same
property to another state or any subdivision of another state. When your
company purchases items for it's own use and pays taxes that are legally due
and payable to Louisiana and its subdivisions and later brings these same items
(equipment, supplies, etc.) into Texas for your company's own use in the
performance of both new construction and taxable services, you may claim a
credit against Texas use taxes due based upon taxes paid to the State of
Louisiana and its subdivisions. Credit cannot be taken against sales taxes that
your company must collect from your customer based upon the agreed contract
price of materials in a separated new-construction contract or the taxes due
based upon the performance of a taxable service: non-residential repair,
remodeling, or restoration. That is credit may not be taken on materials
incorporated into the customer's property even though Louisiana taxes may have
been paid on the materials, except those used in lump-sum new construction.

Items that are purchased in Texas for your company's use in the performance of
both new construction and repair, restoration, or remodeling contracts are
taxable to your company. Items that are purchased in Texas that will be
incorporated into the property being improved are taxable to your company if
the work is being performed pursuant to a lump-sum contract for new
construction or for residential repair, restoration, or remodeling. Tax should
be paid to the Texas vendor at the time of purchase in these situations.

However, items that are purchased in Texas that will be incorporated into the
realty being improved pursuant to the terms of a separated contract for new
construction, residential repair, restoration, or remodeling, and
non-residential repair, restoration, or remodeling may be purchased tax-free.
Your company should issue a properly completed and valid Texas resale
certificate to your supplier at the time of purchase of these items. If Texas
taxes have been paid to the Texas supplier on such items that could have been
purchased for resale, then a refund may be obtained from the supplier or credit
may be taken on your company's sales tax return. I am enclosing the rule and
the procedures to follow in this situation.

In response to statements 1 and 6, I am enclosing an application packet. You
should complete the application and return it to this agency in order for the
Texas sales/use tax permit to be issued. The sales and use taxes for the State
of Texas and for all the taxing subdivisions of the State of Texas are remitted
on one return with one check to this agency. The taxes are then distributed to
each taxing subdivision according to the information on your return.

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

You may write Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence

February 10, 1989

Comptroller of Public Accounts
State of Texas
Austin, Texas 78774

Tax Correspondence

Dear Tax Policy Division:

After corresponding with you and Mr. **, and obtaining additional
information from our Association, we believe the following will apply to our
"sales" in Texas as a fire protection contractor. We will appreciate your
correction of any misunderstanding.

1. All taxes we collect, state, city, counties, will be remitted to you; none
   direct to those agencies.

2. If we make a new system installation in existing or new construction,
   including additions, or completion of lease/unfinished areas, and it is for a
   lump sum, we collect no tax from our customer.

If it is for a separated contract, when the agreed contract price is divided
into separately agreed upon amounts for labor and material (or it is a
cost-plus billing), then we must collect tax on the entire billing amount and
make proper remittance.

We will need from your office resale certificates which we can issue to
suppliers instead of paying them sales tax.

3. If we perform any repair, remodeling, or upgrading of existing property,
   regardless of lump-sum or separated status, we collect and remit sales tax on
   entire billing amount.

4. We pay 4% Louisiana state, 2% ** city, and 1 1/2% ****
   parish (county) taxes on all material purchased for our inventory, from which
   we ship all fabricated material used by us in our work. How will we be
   credited for these percentages/amounts we pay these agencies?

5. We do make minor and incidental purchases from Texas vendors while we
   install our systems. In these instances, sales taxes are paid by us to the
   vendor.

6. When will we be assigned a Taxpayer Number (formerly No. **)?

We thank you for your cooperation with this matter.

Yours very truly,