How did Texas distinguish new-construction and remodeling tax for signs attached to buildings or pylons?

Plain-English summary

The signs in the ruling were improvements to realty. A sign installed on a new building before occupancy, or a new pylon and sign erected from the ground up, was new construction. A sign ordered before occupancy but installed later because of delay was also treated as new construction.

Under a lump-sum new-construction contract, the sign company paid tax on its materials and did not collect tax from the customer. Under a separated new-construction contract, material charges were taxable and labor charges were not.

Replacing a sign, adding one to a previously occupied building, installing a new cabinet on an existing pylon, or adding signage later was remodeling, making the total customer charge taxable. The remodeler could buy incorporated sign materials tax-free for resale. A mixed contract had to separately state remodeling and new-construction charges.

Subcontractor treatment followed both the subcontractor's role and the prime contract. A subcontractor attaching a sign acted as a contractor or remodeler; a subcontractor only manufacturing the sign generally made a taxable sale, subject to resale-certificate treatment when the prime contractor would collect tax or operated under a separated new-construction contract.

Common questions

Was a sign on a previously occupied building new construction? No. It was remodeling and the total charge was taxable.

Was a completely new pole and sign new construction? Yes.

Could the company mix new construction and remodeling in one contract? Yes, but it had to state the remodeling charges separately.

Did a strip-center lease space change the rule? No. Prior occupancy, not building style, controlled the distinction described.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8904L0934G07

Original ruling text

April 21, 1989

Dear ***:

I just want to take a minute to acknowledge our phone conversation
and your follow-up letter. As we discussed, in each of the examples
you gave the signs are improvements to realty and your contracts
and billings do not make separate charges for material and labor.

Case One: A new building is erected and the sign company erects a
pole sign and installs either a cabinet sign or neon-lit channel
letters to the building. All taxable or materials only?

Answer: This job would be considered new construction. Since you
bill your customers a single amount for materials and labor, you
are considered to be a "Lump Sum" contractor. That means that you
would pay tax on all your materials at the time of purchase but
would not bill any tax to your customer. You would recoup all of
your costs, including the tax, and your profit in your lump sum
charge to your customer.

Please note:

When a sign company acts as a contractor and gives the customer
separate charges for materials and labor, the charge for labor is
not taxable while the charge for materials is taxable. You will
be treated as a contractor in the following situations:

• You sell and install a pylon sign. This would include your setting
  the pylon in the ground and attaching the sign.

• You manufacture or sell, and attach a sign to a building which is
  being constructed or which has been constructed but has not yet been
  occupied.

The rule that explains contractor's responsibilities is 3.291 and
is being sent under separate cover. Under this rule you may
operate as either a separated or a lump sum contractor at any
given time. You may operate as a lump sum contractor with one
customer and as a separated contractor with another but since the
tax consequences are different, you should become thoroughly
familiar with the rule.

Case Two: Same as case one except the building was existing and
had been vacated by the previous tenant. Would the new tenant's
wall sign be completely taxable or materials only? Also, if the
pole had been left by the previous tenant and a new sign was installed
on this pole, would it be completely taxable or materials only?

Answer: This job would be considered remodeling. That means your
total charge is subject to tax. But, since your charge is taxable,
you may buy the sign materials tax free from your supplier.

Case Three: Existing building with signage undergoes a building
remodel and the old building sign is removed. Is the new sign
that is installed considered a part of the building remodel and
therefore completely taxable? Also, if the owner contracts with
the sign company to demolish the existing pole sign and install a
completely new pole sign including new pole and foundation,
wouldn't this be a new addition to realty and therefore taxable on
materials only?

Answer: Replacing an existing sign or adding a sign to a building
that has been previously occupied is considered remodeling. The
total charge is taxable. When a new pole and sign are erected, the
project is considered new construction. The job would be taxed as
described in the answer to case one. If both new construction and
remodeling are performed under the same contract, you should state
the charges for remodeling separately from the charges for the new
construction. I'm sending you a copy of the repair and remodeling
rule (#3.357) under separate cover. Please refer to part (b)(7).

Question: Would it make any difference in case two or three if
the tenant was moving into a lease space in a strip center, instead
of a free standing building?

Answer: No. However, as we discussed, if the building or space
had not been previously occupied we will treat the sale and
installation of the sign as new construction. If the sign is added
after the building is occupied the work will be taxable as remodeling.

In our conversation you also asked how we would treat the addition
of a sign to a newly constructed building where the occupant had
ordered the sign before moving in but the sign could not be
installed until a later date. For the record, we would treat the
sign as new construction.

Question: If there is an existing double-pole pylon with some
signage on the poles, how is the tax collected if a new sign
cabinet with new faces is added to this structure?

Answer: The total charge would be taxable as remodeling.

Question: In the cases where signage would be taxed only on
materials, can one add more signage of the same type at a later
date and tax only the materials?

Answer: Signage added at a later time would be treated as remodeling
and would be taxable in total.

Question: Some of our signs are purchased from subcontractors in
completed form. If they separate their materials and labor, do I
collect tax on just their material or the total bill?

Answer: If the subcontractor is selling and attaching the sign to
the real property then he is acting as either a contractor or a
remodeler depending on the situation.

If the addition of the sign is remodeling the realty then you may
give the subcontractor a resale certificate in lieu of tax because
you will be charging tax to your customer on your total charge.

If the addition of the sign is new construction and you are acting
under a lump sum contract then you may simply pay tax to the
subcontractor on his material charges and you will incur no further
tax liability.

If the subcontractor is simply manufacturing a sign for you to
install then his total charge is taxable to you. However, in some
instances you may give the subcontractor a resale certificate in
lieu of tax. For example, if the sign installation constitutes
remodeling, then your total charge to your customer is taxable.
That means you can buy the sign tax free. The same rule would
apply if you were doing new construction under a contract that
separates material and labor charges. If your contract were for
a lump sum amount then you would simply pay tax to the company
that made the sign and you would have no further tax liability.

Please feel free to call or write me if you have questions. You
can reach me at 800-531-5441 or FAX 512-475-0900.

Sincerely,

Al Van Allen
Taxability Section
Legal Services Division