How did Texas tax residential and commercial reroofing under lump-sum and separated contracts?

Plain-English summary

A roofing company used subcontractors to remove and reinstall air-conditioning, gas, and electrical property while reroofing buildings.

For new construction and residential remodeling, including homes and apartments, the roofer was a contractor. Under a separated customer contract, incorporated materials were taxable to the customer and could be bought for resale; labor was not taxable. Under a lump-sum contract, the roofer consumed the incorporated materials and paid tax to suppliers.

Subcontractor treatment also depended on contract form. Under a separated realty-improvement subcontract, the roofer could buy incorporated materials for resale. Under a lump sum, the subcontractor paid tax on those materials.

Repairs to movable equipment damaged during reroofing were taxable to the roofer and could not be bought for resale. Merely removing and reinstalling tangible property was nontaxable, but reassembly and related charges were taxable.

For an existing nonresidential building, the full reroofing charge—including labor and materials—was taxable. Incorporated materials and essential repair or remodeling services could be purchased for resale, but repairs to damaged tangible property could not.

What this means for you

Residential and commercial reroofing did not share one rule. Property classification, customer contract form, subcontract form, and whether work affected realty or movable equipment each mattered.

Common questions

Were materials taxable under a separated residential contract? Yes to the customer; the roofer could buy them for resale.

Who paid tax on materials under a residential lump sum? The roofer.

Was existing commercial reroofing fully taxable? Yes.

Was merely removing and reinstalling equipment taxable? No, but reassembly was taxable.

Could repairs to damaged movable equipment be bought for resale? No.

Citations and references

• 34 Tex. Admin. Code Rule 3.357, including subsection (d)(2) (real-property repair and remodeling)
• 34 Tex. Admin. Code Rule 3.291 (contractors)
• 34 Tex. Admin. Code Rule 3.292 (repair of tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9010L1049A07

Original ruling text

October 10, 1990

Dear **:

In your letter of September 21, you requested information regarding the
taxability of repair charges as a result of re-roofing a structure.

You indicate that you re-roof buildings under a lump-sum contract. You use
subcontractors to remove and reinstall air conditioning and various gas or
electric equipment or facilities. When you "tear-off" an old roof you increase
the price for possible damage to existing facilities and equipment.

First, your company is treated as a contractor for sales tax purposes when
your company improves real property that qualifies as "new construction" as
defined in the enclosed Comptroller's Rule 3.357 (Real Property Repair and
Remodeling) or repairs or remodels residential real property. In particular,
residential real property includes homes and apartment complexes. As a
contractor, your company's tax responsibilities depend on whether the contract
between your company and the customer is a "lump-sum contract" or "separated
contract" as defined in Comptroller's Rule 3.291 (Contractors).

Separated contract

If the contract is a separated contract, your company is considered the
retailer of all materials physically incorporated into the realty.
Therefore, charges for these materials (but not labor) are taxable.

Under these circumstances, your company should issue a resale certificate to
suppliers in lieu of sales tax on materials incorporated into the customer's
realty.

If the subcontractor is improving realty (such as repairing realty or
removing and re-installing realty), your company's tax responsibilities for
these services depends on the contract between your company and the
subcontractor. If the contract is a separated contract, your company may issue
a resale certificate to the subcontractor in lieu of tax on materials that the
subcontractor physically incorporates into the realty. If the contract is a
lump-sum contract, the subcontractor should pay tax on all materials
incorporated into the realty (i.e., your company wouldn't owe tax on the
charges by the subcontractor).

Lump-sum contract

If the contract between your company and the customer is a lump-sum contract,
you are considered the consumer of the materials incorporated into the realty.
In this case, you should pay tax to your suppliers on the materials
incorporated into the realty.

If your company hires a subcontractor to improve realty, the materials
charge is taxable if the contract with the subcontractor is a separated
contract. As I indicated above, the subcontractor should pay tax on all
materials incorporated into the realty under a lump-sum contract.

In either case (i.e., whether your company's contract with the customer is
separated or lump-sum), your company may not issue a resale certificate to
subcontractors who perform taxable repair or processing on tangible personal
property which isn't incorporated into the realty. For example, if your company
hires a subcontractor to repair equipment (which isn't an improvement to
realty) damaged as a result of your re-roofing, the total charge for the
repair is taxable to your company. You should note that charges to merely
remove and reinstall tangible personal property aren't taxable while charges
for re-assembly (and any related charges) are taxable. I have also enclosed
Comptroller's Rule 3.292 ( Repair, Remodeling, Maintenance and Restoration
of Tangible Personal Property) which addresses the taxability of repairs to
tangible personal property.

Second, the total charge to repair or remodel nonresidential real property is
taxable as indicated in Rule 3.357. Therefore, the labor, materials, and
other charges to re-roof a nonresidential building are taxable.

If your company is re-roofing a nonresidential building, your company may
issue a resale certificate to suppliers in lieu of tax on materials
incorporated into the customer's realty. In addition, your company may issue
a resale certificate in lieu of tax on services which are transferred as an
integral part of the taxable repair or remodeling activity [Rule 3.357(d) (2)]
Therefore, your company may issue a resale certificate to subcontractors on
repair and remodeling services if the services are essential to the
performance of your company's taxable services. However, you may not issue
& resale certificate on repairs to tangible personal property damaged as a
result of your activities.

Finally, you should consult Rule 3.291 regarding the taxability of supplies,
equipment, and other tangible personal property used in performing your
contracts.

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

If you have any questions, please contact Tax Correspondence. You may call
toll free 1-800-252-5555, or our regular number is 512/463-4600. My extension
is 3-4662. You may write me at Tax Correspondence, Comptroller of Public
Accounts.

Sincerely,

Bob Jeffcoat
Tax Correspondence