How could a Texas elevator contract combining maintenance and repairs avoid tax on its full price?

Plain-English summary

An elevator contract covered both maintenance and repairs to real-property improvements. Without separating the charges, repairs exceeding 5% of the contract made the entire contract price taxable.

Instead of taxing the full billing, the provider could review the previous year's work orders, calculate the percentage attributable to nonresidential real-property repairs, separately state that percentage in the current contract, and tax it. A reasonable estimate could be used for an original maintenance contract.

Using that formula prevented the entire maintenance contract from becoming taxable even if the actual repair percentage later exceeded the projection. The provider had to tell each customer the taxable percentage and keep records supporting its figures.

What this means for you

The letter offered a documented allocation method for a contract whose repair share was unknown at signing. Separate identification, customer notice, and records were essential.

Common questions

When did the whole contract become taxable? When repair charges exceeded 5% and were not separately identified.

Could the provider use the prior year's repair percentage? Yes.

What about a new contract with no history? A reasonable estimate could be used.

What if actual repairs later exceeded the estimate? The whole contract did not become taxable solely for that reason if the formula was used.

Did customers need notice? Yes, and the provider had to retain supporting records.

Citations and references

The letter did not cite a specific statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9011L1058G01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 9, 1990

Dear **:

I have reviewed your contract with ** and agree that it calls
for both maintenance and needed repairs to improvements to real
property. In this type contract, if the charges for repair exceed 5%,
the total contract price will be taxable unless the charges for re-
pairs are separately identified.

Since *** doesn't know when the contract is entered into what
percentage of their charges to allocate to maintenance and repair
they are apparently charging tax on their total billing. As an al-
ternative to this, carrier may elect to:

*review their work orders and compute the percentage of the
prior years contract that was attributable to repairs to
non-residential real property and separately identify this
percentage (in the current contract) as charges for repairs
and tax that amount. On original maintenance contracts, a
reasonable estimate may be used.

If this formula is used, the entire maintenance contract would not
become subject to sales tax even if the actual repair percentage ex-
ceeded the projection. However, ** would need to notify each
customer of the taxable percentage used and retain records document
the accuracy of their figures.

This opinion is based on the facts you presented. Other facts, though
similar, may yield different results.

If you have questions or need more information, please call our toll-
free number 1-800-531-5441. My direct line number is 463-4680 [FAX
(512) 475-0900]. You may write to me in care of Taxability Section.

Sincerely,
Al Van Allen
Taxability Section
Legal services Division