How did Texas sales tax apply to a contractor expanding an underground sprinkler system at an apartment complex?

Plain-English summary

A contractor was hired to expand an existing irrigation or underground sprinkler system at an apartment complex. The Comptroller treated the apartment complex as residential property, making the expansion an improvement to residential real property under Rule 3.291(a)(2). The labor charge was not taxable.

Under a lump-sum contract, where material and labor charges were not separated, the contractor had to pay tax on all materials, supplies, and equipment used or incorporated into the property. The contractor's lump-sum charge to the customer was not taxable under Rule 3.291(b)(2).

Under a separated contract, the contractor could issue a resale certificate for materials incorporated into the realty and had to collect tax from the customer on the separately stated material charge. The contractor still had to pay tax when buying supplies and equipment used on the job, under Rule 3.291(b)(3).

What this means for you

The contract format changed who paid or collected tax on incorporated materials, but the residential-improvement labor remained nontaxable under the ruling.

Common questions

Was the apartment complex residential property? Yes.

Was labor to expand the sprinkler system taxable? No.

What happened under a lump-sum contract? The contractor paid tax on materials, supplies, and equipment; its charge to the customer was not taxable.

What happened under a separated contract? The contractor could buy incorporated materials for resale and had to tax the customer on the material charge, while paying tax on job supplies and equipment.

Citations and references

• 34 Tex. Admin. Code § 3.291(a)(2) (residential real property)
• 34 Tex. Admin. Code § 3.291(b)(2) (lump-sum contracts)
• 34 Tex. Admin. Code § 3.291(b)(3) (separated contracts)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9101L1066G09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

January 14, 1991

Dear ****:

We received your letter stating that you have been contracted
to complete an irrigation system or underground sprinkler system at an
apartment complex. You questioned the taxability of this contract.

An apartment complex is considered residential property;
there-fore, you are improving residential real property when you ex-
pand the old sprinkler system to cover more area. See
section (a)(2) of the enclosed Rule 3.291 relating to contractors.

The labor charge to improve residential real property is not
tax-able. You should follow the guidelines in Rule 3.291. If you have a
lump-sum contract with your customer meaning that the charge
for materials is not separated from the charge for labor,
then
you will pay tax on all materials, supplies, and equipment
used
or incorporated into the real property. Your charge to your
cus-
tomer would not be taxable. See section (b)(2) of Rule
3.291.

If you have a separated contract with your customer meaning
that you separate the charge for materials incorporated into the real-
ty from the charge for labor, then you should issue a resale
cer-tificate in lieu of the tax for all materials incorporated into the real
property. Your charge to your customer for the materials incorporated into the
realty is taxable. You should pay tax on all supplies and equipment used on
the job at the time of pur-chase. See section (b)(3) of the enclosed Rule
3.291.

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

If you have any questions you may call or write Tax
Administra-tion Division. You may call toll free 1- 800- 252- 5555, or our
regular number is 512/463-4600. My extension is 3-4658.

Sincerely,
Sherry Buckley
Tax Administration Division