How did Texas tax new sprinkler systems, residential and commercial repairs, and unprocessed materials used in the work?

Plain-English summary

A lawn-sprinkler system was an improvement to realty. New construction and residential repair followed contractor rules: lump-sum contractors paid tax on materials and charged the customer no tax; separated contractors collected tax on incorporated materials but not labor or design.

Nonresidential repair or remodeling was a taxable service on the entire charge, including labor, materials, overhead, and passed-through expenses.

The January 1992 correction withdrew prior advice about unprocessed sand, gravel, dirt, and soil. Although the supplier did not charge the contractor tax on those unprocessed materials, the contractor had to include them in the taxable customer charge when transferred through nonresidential repair. Earlier incorrect advice could support detrimental reliance only until the contractor received this correction.

What this means for you

Sprinkler contractors should distinguish new or residential work from commercial repair and keep the correction with the original ruling. Separately stating unprocessed materials did not remove them from a taxable nonresidential-service price.

Common questions

Was commercial sprinkler repair taxable? Yes, on the full charge. Did residential repair follow the same rule? No, it followed contractor treatment. Could unprocessed material be excluded from commercial repair? No.

Citations and references

• 34 Tex. Admin. Code Rules 3.291, 3.357, and 3.338
• 34 Tex. Admin. Code Rule 3.285 (STAR's later resale-certificate alert)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1149G06

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

January 15, 1992

Dear **:

I am writing to correct some misinformation contained in my

letter of May 10, 1991, regarding the design and installation

of lawn sprinklers.

On page 2 of the letter, I wrote the following:

Special note: Sale and delivery of unprocessed sand, gravel,

dirt, soil and similar materials is a nontaxable service.

(Simply washing, drying, sorting, sizing or screening these

materials is not processing).

You may exclude such a charge from your materials charges under

a separated contract for new construction or a separated

contract for repair or remodeling of a residential sprinkler

system. Under a contract for repair or remodeling of a nonresidential

sprinkler system, you do not have to collect tax on the unprocessed

materials if you separately state and clearly identify the charge.

However, if the materials are sold in a processed state (crushed,

or mixed with other materials), then they are no longer exempt,

and are treated the same as the other materials that you incorporate

into the customer's property.

(Emphasis added.) The underlined sentence is incorrect. Under a

contract for repair or remodeling of a nonresidential sprinkler

system, you must collect tax on the total charge to the customer,

including any charges for unprocessed materials transferred as

part of the taxable service. (Your supplier of unprocessed materials

will not charge tax to you on the unprocessed materials,

though, because by policy he is considered to be performing a

nontaxable service for you.)

I apologize for any inconvenience this has caused. Be sure to

keep a copy of the original letter on file, as well as this

correction, in the event of an audit. Generally speaking, a person

who fails to collect tax on a taxable good or service due to

proven reliance on incorrect advice from a Comptroller employee

may be relieved of liability for the tax he or she failed to

collect, as well as any applicable penalty and/or interest. This

letter and the letter of May 10, 1991 constitute the proof of

detrimental reliance that you would have to produce in an audit.

Detrimental reliance is no defense against tax liability incurred

after you have received notice of the correct information.

If you have any questions, feel free to write or call 1-800-252-5555,

extension 3-3889.

Sincerely,

John Christian

Attorney

Tax Administration

May 10, 1991

Dear **:

Thank you for your recent letter. As I understand it,, your company

will design and install lawn sprinklers. You had several questions

regarding taxability of this business.

A lawn sprinkler system is an improvement to realty. When and

whether you have to collect tax when you install a sprinkler system

depends on the situation.

New construction (both residential and nonresidential)

Lump-sum contract (No separately agreed upon contract prices for

materials and for labor): You must pay tax on all materials used on

the project. You should collect no tax from the customer on any

portion of the lump-sum charge.

Separated contract (Separately agreed upon contract prices for

materials and for labor): You may issue a resale certificate to

purchase, tax-free, materials that you will incorporate into your

customer's property. You must collect tax from the customer on the

total agreed contract price for the materials, including any mark-up

(and your materials charge cannot be less than you paid for the

materials). Your labor charge and your design service charge are not

taxable.

Repair or remodeling of a sprinkler system at a residence (a home,

an apartment complex, etc.):

Same as new construction.

Repair on remodeling of a sprinkler system at a nonresidential facility

(an office, a factory, a warehouse, a hotel, etc.):

This is a taxable service. You must collect tax on the entire charge

including labor, materials, overhead, passed-through expenses, etc.,

under both lump-sum and separated contracts. You may issue a resale

certificate to purchase tax-free, materials whose care, custody and

control you will transfer to the customer. This includes materials

that you will incorporate into the customer's real property.

You may take credit on your tax return for tax paid to suppliers on

materials that you were entitled to buy tax-free with a resale

certificate. See enclosed Rule 3.338 for more on this.

Special note: Sale and delivery of processed sand, gravel, dirt,

soil and similar materials is a nontaxable service. (Simply washing,

drying, sorting, sizing or screening these materials is not processing).

You may exclude such a charge from your materials charges under a

separated contract for new construction or a separated contract for

repair or remodeling of a residential sprinkler system. Under a

contract for repair or remodeling of a nonresidential sprinkler system,

you do not have to collect tax on the unprocessed materials if you

separately state and clearly identify the charge.

However, if the materials are sold in a processed state (crushed or

mixed with other materials), then they are no longer exempt, and are

treated the same as the other materials that you incorporate into

the customer's property.

I have enclosed copies of Rules 3.291 and 3.357 for your information.

Under separate cover, I have transmitted a sales tax application

packet. You are not required to obtain a permit if you perform only

lump-sum contracts for new construction, and/or lump-sum contracts

for repair or remodeling of sprinklers at residential structures.

You must obtain a permit if you do nay separate contracts, and/or if

you repair or remodel sprinklers at nonresidential structures.

This opinion is based on the facts presented. Different facts, though

similar, might lead to different answers. If you have further questions,

feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian

Attorney

Tax Administration