How did Texas tax property-management maintenance, employee reimbursements, management fees, construction supervision, and passed-through project costs?

Plain-English summary

The Comptroller answered six questions from a property-management company. Scheduled, periodic work that prevents the failure or decline of an operational real-property improvement was nontaxable maintenance. The letter used monthly elevator-shaft inspection and lubrication as an example.

A management-company employee permanently assigned to one rental property could be treated as that property's employee when the owner reimbursed the manager dollar for dollar. The reimbursement for the employee's taxable services at that managed property was not taxable under the stated conditions, but taxable work at other properties was taxable. An employee splitting time between properties could be permanently assigned to only one, and the manager had to document work at each location.

Management fees and commissions were nontaxable when paid for services unrelated to a taxable service. Construction coordination was also nontaxable when the manager provided supervision only and had no responsibility for others' work. If the manager was responsible for the overall project or contracted with subcontractors, it had to collect tax on taxable services or items sold to the owner.

For new construction or residential repair and remodeling, lump-sum contractors paid tax on taxable purchases and did not charge the owner sales tax; separated contractors collected tax on the agreed materials price. City permits, surety bonds, and insurance were not taxable under those arrangements. Nonresidential repair and remodeling was a taxable service on the total contract amount, except qualifying separately stated unrelated services and dollar-for-dollar city-permit reimbursement. Passed-through bond and insurance costs remained taxable overhead for that taxable service.

What this means for you

Property managers should define permanent employee assignments, keep property-by-property work records, and make construction contracts clear about whether the manager merely supervises or is responsible for delivery. Separately stating a cost does not by itself make it nontaxable.

Common questions

Was scheduled maintenance taxable? No when it met the letter's operational, periodic, preventive criteria. Were ordinary management fees taxable? Not when unrelated to a taxable service. Was construction supervision taxable? Not when it was supervision only; responsibility for the job or subcontractors changed the result. Were bonds and insurance always exempt pass-throughs? No; for taxable nonresidential remodeling, the letter treated them as taxable overhead.

Citations and references

• 34 Tex. Admin. Code Rule 3.357
• 34 Tex. Admin. Code Rule 3.356
• 34 Tex. Admin. Code Rule 3.291

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1151C06

Original ruling text

January 8, 1992

Dear *****:

Thank you for your letter concerning services provided by your property
management company. You asked if the following items are subject to sales
tax:

1) Scheduled maintenance on real property that is necessary to keep it
running.

Response: A charge to maintain an improvement to real property is not
taxable. Please refer to the enclosed Rule 3.357 regarding real property
repair and remodeling. Subsection (a)(3) of that rule defines maintenance
on real property and subsection (c)(2) explains the exemption for scheduled
periodic maintenance on real property. An example of scheduled periodic
maintenance is the monthly inspection and lubrication of an elevator shaft
in a building. In order to qualify as maintenance the labor must be
performed on operational and functioning improvements, must be scheduled and
periodic, and must be to prevent the failure or decline of the improvement.

2) Reimbursement received by a property management company for its employees
that are permanently assigned to the property.

Response: Employees permanently assigned to one rental property are
considered employees of that property when the property manager is reimbursed
by the property owner on a dollar-for-dollar basis. On managed rental
properties, the employees remain assigned to the property while employed by
successive owners or management companies. The reimbursement charge for
taxable services performed on a managed rental property by management company
employees assessed to it will not be taxable; however, if these same employees
provide real property services for other properties, the property manager must
collect tax on the total charge for those services. Those services refers to
the services provided at the other properties.

The management company owes tax on the purchase price of all taxable items
purchased and provided to the employees providing services on managed rental
property. See the enclosed Rule 3.356 regarding real property services. The
responsibilities of property management companies are discussed in subsection
(n).

3) Reimbursement received by a property management company from two different
owners for an employee whose time is split between two buildings.

Response: An employee of a property management company may be permanently
assigned to only one property managed by the property management company. If
an employee's time is split between two different properties, then an election
must be made by the property management company deciding which property is the
permanent assignment. The employee's services for the permanent property that
meet the criteria in the rule and response #2 will not be taxed. If this same
employee works at other properties any taxable services performed at the other
properties must be taxed. The fact that an individual employee works at
multiple properties will not cause the services performed at a permanently
assigned property to become taxable, as long as the property management company
documents the employee's work at each property.

4) Management fees and commissions earned by a property management company
and paid by the owner of a property.

Response: Management fees and commissions earned by a property management
company are not taxable when the payment is for services that are unrelated
to a taxable service. Again see Rule 3.356 on real property services. Please
note subsection (i) which defines an unrelated service.

5) Fees paid by the property owner to a property management company for
the coordination of construction work performed within the project.

Response: A property owner may have a property management company act as
their eyes and ears to ensure that a taxable repair or remodeling job is
completed to the property owner's satisfaction. If the property management
company enters into an agreement with the property owner for supervision
only and is in no way responsible for the work performed by others, then
the management company could be considered to be providing a nontaxable
service.

However, if the contract makes the property management company responsible
for the overall job or the management company enters into contracts with
the subcontractors for specific services, then the management company must
collect tax on any taxable services or taxable items it is selling to the
property owner. The already mentioned Rule 3.357 provides information on
repairs and remodeling of nonresidential real property. You should refer
to the enclosed Rule 3.291 on contractors when the job concerns either new
construction or repairs and remodeling of residential real property.

6) Permits, fees, bonds and insurance that are separately identified in
the contracts for remodeling work; and other taxable construction work.

Response: A contractor that is performing new construction of real property
or that is repairing and remodeling residential real property may enter into
a lump-sum contract with the property owner. A lump-sum contract will make
the contractor the ultimate consumer of all materials purchased in the
performance of the contract. The contractor must pay tax on any taxable
items purchased to perform the contract and the contractor does not charge
tax to the property owner. The payment to a city for a building permit or
fee is not taxable under sales tax. In addition, the lump-sum contractor
will not owe sales tax on the bonds from a surety company or insurance from
an insurance company.

A contractor that is performing new construction or repair and remodeling
to residential property may enter into separated contract with the property
owner. A separated contract exists when the agreed contract price for he
materials is separately stated from the agreed contract price for skill and
labor. The contractor is considered to be reselling the materials to the
property owner and must collect tax on the agreed contract price. New
construction labor is not taxable. The separated contractor does not owe
or charge tax on city permits, bonds, or insurance.

Finally a company that repairs and remodels nonresidential real property is
performing a taxable service. The total contract amount (materials, labor,
etc.) is taxable to the property owner. The type of contract (lump-sum or
separated) is irrelevant because the service is taxable. Only separately
stated charges that are considered unrelated services, as defined in
subsection (a)(10) of Rule 3.357, are not taxable. A separately stated
reimbursement dollar for dollar) for a city building permit is not taxable.

However, amounts charged by a remodeler to a property owner for posting
bonds or paying insurance is considered part of the overhead to perform the
taxable service; therefore, these charges are taxable even when passed on
to the property owner.

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

You may also write to Tax Administration, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division