How did Texas tax floor-covering installation, materials, tools, and labor for remodeling, new construction, and residential jobs?

Plain-English summary

The Comptroller drew a line between nonresidential remodeling and contractor work on new construction, unfinished buildings before initial occupancy, residences, or new additions.

Installing, replacing, or upgrading floor covering in a nonresidential location was real-property remodeling. The entire charge for materials and labor was taxable, whether or not the invoice stated them separately.

For new construction, an unfinished structure before initial occupancy, residential property, or a new addition, the installer was treated as a contractor and the labor was not taxable. Under a separated contract, the contractor collected tax on the stated materials charge. Under a lump-sum contract, the contractor did not charge the customer tax but owed tax on the incorporated materials.

Tools, supplies, and equipment used on jobs but not incorporated into the customer's property were taxable to the business when purchased. The business could not collect tax from the customer on a separate charge for those unincorporated items.

What this means for you

Flooring contractors

Classify the project before invoicing. Existing nonresidential remodeling and qualifying contractor jobs had different treatment, and separated versus lump-sum contracts changed who paid or collected tax on incorporated materials.

Subcontractors and material purchasers

Subcontractors followed the same contract-type rules. A business buying materials for resale could issue a resale certificate to its supplier or separated subcontractor.

Common questions

Was labor taxable on nonresidential floor remodeling? Yes. The total materials-and-labor charge was taxable.

Was labor taxable on residential or new-construction floor installation? No, under the contractor treatment described in the letter.

Who paid tax on materials under a lump-sum contract? The contractor owed the tax and did not charge tax to the customer.

Could reusable tools be bought tax-free for resale? No. Tools, supplies, and equipment used in the work but not incorporated into the property were taxable to the contractor when purchased.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 (real-property repair and remodeling)
• 34 Tex. Admin. Code Rule 3.291, including subsections (b)(2) and (b)(3) (contractors and incorporated materials)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1156F12

Original ruling text

January 31, 1992

Dear *****:

Thank you for your letter requesting information about the taxability
of floorcovering labor. I hope you will accept my apology for the
delay in answering your questions.

Installing, replacing, or upgrading of floor covering in locations
other than residences is treated as real property remodeling. The
total charge (materials and labor) is taxable whether separately
stated or not. I have enclosed a copy of Rule 3.357 for your reference.

If you are installing floor covering in a building under a contract
for new construction, in an unfinished structure prior to
initial occupancy, in residential property, or in new additions to
existing structures, you are considered a contractor (see enclosed
Rule 3.291). The labor is not taxable. The type of contract
(lump-sum or separated) determines whether you will collect tax
from your customer on materials incorporated into the property or
pay tax to your supplier at the time of purchase. If you charge
separate amounts for materials and labor, you must collect tax on
the total charge for materials. If you have a lump-sum contract
with your customer, you will not charge tax to your customer. A
lump-sum contractor owes the tax on materials. Your subcontractors
must follow the same guidelines in determining whether or not
to charge tax to you. If you are buying materials for resale to
your customers, then you may issue a resale certificate to your
supplier or separated subcontractor.

You also asked about the taxability of tools and supplies used on
each job, stating that the tools would be taken from job to job.
You must pay tax at the time of purchase on supplies, tools, and
equipment used to perform a contract but which are not physically
incorporated into the property of a customer. You may not collect
tax from the customer on the charges for these unincorporated
items. For materials physically incorporated into the property
a repairman or remodeler, Rule 3.357(b)(4) explains the tax
responsibility. For materials physically incorporated into the
property by a contractor, Rule 3.291(b)(2) and (b)(3) outline the
tax responsibility.

Rule 3.291 regarding exempt jobs is being amended because of
changes in the tax code effective October 1, 1991. I am enclosing
general guidelines for contractors and repair/remodelers doing
work for school districts and certain nonprofit hospitals for
information. If you do work for these entities and need additional
information, please contact us.

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

If you have any questions, please don't hesitate to write the Tax
Administration Division or call one of our tax specialists toll
free at 1-800-252-5555.

Sincerely,

Joan Hale
Tax Administration Division