Did an insulation contractor need a Texas sales tax permit to remodel an exempt organization's nonresidential building?

Plain-English summary

An insulation contractor normally worked on residential property, paid tax when buying materials, kept no inventory, and had no sales tax permit. The contractor planned to add attic insulation to an existing nonresidential building owned and used by a tax-exempt lodge organization.

The Comptroller said installing insulation in existing nonresidential realty was a taxable repair and remodeling service. The contractor therefore had to hold a Texas sales tax permit even though the customer itself was exempt.

For the exempt job, the contractor could issue a resale certificate to suppliers using the permit number and buy incorporated materials without tax. The exempt organization could then give the contractor an exemption certificate instead of paying tax on the remodeling service.

What this means for you

Insulation contractors

An exempt customer does not eliminate the permit requirement for a contractor providing an otherwise taxable service. The exemption is documented through certificates within the contractor's sales-tax account.

Exempt organizations

The organization could provide an exemption certificate for qualifying work on property it owned and used, but the contractor still needed a permit and proper supplier documentation.

Common questions

Did the contractor need a sales tax permit? Yes. Existing nonresidential insulation work was taxable repair and remodeling.

Could the exempt lodge avoid tax on the contractor's charge? Yes, by giving the contractor an exemption certificate on the stated facts.

Could the contractor buy incorporated materials tax free? Yes, by issuing suppliers a resale certificate validated with the contractor's permit number.

Did the letter address new construction? It distinguished existing-property work from new construction but decided the proposed existing-building remodeling job.

Citations and references

• 34 Tex. Admin. Code Rule 3.287 (exemption certificates for exempt organizations)
• 34 Tex. Admin. Code Rule 3.291 (contractors and materials incorporated into exempt property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1170B01

Original ruling text

February 28, 1992

Dear **:

Thank you for your recent letter asking about your need for a sales tax permit.
The facts you presented are restated below with our response.

FACTS: I am an insulation contractor. I do work on residential real property,
both new construction and repair and remodeling. I pay sales tax on the
materials at the time I purchase them and I do not maintain an inventory. I do
not collect or remit sales tax for my services and I do not have a sales tax
permit.

I have been asked to perform work for the LODGE ORGANIZATION. The work would
add insulation to the attic areas of the building they own and meet in.
According to Rule 3.287, I may accept an exemption certificate from them in
lieu of payment of taxes for the remodeling of non-residential real property
which is owned and used by their organization. This releases me of the
requirement to collect and remit sales tax on proposed work. According to Rule
3.291, I may purchase material tax free by issuing an exemption certificate for
the materials that I purchase to be incorporated into the property of the
exempt entity. A sales tax permit would not be required for these transactions.

Question: Is this an accurate and acceptable interpretation of the sales tax
rules and regulations?

Response: For tax purposes, installing insulation in any realty, other than new
construction, is called "repair and remodeling." When you install insulation in
existing nonresidential realty (like the LODGE ORGANIZATION), you are providing
a taxable repair and remodeling service. You are required to hold a sales tax
permit in order to provide this taxable service.

When you provide taxable repair and remodeling services for an organization
exempt from tax, like the LODGE ORGANIZATION, you use the number from your
sales tax permit to validate a resale certificate that you issue to suppliers
in lieu of tax. You may then accept an exemption certificate in lieu of tax
from the LODGE ORGANIZATION.

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

If you have any additional questions or need more information, you may call me
toll free at 1-800-252-5555, extension 3-4633. The regular number is
512/463-4633. You may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division