Does a Texas contractor owe sales tax on labor to install wall-to-wall carpet, and does it matter if the job is new construction, repair, or a gutted building?

Subject

Carpet — Sale And Installation — Lump — Sum And Separated Contract Guidelines

Plain-English summary

The Texas Comptroller answered a carpet installer's question about sales tax on labor for jobs where an existing building has been gutted and re-carpeted, and also explained the tax treatment of the hourly wages the company pays its own installation crews.

The key point is that wall-to-wall carpet installation counts as an improvement to real property, not a sale of tangible personal property by itself. Whether the labor is taxed turns on two things: (1) is the building residential or nonresidential, and (2) is the work new construction or repair/remodeling/restoration?

• Residential carpet installation labor is never taxed — whether it's new construction or repair/remodeling.
• Nonresidential new construction labor is not taxed. But "new construction" is narrowly defined: building a brand-new building, adding new square footage, rebuilding on a foundation after the original building was razed down to the foundation, or doing the initial finish-out of previously unoccupied space.
• Nonresidential repair, remodeling, or restoration labor is taxed. This includes finishing out an existing nonresidential building that has been partially or totally gutted for a new tenant — that's remodeling, not new construction, even though the building may look empty like new space.
• Shop repair of carpet is always taxed in full — the removal, shop repair labor, reinstallation, and pickup/delivery charges are all part of one taxable charge.
• Materials are always taxed to the end consumer, regardless of whether the installation labor itself is taxable.

The ruling also addressed the company's own hourly-wage employees: because Tex. Tax Code § 151.057 excludes employee services performed for an employer from the tax base, the installers do not need to charge the company tax on their wages, even though those wages become part of the price the company later charges its customer. Separately, under § 151.058, tools and supplies the company buys or rents to use while performing taxable repairs are themselves taxable purchases (not resale purchases), since the company is consuming them to provide the service rather than reselling them.

What this means for you

Carpet installers and flooring contractors

Before quoting a job, determine (1) whether the building is residential or nonresidential, and (2) whether the contract is genuinely new construction or falls under repair/remodeling/restoration. Gutting and re-finishing an existing nonresidential building for a new tenant is treated as remodeling — the labor is taxable — even though the space may be functionally empty. Only truly new buildings, new square footage, rebuilds from a razed foundation, or the first finish-out of previously unoccupied space qualify as tax-free new construction labor.

Businesses with hourly installation crews

If your employees are paid by the hour to perform installation work, those wages are not subject to sales tax between the employee and the employer, per § 151.057 — even though the wage cost flows into the total price you charge the customer. Don't confuse this internal labor-cost pass-through with the separate question of whether your charge to the customer is taxable.

Accountants and tax professionals

Watch the materials-vs-labor split carefully: even when installation labor is exempt (residential, or nonresidential new construction), the carpet, pad, and other materials are still taxable to the end consumer. And equipment or supplies your client buys or rents to perform taxable repair work is taxable to the client under § 151.058 — it is not a resale purchase under § 151.302(b). 34 Tex. Admin. Code § 3.357 has the detailed definitions of new construction versus repair/remodeling that this ruling applies.

Common questions

Q: Is labor to install carpet in a house taxable?
A: No. Labor to install wall-to-wall carpet in residential real property is not taxed, whether it's new construction or repair/remodeling.

Q: My company is re-carpeting an existing office building that was gutted for a new tenant. Is that labor taxable?
A: Yes. Finishing out an existing nonresidential building that has been partially or totally gutted and restored — for a new tenant or any other reason — is a repair/remodeling/restoration contract, and that labor is taxable.

Q: What counts as "new construction" for nonresidential property?
A: Only: building a new building, adding new square footage to an existing building, rebuilding on a foundation where the original building was completely razed down to the foundation, or the initial finish-out of previously unoccupied space.

Q: Do I owe tax on the wages I pay my installation employees?
A: No. Under Tex. Tax Code § 151.057, employees are not required to charge their employer tax on their wages for taxable services, even though those wages become part of the sales price charged to the customer.

Q: Is the carpet itself taxed even if the installation labor is exempt?
A: Yes. The charge for carpet, pad, and other materials installed into the real property is always taxed to the end consumer, separately from the labor question.

Citations and references

• Tex. Tax Code § 151.057 (employee services performed for an employer are not taxed between employee and employer)
• Tex. Tax Code § 151.058 (items used by a repair person to perform taxable repairs are taxable to the repair person when purchased or rented)
• Tex. Tax Code § 151.302(b) (sale for resale)
• 34 Tex. Admin. Code § 3.357 (Rule 3.357 — nonresidential repair, remodeling, and restoration; definitions of new construction)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9208L1192A04

Original ruling text

August 13, 1992

Dear ***:

I am responding to your letter regarding your sales and use tax
responsibilities on jobs to install new carpeting when an existing building
has been gutted. You stated that your company supplies the trucks and
equipment and your employees work by the hour. You also requested
clarification of Sec. 151.057 and Sec. 151.058 of the sales tax statute.

The installation of wall to wall carpet is considered an improvement to
realty. The taxability of the labor is determined by (1) the type of realty
being improved (residential vs. nonresidential) and (2) the scope of work
being performed (new construction vs. repair or remodeling).

The labor to install wall to wall carpet in residential realty is not
taxed. This is true when the labor is new construction or is residential
repair or remodeling labor. However, the total charge for shop repair of
residential carpet is taxed. The charge for shop repair includes the labor
to remove the carpet, shop repair labor, reinstallation, and pick up and
delivery charges.

Regarding nonresidential realty, the labor to install wall to wall carpet
in a building under a new construction contract is not taxed. New
construction contracts are limited to contracts for the construction of a
new building, contracts to add new square footage to an existing building,
contracts to rebuild on a foundation where the original building was
completely razed or demolished down to the foundation, and contracts to
provide initial finish out of a previously unoccupied space.

The labor to carpet nonresidential realty under a remodeling, repair, or
restoration contract is taxed. Repair, remodeling, or restoration
contracts are all contracts to install carpet in an existing nonresidential
building with the exception of those mentioned in the previous paragraph.
Taxable contracts include the installation of carpet in a contract to
finish out an existing nonresidential building that has been partially or
totally gutted and restored for a new tenant or any other reason.

Again, the total charge for shop repair is taxed. The previous page is
referring to the charges for labor your company makes to its customers.
Of course, the charges for the carpet, pad, and other materials installed
into the realty are taxed to the end consumer. If you need assistance in
determining who is the end consumer, please call or write explaining your
billing/contract methods.

Although, the hourly wages that your company pays its employees become a
part of the sales price of the contract to your customer, your employee is
not required to charge your company tax on these wages as evidenced by Sec.
151.057 of the tax code. This policy was implemented in 1984 when taxable
services included specific tasks that were provided by employees for
employers. Quite a number of inquiries were made asking whether employees
should be charging their employers tax on these services. In answer to
these questions, the Comptroller determined that employee "wages" were not
intended to be a part of the tax base. Sec. 151.057 is intended to clarify
this issue.

You also requested an explanation of Sec. 151.058 of the tax code. This
section states that items used by the repair person when performing taxable
repairs are taxable to the repair person when purchased or rented. These
items are bought for your company's use when providing these services and
are not purchased for resale to your customers. You may also review Sec.
151.302(b) of the tax code.

Contracts to finish out realty are specifically addressed in the rule for
repair and remodeling (Rule 3.357) as are precise definitions of new
construction, repair, etc. The policy regarding employee wages was in
effect in 1988. As you can see by this response, all facts are very
important when determining the taxability of services. I am not aware of
the facts as presented in your 1988 conversations; therefore, I cannot
determine how the misunderstanding or misinformation occurred.

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

I have enclosed the rules for new construction contracts and for
nonresidential repair or remodeling contracts. You may also write
to Tax Administration Division, Comptroller of Public Accounts.

Tax Administration Division