Is sales tax owed on installing, repairing, or remodeling an underground sprinkler/irrigation system in Texas?

Subject

Sprinklers/Underground Irrigation Systems — Repairs, Expansion To Old System/Remodeling In Residential Vs. Nonresidential 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/9402L1285C04

Plain-English Summary

This 1994 Texas Comptroller letter ruling explains how sales tax applies to underground landscape irrigation (sprinkler) systems, covering both new installation and later repair or remodeling work.

New installation. Installing a new underground irrigation system — whether on residential or nonresidential property — counts as new construction, an improvement to real property. Who pays the sales tax on the materials depends on how the contract is written:

• Lump-sum contract (materials and labor billed together, no separate charges): the contractor does not collect tax from the customer. Instead, the contractor pays sales tax on the cost of the materials and should build that cost into the bid.
• Separated contract (materials and labor billed separately): the contractor collects and remits sales tax from the customer on the separately-stated materials charge; the separately-stated labor charge is not taxable. The contractor can buy the materials tax-free from suppliers by issuing a resale certificate.

Repair or remodeling of an existing system is treated differently depending on whether the property is residential or nonresidential:

• Residential realty: materials are taxable, labor is not — the same lump-sum vs. separated contract rules from new construction apply to how the materials tax is collected.
• Nonresidential realty: the repair or remodeling itself is a taxable service. Because repair and remodeling of nonresidential real property became taxable on January 1, 1988, the entire charge — materials, labor, everything — is taxable, whether or not the invoice separates them out. The service provider can still buy the parts it incorporates into the job tax-free using a resale certificate.

Agricultural exemption. Effective September 1, 1993, farmers and ranchers can buy components for underground irrigation systems tax-free if the components are used exclusively to produce food for human consumption, feed, grass, or other agricultural products intended for sale in the ordinary course of business. The contractor can accept a properly completed exemption certificate instead of collecting tax on those components.

Lawn watering/lawn care as a service. Separately, a person who waters or maintains lawns as a service (rather than installing or repairing the irrigation system itself) is providing a taxable "real property service" — sales tax is due on the total charge for that service. Real property services became taxable on October 1, 1987. The letter is careful to distinguish this from irrigation system installation/repair/remodeling, which is treated as improving real property rather than providing a real property service.

About the ALERT banner at the top of the source text: The banner referencing House Bill 268 (82nd Legislature, 2011) and a Comptroller-issued agricultural/timber exemption registration number (effective January 1, 2012) is a notice added later by the Comptroller's STAR database, not part of the original 1994 ruling. It flags that Texas subsequently changed how agricultural/timber sales tax exemptions are documented (via a registration number system), which could affect how the agricultural exemption described in this 1994 letter is claimed today. It is not part of the letter's own reasoning and should not be read as 1994 legal analysis.

What This Means For You

If you're installing a new underground irrigation system: Whether you or your customer effectively bears the sales tax on materials depends on your contract structure. A lump-sum contract means you (the contractor) pay tax on materials and price it into your bid. A separated contract means you collect tax from the customer on the materials line only — labor stays untaxed either way at this stage.

If you're repairing or remodeling an existing system on a home: Only the materials are taxable; your labor charge is not, regardless of contract type.

If you're repairing or remodeling an existing system on nonresidential property (commercial, industrial, etc.): Be aware the whole job is taxable as a real property service — you can't avoid tax on labor by separately stating it, unlike the residential case. You can still buy your incorporated parts tax-free with a resale certificate.

If you're a farmer or rancher: You may be able to buy irrigation system components tax-free if they're used exclusively for producing food, feed, grass, or other agricultural products for sale — give your contractor a properly completed exemption certificate. Note the later ALERT about H.B. 268's registration-number requirement (2012) — check current Comptroller guidance before relying on this 1994 letter's description of how to claim that exemption today.

If you just water or maintain lawns without installing/repairing the irrigation system: Your service is a taxable real property service, and tax applies to your total charge, not just materials.

Q&A

Q: Do I owe sales tax on labor to repair a broken sprinkler system at my house?
A: No. For repair or remodeling of an existing irrigation system on residential realty, labor is not taxable — only the materials are, and how that materials tax is collected depends on whether your contract is lump-sum or separated.

Q: My irrigation company is fixing a sprinkler system at an office building. Is that different from a house?
A: Yes. Repair or remodeling of an underground irrigation system on nonresidential realty is a taxable service, so the entire charge — materials and labor together — is taxable, even if they're billed separately.

Q: Can a farmer buy irrigation parts without paying sales tax?
A: Yes, as of September 1, 1993, farmers and ranchers can purchase components for underground irrigation systems tax-free if the components are used exclusively in producing food for humans, feed, grass, or other agricultural products sold in the regular course of business, by giving the contractor a properly completed exemption certificate. (The source document also carries a later ALERT noting that a 2011 law, effective 2012, added a Comptroller-issued registration number requirement for claiming certain agricultural/timber exemptions — check current rules before relying on the 1994 procedure alone.)

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

February 15, 1994

Dear **:

Thank you for your letter requesting sales tax information about landscape
irrigation systems. I will provide an overview regarding the taxability
of situations that irrigation contractors may encounter.

An underground irrigation system is an improvement to real property and
the installation of a new underground irrigation system for residential
realty or for nonresidential realty is new construction. The type of
contract used by a contractor will determine who is responsible for paying
sales tax on the materials incorporated into a new irrigation system. The
enclosed Rule 3.291 has information on both lump-sum and separated
contracts. If the contract is lump-sum (i.e., no separately stated charges
for materials and labor), the contractor does not collect and remit sales
tax from the customer. Instead, the contractor pays sales tax on the cost
of materials and should take that in account when bidding the lump-sum
contract.

If the contract has separated charges for materials and labor, the
contractor collects and remits sales tax from the customer on the
separately-stated charge for materials incorporated into the irrigation
system. The separately-stated charge for labor is not taxable. The
contractor may purchase the incorporated materials tax free by issuing a
properly completed resale certificate to his supplier.

The taxability of the repair or remodeling of existing underground
irrigation systems is determined by the type of realty. If the irrigation
system is for residential realty, the materials are taxable, but not the
labor. As in new construction explained above, the type of contract
(lumpsum or separated) determines how tax is paid on the incorporated
materials. Rule 3.291 is the reference for repair or remodeling of
residential realty.

If the irrigation system is for nonresidential realty, the repair or
remodeling is a taxable service. Repair and remodeling of nonresidential
realty became a taxable service on January 1, 1988. Whether separately
stated or not, the total charge (materials, labor, etc.) for the
nonresidential repair or remodeling service is taxable. The service
provider may purchase the repair or remodeling parts incorporated into
the irrigation system tax free by issuing a properly completed resale
certificate to his supplier. The enclosed Rule 3.357 has information
regarding nonresidential repair and remodeling services.

Effective September 1, 1993, a farmer or rancher may purchase tax free
components for underground irrigation systems that are used exclusively
in the production of food for humans, production of feed, grass, or other
agricultural products to be sold in the regular course of business. An
irrigation contractor may accept a properly completed exemption
certificate instead of collecting tax on the charge for components of a
qualifying system.

Persons who water private or commercial lawns as a service are providing
real property services. Sales tax is due on the total charge for real
property services such as lawn maintenance and landscaping. Real property
services became taxable on October 1, 1987. The enclosed Rule 3.356 has
information regarding real property services. Please note that persons who
install underground irrigation systems or who repair and remodel underground
irrigation systems are considered to be improving real property rather than
providing real property services.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line
is 512/475-0030. You may also write to Tax Administration, Comptroller of
Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9402039L