If my company makes and installs fireplace facings or mantles for home builders, is the whole charge (materials, labor, overhead, markup) taxable as a sale of tangible personal property, or is it a nontaxable real property improvement?

Plain-English Summary

A company mixes a dry, granulated material with water, pours the mixture into a mold, and lets it dry into a rock-like fireplace facing or mantle, which it then installs for new home builders. It asked the Comptroller whether it owes sales tax on the labor to mix, pour, and process the product, on top of the tax it already pays on materials.

The Comptroller explained that the answer turns on the scope of work in the agreement with the home builder, and splits into two scenarios:

1. Sold as tangible personal property, or installed without becoming a permanent improvement to realty. Here, the company is a manufacturer selling free-standing tangible personal property. The entire charge to the home builder is taxable — materials, labor, overhead, and markup all included.

2. Installed so that it becomes a permanent improvement to realty. Here, the company is a new construction contractor rather than a manufacturer, and does not qualify for manufacturing exemptions. The labor to mix, pour, and install the facing/mantle is new construction labor and is not taxed. Whether tax is owed on the materials depends on how the contract is billed: under a lump-sum contract (labor and materials billed together), the charge to the home builder is not taxed, but the contractor must pay tax on its own cost of the incorporated materials. Under a separated contract (materials billed separately from labor), the materials charge to the customer is taxed, the labor charge remains untaxed new construction labor, and the contractor may buy the materials tax-free for resale.

What This Means For You

Manufacturers and installers of building products

Whether your product is taxed as tangible personal property or treated as a real property improvement depends entirely on your contract language and how the item is installed — not on how the product is made. If the installed item does not become a permanent part of the home, treat the whole job (materials, labor, overhead, markup) as a taxable sale. If it does become a permanent improvement, you're acting as a new construction contractor for that job.

Construction contractors

If your installation makes the fireplace facing or mantle a permanent improvement to realty, your installation labor is nontaxable new construction labor. But your tax exposure on materials flips depending on whether you bill a lump sum or separate out materials from labor: lump-sum billing means you owe use tax on your own cost of materials, while separated billing means you charge your customer sales tax on the materials (and can buy those materials tax-free for resale).

Accountants and tax professionals

This letter illustrates the Comptroller's manufacturer-versus-contractor distinction and the lump-sum-versus-separated-contract framework that governs new construction labor and materials tax treatment in Texas. Confirm which category applies by reviewing the actual contract/billing method with the home builder, since the ruling is fact-specific and based solely on the facts as presented.

Q&A

Q: Do we have to charge sales tax on the labor to mix, pour, and install the fireplace facing or mantle?
A: It depends on whether the installation becomes a permanent improvement to realty. If it does not (i.e., the item is sold as tangible personal property or installed without becoming a permanent improvement), the entire charge — including labor — is taxable because the company is acting as a manufacturer. If the installation does become a permanent improvement to realty, the labor is nontaxable new construction labor, but the materials may still be taxable depending on the contract structure.

Q: What's the difference between a lump-sum contract and a separated contract for a new construction contractor?
A: Under a lump-sum contract (materials and labor billed together as one price), the charge to the home builder is not taxed, but the contractor owes tax on its own cost of the materials incorporated into the job. Under a separated contract (materials billed separately from labor), the materials charge to the home builder is taxed, the labor remains untaxed, and the contractor may purchase the materials tax-free for resale.

Q: Can I rely on this 1994 letter ruling for my own business?
A: Only if you are the taxpayer to whom it was issued. STAR letters can support a detrimental reliance claim only for that original taxpayer, and this letter may no longer reflect current Comptroller policy even though it is not marked superseded. Businesses with similar facts should request their own ruling or consult a Texas tax professional.

Citations

No specific statutes or administrative rules are cited in the body of this letter; the Comptroller's conclusions rest on the general manufacturer-versus-new-construction-contractor distinction and the lump-sum/separated-contract framework for taxing materials and labor in 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/9408688L

Original ruling text

August 18, 1994

Dear ***:

I am responding to your letter questioning your sales tax responsibilities when
collecting and remitting tax on fireplace facings or mantles.

You explained that your company purchases a dry, granulated material; adds
water; mixes these ingredients together; pours the mixture into a mold. When
the mixture dries, the product is a rock-like material used as a fireplace
facing or mantle. The fireplace facing or mantle is installed for new home
builders in your area. Of course, labor is involved in the mixing, pouring,
processing, and installation.

You explained that your company does not pay sales tax on the materials
(presumably the dry, granulated material and other components of the facing or
mantle) when purchased. You stated "we know that we are to remit to the State
of Texas the sales tax on the cost of materials." You asked:

Do we have to include sales tax on the labor cost to mix, pour, and process
this product?

Your tax responsibilities are determined by the agreement with the home
builder. The scope of work set out in the agreement will determine which of the
two categories your tax responsibilities are based upon.

1) Your company sells the fireplace facing or mantle to the home builder or
your company sells the fireplace facing or mantle and I installs the item is
such a way that it does not become a permanent improvement to realty.

In either of these situations, your company is considered a manufacturer
selling free-standing, tangible personal property. The total charge to the home
builder (your customer) is taxable. This charge includes the cost of materials,
labor, overhead, markup, etc.

2) Your company installs the fireplace facing or mantle into the home in such a
way that it becomes a permanent improvement to realty.

In this situation, your company is considered a new construction contractor and
not a manufacturer. As a contractor, your company does not qualify for the
manufacturing exemptions.

The labor to mix, pour, and install the facing or mantle is treated as new
construction labor and is not taxed. Whether you or your customer pays tax on
the materials is determined by your contract with the home builder. If you
contract/bill a lump-sum amount for the labor and materials, the charge to the
home-builder is not taxed and you must pay tax on your cost of the incorporated
materials. However, if you contract/bill a separated amount for the labor from
the materials, the materials charge to the customer is taxed. The labor charge
is new construction labor and not taxed. Under the separated contract/billing
you may purchase the materials for resale.

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

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

Sincerely,

Tax Administration Division