When a contractor issues a change order on a nonresidential repair or remodeling contract, is the change order taxed the same way as the original contract, and when does the contractor become liable to collect the sales tax?

Subject

Repair/Remodeling/Renovations Contract — Change Orders

Plain-English Summary

The Texas Comptroller's Tax Policy Division addressed how sales and use tax applies when a contractor performing nonresidential real property repair or remodeling work for a taxable (nonexempt) owner issues a change order. The ruling holds that change orders are taxed the same way as the original contract. If a change order doesn't change the contract's sales price, there's no change in the tax owed. But if a change order adds work or changes the scope of work, it can end up taxed differently than the original contract — most commonly when a tax rate or tax base change took effect (via legislation) between the date of the original contract and the date of the change order. In that situation, the original contract might still qualify for a "prior contract" exemption while the change order itself gets taxed under the newer law.

The ruling also confirms that the total contract price for nonresidential repair and remodeling work is taxable, and it walks through exactly when the contractor's duty to collect tax kicks in: when the taxable service is performed, or agreed to be performed for consideration — not necessarily when the customer is billed or when cash actually changes hands. The letter also explains how retainage and progress payments are handled under both accrual-basis and cash-basis accounting.

What This Means For You

If you're a contractor doing nonresidential repair, remodeling, or renovation work in Texas, change orders aren't a separate, tax-free add-on — they ride on the same taxable footing as the underlying contract. Watch out specifically for situations where a change order is issued after a change in the sales tax rate or tax base: the original contract may be grandfathered under a prior-contract exemption, but a later change order for added or different scope of work could be taxed under the new rules. Also be careful about when you owe the tax: liability attaches when the taxable service is performed or agreed to be performed for consideration, not simply when you send an invoice or receive payment. If you use accrual-basis accounting, tax on retainage is due when the contract is recorded as a sale on your books, even before you're paid the retained amount; if you use cash-basis accounting, tax on retainage (and on progress payments generally) is due only as cash is actually received, and it must be properly apportioned between sales price and tax.

Q&A

Q: Are change orders subject to sales and use tax?
A: Yes, in the same manner as the original contract. A change order that doesn't alter the sales price of a nonresidential repair or remodeling contract causes no change in the sales or use tax owed on the contract. However, a change order that requires additional work or changes the scope of work can be taxed differently than the original contract — typically when a tax rate or tax base change has occurred due to legislative changes, so the original contract may retain a prior-contract exemption while the change order is taxed under the new legislation.

Q: Is the original contract subject to sales and use tax?
A: Yes. The total contract price for nonresidential repair and remodeling is taxable.

Q: At what time does the original contractor become liable for collection of sales tax?
A: The contractor is responsible for collecting the tax when a sale of the taxable service occurs — that is, when the taxable service is performed or agreed to be performed for consideration.

Q: Does the contractor become liable upon billing or upon actual cash collection?
A: Liability arises when the service is performed for consideration. A service provider on the accrual basis of accounting must remit tax when the contract is recorded as a sale on its books, whether or not payment has been received; if progress payments are made during the work, tax must be remitted on those progress payments, with the proper percentage allocated as tax. A service provider may instead elect the cash basis of accounting, remitting tax as the sales price is actually paid.

Q: When is sales tax paid on retainage?
A: Under the accrual basis of accounting, tax is due on the initial payment, progress payments, and retainage at the time the contract is shown as a sale on the provider's books and records. Under the cash basis of accounting, tax is due on the initial payment, progress payments, and retainage when the cash is actually received. Either way, payments must be apportioned between sales price and tax.

Citations

No specific statutes or administrative rules were cited by name in this letter; the ruling is based on the Comptroller's general policy regarding taxation of nonresidential repair and remodeling services under Texas sales and use tax law.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408L1312D13

Original ruling text

August 16, 1994

Dear *****:

I am responding to your letter questioning the sales tax responsibilities
of a contractor when performing nonresidential real property remodeling for
a nonexempt owner. You had the following specific questions.

1) Are change orders subject to sales and use tax?

Yes, change orders are subject to sales and use tax in the same manner as
the original contract. A change order that does not alter the sales price
of a nonresidential repair or remodeling contract will cause no differences
in the sales or use tax owed by the customer on the contract price.

However, it is possible for some change orders (those that require
additional work or that change the scope of the work performed, etc.) to be
taxed differently than the original contract; this generally occurs when a
tax rate or tax base change has occurred due to legislative changes. The
original contract may qualify for the prior contract exemption, but the
change order may be taxed under the new legislation.

2) Is the original contract subject to sales and use tax?

The total contract price for nonresidential repair and remodeling is
taxable.

3) At what time does the original contractor become liable for the
collection of sales tax?

The original contractor (nonresidential repair or remodeling service
provider) is responsible for collecting the tax when a sale of the taxable
service occurs. The sale occurs when the taxable service is performed or
agreed to be performed for consideration.

4) Does the contractor become liable upon billing or upon actual cash
collection?

The contractor (nonresidential repair or remodeling service provider)
becomes liable when the service is performed for consideration. The
service provider/seller operating on an accrual basis of accounting must
remit the tax when the contract is shown as a sale on its books or
records; this may occur with or without payment being received. However,
the service provider may elect to remit the tax on the cash basis of
accounting; this means the service provider/seller will remit the tax as
the sales price of the service is paid. If the sales price is paid
through progress payments during the course of the work, the tax must be
remitted on these progress payments. The amount of the progress payment
must have the proper percentage allocated as tax.

5) When is sales tax paid on retainage?

If the service provider/seller is remitting tax on the accrual basis of
accounting, the tax is due on initial payment, progress payments, and
retainage at the time the contract is show as a sale on the service
provider's books and records. If the service provider/seller is remitting
tax on the cash basis of accounting, the tax is due on the initial payment,
progress payments, and retainage when the cash is received. These payments
must be apportioned for sales price and tax.

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

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

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9408527L