Is 'third-party installation' a valid reason to claim a Texas sales tax exemption?

Plain-English Summary

The Comptroller was asked to verify whether a customer's refund claim was valid. The exemption certificates the customer used gave "third party installation" as the reason for claiming exemption. The Comptroller explained that this phrase, standing alone, is not a valid exemption reason.

It's true that genuine third-party installation labor -- installation performed by a company that did not sell the item being installed -- is not taxable. But not all third-party installation qualifies. Some of it is a taxable service in its own right. For example, installing a replacement part in a piece of equipment is really a repair of tangible personal property, which is taxable. Third-party installation can also be taxable as nonresidential repair or remodeling. And when the service itself is taxable, the entire charge is taxed even if it's billed as "installation labor only."

Because the paperwork provided didn't show the exact nature of the work done on each invoice, the Comptroller could not say whether the refund was valid or invalid. The taxpayer would need to determine, invoice by invoice, what kind of work was actually performed before a taxability determination could be made.

What This Means For You

If you accept exemption certificates from customers, "third-party installation" is not, by itself, a sufficient or valid reason for exemption. You (or your customer) need to look at what the third party actually did:

• If it was pure installation of a new item, by a party that did not sell that item, it is generally not taxable.
• If the work amounted to repairing or replacing a part in existing tangible personal property, or repairing/remodeling nonresidential real property, it is a taxable service -- and the full charge, including any portion billed as "labor only" or "installation only," is taxable.

Businesses relying on this reason code on exemption certificates should review the underlying invoices and confirm the true nature of the work before treating the charge as exempt. When in doubt, get a specific determination for the actual facts rather than relying on a generic label.

Q&A

Q: Is third-party installation always exempt from Texas sales tax?
A: No. True third-party installation (labor performed by a party that didn't sell the item being installed) is generally not taxable, but some third-party installation is a taxable service, such as installing a replacement part (a repair of tangible personal property) or nonresidential repair/remodeling work.

Q: Can a business just write "third-party installation" on an exemption certificate to avoid tax?
A: No. The Comptroller specifically found that the bare phrase "third-party installation" is not a valid reason for exemption. What matters is the actual nature of the work performed.

Q: If the taxable service is billed as "installation only" or "labor only," is any part of it exempt?
A: No. When the underlying service is taxable (for example, because it's really a repair), the total charge is taxed even if it is billed only as labor or installation.

Citations

No statutes or regulations were cited in the body of this letter.

Subject

Installation Charge Only/Third Party Installation — Can Be A Taxable Service (Repair/Remodeling Of Commercial Real Property; Repair/Remodeling Of Tpp)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9409L1315A03

Original ruling text

September 13, 1994

Dear *****:

I am responding to your request to verify that the refund claimed by your
customer, *****, is valid. You enclosed copies of their correspondence
and exemption certificates.

I have reviewed the documents that you enclosed. The reason given on the
exemption certificates is "third party installation." Although true
third-party installation is not taxable, the phrase, "third-party
installation" is not a valid reason for exemption.

Third-party installation generally refers to installation labor performed
by an entity (a third party) that did not sell the item being installed (to
the customer/*****). However, some third-party installation is taxed
as a taxable service. For example, simply installing a replacement part in
a piece of equipment is actually the repair of tangible personal property,
a taxable service. In the same manner, third-party installation may also
be taxable as nonresidential repair or remodeling. The total charge for a
taxable service is taxed, even when the charge is "labor only."

The information provided by you, your customer, and their accounting firm, is
not sufficient for me to determine whether the refund request is valid or
invalid. The exact nature of the work performed on each invoice must be
determined before a taxability determination can be made.

Once the taxability status of the third party installation is confirmed,
I can assist you with the refund procedures as you requested.

This opinion is based upon the facts presented. If there are additional
or different facts, this opinion may change. You may also write to Tax
Administration Division,

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9409574L