Is caring for indoor plants a taxable service in Texas, and do I owe sales tax on the supplies (stakes, fertilizer, leaf cleaner, containers) I use to provide that service?

Plain-English summary

A taxpayer in the business of caring for indoor plants for a number of small companies wrote to the Comptroller's office asking about their sales tax responsibilities. The Comptroller's office answered four questions.

First, the taxpayer asked whether applying sales tax to their services would violate the U.S. Constitution's prohibition on states impairing the obligation of contracts. The answer was no: courts have held that contracts are entered into with the expectation that tax laws may change, and a state may tax transactions occurring under a contract after a change in the tax statute (though not transactions that already occurred), absent a prior-contract exemption.

Second, the taxpayer asked whether the sales tax is really an income tax requiring voter approval. The answer was no: the sales tax is an excise tax authorized under the Texas Constitution, while an income tax is measured by income rather than gross receipts.

Third, the taxpayer asked whether their plant-care service is subject to sales tax at all. The answer was yes: in 1984 the Legislature imposed a tax on the maintenance of tangible personal property, including indoor plants, with a three-year grandfather period for existing contracts (contracts renewed during that period were treated as new and became taxable). After 1987, all charges for maintenance of tangible property became taxable regardless of when the original contract was signed.

Fourth, the taxpayer asked whether they must pay tax on the supplies purchased to provide the service. The answer was "yes and no": if a purchased item is transferred to the customer as part of the taxable service, it can be bought tax-free using a resale certificate. If the item is not transferred to the customer, tax must be paid when it is purchased from the supplier. The letter gives plant stakes as an example of a tax-free purchase (because they are left with the customer's plants as part of the service) and a leaf cleaner as an example of a taxable purchase (because the business uses it and keeps it rather than transferring it to the customer).

What this means for you

Indoor plant care and similar maintenance businesses

If you provide a maintenance service for tangible personal property — such as caring for a customer's indoor plants — your charges for that service are subject to Texas sales tax. This has been the rule for all such contracts since 1987, regardless of when the underlying service contract was first signed.

Purchasing supplies used to perform the service

Whether you owe tax on a supply item when you buy it depends on what happens to that item afterward. If you transfer the item to the customer as part of the service (the letter's example is plant stakes left in place to support the customer's plants), you can purchase it tax-free by giving your supplier a resale certificate. If you keep and reuse the item yourself (the letter's example is a leaf cleaner), you owe sales tax on it when you buy it, because you — not the customer — are the end user of that item.

Constitutional and classification objections

The letter also addresses two objections taxpayers sometimes raise: that taxing services under a pre-existing contract impairs the contract (rejected, because tax laws are presumed subject to change and only transactions occurring after a rate/law change are affected), and that the sales tax is really an income tax requiring voter approval (rejected, because the sales tax is an excise tax on gross receipts, not a tax measured by income).

Common questions

Q: Do I owe sales tax on plant stakes I leave with a customer's plants?
A: No — according to this letter, because the stakes are transferred to the customer as part of the taxable maintenance service, you can buy them tax-free by giving your supplier a resale certificate.

Q: Do I owe sales tax on a leaf cleaner I use on customers' plants but keep afterward?
A: Yes — the letter states that because you use the leaf cleaner yourself and do not transfer it to the customer, you must pay tax on it when you purchase it.

Q: Does it matter that my service contract with a customer was signed before the tax applied to plant maintenance?
A: According to the letter, after 1987 all charges for maintenance of tangible personal property became taxable regardless of when the contract was originally executed; a three-year grandfather period following the 1984 enactment has since expired.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9503Ll341DI3

Original ruling text

March 14,1995

Dear **:

On March 6, 1995, you asked for an opinion from our office concerning your tax
responsibilities under the sales tax act. As I understand the facts, you are
in the business of caring for indoor plants for a number of small companies.
When you purchase tangible property for use in your business you pay sales tax
on it.

I have summarized your questions as follows:

1. If the sales tax is applied to my services, is there a violation of the U.S.
   Constitution which forbids states from passing laws which impair the obligation
   of contracts?

Answer: No. This issue has been addressed by the courts which have found that
contracts are subject to the tax laws of a state even though the taxing
provision was passed after the contract was signed. The basic assumption by
the courts is that contracts are entered into with the expectation that tax laws
affecting the responsibilities of the parties to the contracts may change.
Undoubtedly, the courts have also been concerned about protecting the ability
of states to raise revenue. Without this interpretation, tax revenue would be
dramatically decreased because long term contract would be executed for the
purpose of avoiding taxes. This does not mean the tax can be collected on
transactions that have occurred, but transactions occurring under the contract
after the change in the statute are subject to the change in the absence of a prior
contract exemption.

2. Is the sales tax an income tax which cannot be imposed without voter
   approval?

Answer: No. The sales tax is an excise tax which is authorized under the Texas
Constitution. An income tax is a tax measured by income, not gross receipts.

3. Is the service I perform subject to sales tax?

Answer: Yes. In 1984, the Legislature imposed a tax on the maintenance of
tangible property, such as indoor plants. When the tax was passed, a provision
was included that would protect existing contracts for three years. If the
contract was renewed during the three-year period, it was considered a new
contract and subject to the tax. Without this prior contract provision, a
person providing this service would have been required to collect the tax on
contract executed prior to as well as after the imposition of the tax. After
1987, all charges for the maintennce of tangible property became taxable regardless
of when the initial contract was executed.

4. Must I pay tax on the supplies which I purchase to provide the service?

Answer: Yes and No. The sales act provides that if an item is purchased for use
in performing a taxable service and is transferred to the customer as part of
the service, it may be purchased tax-free under a resale certificate.
Therefore, when you purchase supplies that are passed on the customer, you may
purchase them tax-free by giving a resale certificate to your supplier. If the
supply item is not transferred to your customer, you must pay tax on it when you
purchase it from the supplier. For example, if you purchased plant stakes with
which to support customer's plants and did not intend to remove them, you
could buy them tax-free because they would be transferred to the customer as
part of your taxable service. On the other hand, if you bought a leaf cleaner,
you would be required to pay tax on the cleaner because you use it and do not
transfer it to the customer.

** , I realize that tax laws are often complicated and difficult for anyone
other than a tax specialist to understand. However, maintenance of indoor
plants is subject to the sales tax, and there are no constitutional provisions
which prohibit its imposition. Should you have any further questions, please
feel free to write me at 111 East 17th Street, Austin, Texas 78774, or call me
at 1-800-531-5441, extension 5-0220.

Sincerely,

Glen D. Hunt
Director, Tax Administration

NOTE: Previous Accession Number 9503994L