If a Texas remodeling contractor isn't registered to collect sales tax and doesn't collect it on a lump-sum job, can the customer be assessed the tax instead?

Subject

Repair/Remodeling/Renovations Contract — Lump — Sum Or Separated

Plain-English summary

A tax professional wrote to the Comptroller on behalf of a client ("Company A") that had been assessed sales tax after hiring a contractor to remodel real property in Texas under a lump-sum contract. The contractor had claimed to be properly licensed and authorized to do business in the state, but was not actually registered with Texas for sales tax purposes, and the contract said nothing about taxes. The contractor never collected sales tax on the job, and the state assessed the tax against Company A instead. The requester argued this was unfair, since historically it was the contractor's job to pay tax on a lump-sum contract.

The Comptroller's answer: Company A is liable for the tax. The letter explains that the old rule -- where a contractor on a lump-sum remodeling job paid tax only on its own material costs, and the customer had no tax responsibility -- stopped applying once Texas amended its sales tax law to tax remodeling services themselves. Once the entire charge for a remodeling service became taxable, remodeling purchases started following the same general rule as any other taxable purchase: if the seller doesn't collect the sales tax, the purchaser is responsible for it. The letter notes this would have been true even if the contractor had been properly registered -- the Comptroller routinely assesses tax against purchasers when a seller fails to collect it on a taxable sale.

What this means for you

Businesses hiring contractors for remodeling work

You can't assume the contractor's registration status, licensing claims, or a contract's silence on taxes shields you from sales tax liability. If sales tax isn't collected on a taxable remodeling job, the state can and will look to you, the purchaser, to pay it.

Contractors and accountants

Confirm a contractor is registered to collect Texas sales tax before signing a lump-sum remodeling contract, and make sure the contract addresses who is responsible for tax. This letter reflects that the "contractor pays tax on materials only" regime for lump-sum jobs no longer applies now that remodeling services are directly taxable.

Common questions

Q: If my contractor wasn't registered to collect sales tax, am I still on the hook for it?
A: Yes, per this letter. Once remodeling services became taxable in full, the customer -- as purchaser -- is responsible for the tax if the seller (contractor) didn't collect it.

Q: Does it matter that the contract didn't mention taxes, or that the contractor claimed to be licensed?
A: No. The letter shows the assessment against the customer stood regardless of the contract's silence on taxes or the contractor's licensing representations.

Q: Would the outcome have been different if the contractor had been registered with the state?
A: No. The letter states it still would have been proper to assess tax against the customer on the unpaid remodeling charges even if the contractor had been registered, since the state routinely assesses purchasers for uncollected tax on taxable items.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604L1404E06

Original ruling text

April 19, 1996

Dear **:

On April 18, 1996, you wrote me concerning the tax responsibilities of your
client, COMPANY A, for tax under lump-sum contracts with a contractor who is
not registered with the State of Texas.

The facts as you set them out are that COMPANY A executed a contract for
remodeling real property in Texas with CONTRACTOR ABC. The contractor attested
"that he is authorized to do Business in the state in which the project is
located and properly licensed by all necessary governmental and public and
quasi-public authorities having jurisdiction over him and hover the work and
the project." The contract was silent as to taxes, and the contractor did
not hold a sales tax permit.

COMPANY A has been assessed tax which you believe is unjust because it is the
contractor's responsibility to pay the tax on lump sum contracts and ask that I
advise you whether COMPANY A can be held responsible for the taxes on these
contracts.

COMPANY A is liable for the tax. At one time, a contractor doing remodeling
under a lump sum contract was responsible for tax on the cost of its materials
(labor not being taxable), and the purchaser had no responsibility for tax on
the materials. However, once the sales tax was amended to tax remodeling
services, the entire charge for the service became taxable; and the contractor
provisions no longer applied to these services. Consequently, the same rules
applied to purchases of other taxable items became applicable to the purchase
of remodeling services. A customer purchasing a taxable item is responsible
for sale tax if the seller failed to collect it. As you know, we routinely
set up tax against purchasers on items on which no sales tax was collected.
Therefore, even if the contractor had been registered, it still would have been
proper for the auditor toassess tax on the remodeling charges to COMPANY A on
which no sales taxes were collected.

I hope this satisfactorily explains why the tax was assessed against COMPANY A.
If you have any further questions, please contact me.

Sincerely,

Wade Anderson
Director, Tax Policy

NOTE: Previous Accession Number 9604142L