My client makes and installs custom stone/marble tabletops and wood, vinyl, and stone flooring in homes -- when do I charge sales tax on the materials versus the labor, and can I buy materials tax-free for resale?
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This page answers the general question as of 1996. Ezel answers yours, under current Texas tax law, with citations.
Subject
Floor/Flooring — Wood/Vinyl/Stone — Installation/Remodeling/Repairs
Plain-English summary
A tax professional wrote in on behalf of a client who both fabricates and installs custom stone/marble tabletops and custom flooring (wood, vinyl, stone/marble/tile) in mostly residential homes. The client sometimes writes separately itemized contracts (breaking out labor from materials, with no markup on materials) and sometimes does not. The letter poses 19 detailed questions, and the Comptroller answers each one by applying a three-factor test for whether installed property becomes part of the realty (an improvement) or stays taxable tangible personal property (TPP): (1) actual or constructive annexation, (2) fitness/adaptation to the realty's purpose, and (3) intention of the parties -- with intention being the most important factor, and size/weight/design/potential damage on removal being only evidence, not controlling by themselves.
Applying that test, the ruling draws a clear line between the two products at issue:
- Flooring (tile, marble, stone, hardwood, wall-to-wall carpet, wall-to-wall vinyl) that is installed into a home is treated as an improvement to realty. That means residential installation labor is not taxable (whether new construction or repair/remodeling), but the contractor owes tax on the materials incorporated into the job unless the contract is a valid "separated contract" (labor and materials separately and fully itemized), in which case materials can be purchased tax-free for resale and the customer is instead charged tax on the separately stated materials.
- Stone/marble tabletops generally remain taxable TPP (furniture) even when extremely heavy, bolted to a pedestal, or custom-designed for a specific spot -- because merely setting something in place, however heavy or damage-prone if moved, is not by itself annexation. A tabletop only becomes a realty improvement if it is actually affixed into a countertop, kitchen island, or similar built-in that is itself annexed to the structure (e.g., bolted, glued, or caulked in place as a functioning part of the realty rather than a furnishing).
Other points addressed: diamond drill bits and other tools/supplies used in production/installation are always taxable to the contractor (even under a separated contract or manufacturing exemption); manufacturing equipment used directly to fabricate tabletops that remain TPP can qualify for the manufacturing exemption (with an exemption certificate), but hand tools and installation equipment do not; use tax applies the same way as sales tax to stone/marble purchased overseas and brought into Texas; wasted/scrap stone from a lump-sum residential job is taxable, but scrap that's simply thrown away from an installation-of-TPP or nonresidential remodeling job is not "use"; and equipment leases for both flooring and tabletop work are generally taxable (subject to the same manufacturing-exemption and divergent-use accrual rules).
What this means for you
Flooring installers and remodeling contractors
If you install tile, stone, marble, hardwood, or wall-to-wall vinyl flooring in a residence, your installation labor is not taxable, but you must either (a) pay tax on the materials when you buy them, or (b) use a genuine separated contract (fully itemizing labor and materials, no markup baked into materials) so you can buy materials tax-free for resale and instead collect tax from the customer on the materials portion. A contract that only partially itemizes, or that folds any labor into the materials price, is treated as a lump-sum contract instead.
Fabricators of custom tabletops, countertops, and islands
A stone or marble tabletop by itself is taxable TPP, no matter how heavy or custom-fit -- unless you actually affix it into a countertop, island, or similar structure that becomes a functioning part of the realty. If you just set a heavy tabletop or pedestal in place without bolting, gluing, or caulking it in as part of a built-in, it stays taxable furniture, and your installation labor charge is taxable too (unless it happens to be nonresidential repair/remodel labor, which is also taxable).
Anyone buying tools, equipment, or leasing machinery for this work
Tools and supplies consumed in production (like diamond drill bits) and equipment used in installation are always taxable when purchased or leased -- the manufacturing exemption only reaches machinery/equipment used directly to manufacture items (like a tabletop) that retain their identity as TPP once installed.
Common questions
Q: If my flooring contract states labor and materials separately, do I still pay tax on the flooring materials?
A: Not to your supplier -- under a valid separated contract you can issue a resale certificate and buy the flooring materials tax-free, then charge your customer sales tax on the separately stated materials amount.
Q: Is a heavy stone tabletop automatically a realty improvement because it would damage the house if removed?
A: No. The ruling states potential damage on removal is "only an indication of attachment" and is not controlling; the tabletop stays taxable TPP unless it is actually affixed into a countertop or island that is itself annexed to the realty.
Q: Do I owe use tax on stone or marble I import from overseas?
A: Yes, in the same manner as sales tax -- unless you will be collecting sales tax from your customer on that stone/marble as part of the job (e.g., as a lump-sum contractor incorporating it into realty, you pay use tax; if you're reselling it as TPP and taxing your customer, you don't).
Q: Are diamond drill bits and other production tools ever exempt?
A: No -- per the ruling, tools like diamond drill bits are taxable to the contractor under both lump-sum and separated contracts, and regardless of whether the finished product is an installation 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/9605285L
Original ruling text
May 13, 1996
Dear ***:
I am responding to your letter requesting information about the tax
responsibilities of your client. This client is in the business of preparing
and then installing custom tabletops and custom flooring into residential real
estate; very little work is done on commercial real estate. You provided the
following additional fact statements:
My client is capable of invoicing on an itemized basis by breaking out the cost
for labor and the cost for materials, but does so only where the written
contract specifies itemization of such amounts and specifies the amount being
paid for each. (No markup is allocated through the contract or otherwise to the
materials; further, the allocation as to materials is never less than what it
actually costs my client to purchase such materials.)
My client only enters into contracts which specify and itemize the amount of
materials necessary to produce the tabletop and/or flooring and the labor cost
for manufacturing same.
Installation means that the tabletop, flooring and/or other items are
permanently affixed to the real property structure. They are considered
fixtures and may not be easily removed from the property. This permanence may
not be technical attachment. It may be better described as a piece that is
specifically designed for a particular location in a residence, which by its
nature (its weight, design, etc.) would cause severe damage to the residential
property and/or the table if removed. Even if the residence is sold, the
fixtures as a result of these characteristics would not be removed.
Costs of production are extremely high. Large amounts of raw materials such as
glue are purchased from suppliers in Texas. Also, tools such as diamond drill
bits and blades are used in production and often lost. The glue, of course,
remains with the fixtures; and sometimes the diamond drill bits are consumed
within the tabletop during production.
My client uses raw material it purchases in Texas; however, on occasion, stone
is purchased overseas for its flooring and tabletops.
Heavy mechanical equipment is used to prepare these tables and flooring for
installation.
My client has a sales tax permit and does issue resale certificates to
suppliers.
You asked that we respond to the following questions. Before I address your
specific questions I'd like to explain the basis for these responses.
Installation means to set in place for intended usefulness. Installation that
equals incorporating tangible personal property (TPP) into realty means there
has been some action taken by the installer to affix/annex the TPP to realty.
The total charge to sell and install (set in place without any annexation) TPP
that retains its identity as TPP is taxed, even when a third party will later
affix the item just as it was set in place.
It has been determined by the court and by Comptroller Administrative hearings
on similar issues that there are three factors to consider when determining
whether installation of an item causes the item to become realty or to remain
tangible personal property: (1) real or constructive annexation, (2) fitness or
adaptation to the purposes of the realty, and (3) intention of the parties.
Factor 3 is considered the most important with 1 and 2 being evidence of 3.
Size, weight, and design are not controlling; substantial damage is only an
indication of attachment and also not all controlling.
- Does installation into residential real property causing the property
installed not to be tangible personal property and therefore improvements to
realty, include:
(A) The placement into the customer's real property of large extremely heavy
stone and marble table tops that are virtually immovable by the real property
owner?
Response: No, unless the tabletop is affixed to a table that is itself annexed
into the realty and is a functioning part of the realty (not a furnishing in
the realty). Built-ins such as kitchen countertops, bathroom countertops, and
kitchen islands are improvements to realty. If your client installs and affixes
such countertops, then the client has incorporated the TPP into realty.
(B) If (A) is not included, would it matter if the real property will be
defaced if the tabletop is removed?
Response: No.
(C) The laying of tile and/or marble and/or other stone flooring?
Response: Yes, installation of tile flooring, marble flooring, and stone
flooring is installation that qualifies as improving realty. The same applies
to wall to wall carpeting, hardwood floors, wall to wall vinyl flooring, etc.
- Must a marble or stone tabletop be permanently attached to some part of the
structure to be considered an improvement to realty?
Response: Yes, see discussion above and response to 1(A).
- If not, does just laying the tabletop down constitute attachment since
tabletops generally weigh hundreds of pounds?
Response: No.
- If the answer to #2 is yes, would it make a difference if the residential
real estate was specifically designed for the tabletop to be placed there?
Response: No, regarding the tabletop; no, regarding the countertop when your
client simply sets the stone in place; yes, for the countertop if your client
is also affixing (bolting down, gluing in place, caulking, etc.) it to the
realty.
- Does installing a marble or stone tabletop that is attached to a pedestal
into a new or existing residential real property constitute an improvement to
realty (the pedestal is not attached to the floor or any other part of the real
property, but is virtually immovable due to the total weight of the tabletop
and the pedestal)?
Response: No, furniture (even when heavy, large or bolted to the floor) is not
considered an improvement to realty. Again, see response to 1(A).
- Is the installation of stone flooring considered an improvement to realty?
Response: Yes.
- Is the contract entered into with the real property owner/customer to
produce and install the stone flooring where labor and materials are separately
stated, a contractor's separated contract?
Response: Yes, if the contract separately states all the labor from the
incorporated materials. No, if the price of the materials includes any labor to
produce the stone flooring. A person that both produces and installs must put
all labor into the construction labor category; otherwise the contract is
treated as a lump-sum contract.
- Does my client have to pay sales tax to its suppliers for the marble or
stone it purchases?
Response: No, under a separated contract, remodeling of nonresidential
property, and in the sale and installation of TPP, the client may purchase the
stone for resale. The client must pay tax on marble incorporated into
residential realty under a lump-sum contract.
- Does my client have to pay sales tax to its suppliers for the glue it
purchases?
Response: See response to 8.
- Does my client have to pay sales tax to its suppliers for the diamond drill
bits it purchases?
Response: Yes, under both lump-sum and separated contracts and for installation
of TPP.
- If #7 above is yes, is the charge for the labor on the flooring specifically
identified in the contract something for which my client should charge sales tax?
Response: No, the labor to install flooring is not taxable whether residential
new construction or residential repair or remodeling labor. Yes, for nonresidential
repair or remodeling. Again, all labor is treated as construction labor.
- If it was not specifically identified in #11, would sales tax be
appropriate?
Response: No, the charge to the customer for lump-sum residential new
construction or lump-sum residential repair or remodeling labor is not taxable.
Yes, for nonresidential repair or remodeling. The client must pay tax on all
taxable items used to perform the work and all taxable items incorporated into
the realty.
- If #8 above is yes, is the charge for the labor on the tabletop
specifically identified in the contract something for which my client should
charge sales tax?
Response: The client's charge to its customer for installation labor is taxable
when the tabletop remains TPP (furniture) or is nonresidential repair or
remodeling. The client's charge to its customer for installation labor is not
taxable as residential new construction or residential repair or remodeling
when the marble, etc., is installed into the countertop or island, etc.
- Does my client have to pay sales tax to its suppliers for those items used
and consumed in the production of its flooring that have not been mentioned in
the contractor's separated contract?
Response: Yes. The tools and supplies used in the production and installation
of flooring that is incorporated into realty by your client are taxable to your
client when purchased.
- Does my client have to pay sales tax to its suppliers for those items used
and consumed in the production of its tabletops that have not been mentioned in
the contractor's separated contract?
Response: Machinery and equipment qualify for the manufacturing exemption when
used by your client directly in the production (manufacturing) of tabletops
that once installed retain their identity as TPP. Your client may issue an
exemption certificate for these qualifying items. Hand tools used in
manufacturing and equipment, tools, or other supplies used in the installation
are taxable to your client.
- Is use tax due on stone tabletops and stone flooring purchased overseas and
used in my client's business?
Response: Use tax is due in the same manner as sales tax. Your client owes use
tax on any item (stone, marble, etc.) brought into Texas for use. Use includes
the situations above when your client may operate as a lump-sum contractor.
Your client does not owe use tax when the client will be collecting tax from
the customer on the charge for the marble, stone, etc. However, any tools or
equipment brought into Texas for use will be taxable to your client as
described above. The client may claim the same manufacturing exemption on use
tax; see response to 15 above.
- On property described in #16, is use tax due on wasted stone not used that
becomes scrap?
Response: Whether use tax is due on wasted or scrap stone depends on the type
of job performed. Stone wasted or scraped from a lump-sum residential job is
taxed. Use tax is due on wasted or scrap stone that is diverted to use other
than for resale. Use does not include waste or scrap that is truly thrown away
from a job that is the installation of TPP or nonresidential remodeling.
- Is sales tax due on the lease of equipment used to prepare and install the
flooring?
Response: Yes.
- Is sales tax due on the lease of equipment used to prepare and install the
tabletops?
Response: Yes, with the exception of the manufacturing exemptions described in
15 above. If the manufacturing exemption is claimed and the equipment is used
in non-manufacturing activities, the client must accrue tax on the fair market
rental value for the time of divergent use. The liability for tax due on
divergent use does not end even when the tax accrued is equal or greater than
the amount of tax originally due on the purchase price. Tax on divergent use
continues as long as the divergent use is being made. Also, if your client
elects to stop accruing tax on divergent use and accrue tax on the original
purchase price, no credit is allowed for tax that was accrued on divergent use
against tax later accrued on the purchase price. Your client should determine
whether a piece of equipment will be used both in taxable and exempted manners,
the cost of paying tax on the original purchase price, the cost of accruing tax
on the divergent use, and pay tax according to the lesser of the two. Often,
paying tax at purchase is the lower amount of tax.
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 Policy Division, Comptroller of Public Accounts.
Sincerely,
Tax Policy Division
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