Is installing audio/video (home theater/surround sound) wiring and equipment taxable in Texas, and does it matter if it's new construction, residential, or commercial remodeling?

Plain-English summary

A company that designs, sells, installs, and services audio and video "home theater"/surround-sound systems for homes and businesses asked the Comptroller to walk through the taxability of its various charges, specifically limiting the analysis to work that doesn't require a private security license (separately licensed security work is taxed differently, addressed at the end).

The core rule: installation labor is only taxable when tied to a taxable sale of tangible property or a taxable service like nonresidential remodeling. From there, it comes down to the type of construction job:

• New construction (residential or commercial) and existing residential work: Labor to run cable within walls, floors, or ceilings is not taxable new-construction or residential-remodeling labor.
• Existing nonresidential (commercial) buildings: Labor to run cable is taxable as nonresidential remodeling. Notably, once a commercial space has been finished out or used for any commercial purpose, ALL later work on it counts as remodeling — it can never again qualify as "new construction," even if it's an early tenant buildout.
• Parts/equipment charges (speakers, screens, TVs) are always separately taxable as sales of tangible personal property, whether sold as standalone goods, under a separated realty-improvement contract, or bundled into a remodel. The one exception: a contractor working under a lump-sum new-construction or residential-remodeling contract is treated by law as the consumer of the materials it incorporates — it pays tax on its own purchase cost and recoups everything (materials, labor, profit) in one lump-sum charge to the customer, rather than collecting tax separately.
• Charges to residential builders, remodel companies, or interior designers follow the same rules: collect tax (or get a resale/exemption certificate) on taxable sales, but no separate tax is due on lump-sum realty-improvement contracts since the contractor is legally the consumer of the incorporated materials.

A related but separate issue the letter addresses: combination security/burglar-and-fire alarm systems are taxed in total as a "security service" under Sec. 151.0075/151.0101(a) regardless of whether they're installed during new construction or remodeling. But a fire alarm system installed separately from any security/burglar system is instead analyzed under the ordinary improvements-to-realty rules — taxable only when it's nonresidential remodeling, not when it's part of new construction. Materials for a taxable security or nonresidential-fire-alarm job can be bought tax-free for resale with a resale certificate; fire alarm materials installed as part of new construction are taxable to the end consumer (determined by whether the contract is lump-sum or separated).

What this means for you

Audio/video and home-theater installers

Whether your cable-running labor is taxable depends entirely on the type of job: nontaxable for new construction (any type) and existing residential work, but taxable for existing nonresidential (commercial) remodeling. Your equipment/parts charges are separately taxable regardless of job type, except under a lump-sum new-construction or residential contract, where you pay tax as the consumer instead of collecting it from the customer.

Security and fire-alarm installers

A combined security/burglar-and-fire system is always taxed in total as a security service. A standalone fire alarm system (no security/burglar component) follows the ordinary realty-improvement rules instead — taxable for nonresidential remodeling, not for new construction.

Common questions

Q: Is labor to run A/V cable always taxable?
A: No, per this letter — it's nontaxable for new construction (residential or commercial) and existing residential work, but taxable when it's remodeling of an existing nonresidential building.

Q: Does a commercial space ever go back to being "new construction" after it's been used?
A: No, per this letter — once a commercial space has been finished out or used for any commercial purpose, all later work on it is treated as remodeling, not new construction.

Q: Is a standalone fire alarm system taxed the same as a combined security/fire system?
A: No, per this letter — a combined security/burglar-and-fire system is always taxed in total as a security service, while a standalone fire alarm is analyzed under ordinary realty-improvement rules (taxable only for nonresidential remodeling).

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0075 (definition of "security service")
• Tex. Tax Code § 151.0101(a) (security services taxable in total)
• 34 Tex. Admin. Code Rule 3.291 (Contractors — new construction)
• 34 Tex. Admin. Code Rule 3.347 (improvements to realty)
• 34 Tex. Admin. Code Rule 3.357 (Real Property Repair and Remodeling)
• 34 Tex. Admin. Code Rule 3.333 (Security Services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9805565L

Original ruling text

May 29, 1998

Dear **:

Thank you for your recent letter which is restated in part with response below.

We are in the business of designing, selling, installing and servicing audio
and video systems for homes and businesses. Audio would consist of flush
mounted ceiling or wall speakers providing audio throughout a home or business.
Video would consist of anything from a simple television to a built in big
screen television to a projection screen that electronically lowers out of a
ceiling. These are commonly referred to a "surround sound" "home theater"
systems.

Based on my telephone conversation of May 28, 1998 with ** staff,
the scope of these responses is limited to materials and labor the sale of
which does not require a license under Section 13, Private Investigators and
Private Security Agencies Act (Article 4413(29bb), Vernon's Texas Civil
Statutes) "The Act". Charges for labor and materials, the sale of which
requires a license under The Act are subject to sales tax in total as the
provision of a security service (1).

1. Installation (labor) of audio/video systems for residential and for
   commercial use. Do we charge sales tax to our customers?

Response 1: Charges for installation are not in and of themselves taxable.
Such charges become taxable when the installation is done in connection with
the sale of tangible property or a taxable service such as remodeling of
nonresidential real property.

When determining the tax application for installations that become improvements
to realty, one must also evaluate whether the installation is a part of a new
construction contract, a contract for the repair or remodeling of residential
realty, or a contract for the repair or remodeling of nonresidential
improvements to realty. Charges for installation labor that constitutes new
construction or residential repair or remodeling are not taxed. However, the
total charge for installation that constitutes the repair or remodeling of
nonresidential improvements is taxed.

Labor to run cable within the walls and ceiling of a building at the time the
building is constructed and in residences (new and existing) is considered to
be new construction labor and is not subject to sales tax. Labor to run cable
within the walls and ceiling of an existing nonresidential building is
considered remodeling of nonresidential real property and is subject to sales
tax. I am enclosing Rule 3.291, regarding new construction, Rule 3.357,
regarding remodeling, and Rule 3.347 regarding improvements to realty.

2. Installation (parts) of an audio/video system for residential or commercial
   use. Do we charge sales tax?

Response 2: Separately stated charges for sales of tangible property are
subject to sales tax. This applies whether the property is sold as tangible
property, as part of a separated contract to improve realty, or as part of a
contract to remodel nonresidential realty.

Contractors improving realty under a lump-sum contract for new construction or
residential remodeling are the consumers of all materials they incorporate into
the realty. They owe tax on the purchase price of the materials and recoup all
of their costs and profit in their lump-sum charge to their customer.

3. Do we charge sales tax on equipment if said equipment is being installed in
   a new residence and incorporated into realty?

Response 3: Please refer to Response 2.

4. Do we charge sales tax on installation (labor) if said labor is for the
   installation of equipment into a new residence?

Response 4: Such charges become taxable when the installation is done in
connection with the sale of tangible property that retains its character as
tangible property after installation. You may care to refer to the enclosed
Rule 3.347 regarding improvements to realty.

5. Do we charge sales tax on equipment if said equipment is being installed in
   a new commercial space?

Response 5: Please refer to response 2. Also, it is important to note that
once a commercial space has been finished out or used for some commercial
purpose, that subsequent work is considered taxable real property remodeling.

6. Do we charge sales tax on installation (labor) if said labor is for the
   installation of equipment into a new commercial space?

Response 6: It is important to note that once a commercial space has been
finished out or used for some commercial purpose, that subsequent work is
considered taxable real property remodeling. Please refer to response 1.

7. Do we charge sales tax on equipment and labor to a residential builder,
   interior remodel company or interior designer?

Response 7: You must collect sales tax or obtain a properly completed resale
or exemption certificate from your customer for all taxable sales. No tax is
due on charges related to lump-sum contracts to improve realty since the
contractor is by law the consumer of the materials incorporated into the
realty.

8. Would the answers to any of the above questions be any different if we were
   strictly an audio/video company?

Response 8: All of the above responses are made based on the firm acting
strictly as an audio/video company. A single charge made for the provision of
services for which a license is required under "The Act" and other unrelated
services will be taxable in total. Accordingly, such charges should be
separately identified to the customer.

(1) Tax Code Section 151.0075. defines "Security service" as a service for
which a license is required under Section 13, Private Investigators and Private
Security Agencies Act (Article 4413(29bb), Vernon's Texas Civil Statutes). The
total charge for labor and materials to perform security services are subject
to sales tax under Tax Code Section 151.0101(a).

Security services include the functions of selling, installing, monitoring, and
maintaining security systems. The application of sales tax does not change
whether the installation occurs during the initial construction of a building
or occurs during repair or remodeling of an existing building. See Rule 3.333

• Security Services.

The installation of a combination security/burglar and fire alarm system will
be treated as a security service. However, the sale and installation of a fire
alarm system that is separate and apart from a security/burglar alarm system is
not treated as a security service but rather as an improvement to realty.

The installation of the fire alarm system separate from any security system is
taxed when the job is non-residential remodeling and is not taxed when the fire
alarm system is installed as a part of a new construction contract. See Rules
3.291 - Contractors and 3.357 - Real Property Repair and Remodeling.

Materials and equipment purchased to be installed and resold as a part of a
taxable security service or installation of a fire alarm system which is
non-residential repair or remodeling may be purchased tax-free for resale. You
must issue a resale certificate to your supplier at the time of purchase. Fire
alarm materials and equipment purchased to be installed as part of a new
construction contract are taxable to the end consumer. The end consumer is
determined by the type of contract: lump-sum or separated. Please refer to Rule
3.291.

This opinion is rendered based on the facts presented. If there are additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division