Can a sole-proprietor furniture manufacturer occasionally install pieces that get permanently attached to real property, without losing manufacturing tax exemptions on the equipment used to make them?

Plain-English summary

A one-person furniture-manufacturing business (corporate furniture and accessories, some of it permanently affixed to real property once delivered) wanted to occasionally offer installation too, but worried that becoming a "contractor" for those jobs would strip away the manufacturing exemptions the equipment purchases currently enjoy. This full email thread is preserved: the taxpayer's detailed original question (with several structuring options he was considering -- a new DBA, a joint venture with another craftsman, a formal partnership, or a corporation) followed by the Comptroller's point-by-point response.

Forming a genuinely separate legal entity works. A separate partnership or corporation (not just another DBA under the same sole proprietorship) can do the installation. If the manufacturing sole proprietorship sells the finished item to the customer (or to the installation entity), and the separate partnership/corporation is the one hired and billed for installation, the sole proprietorship keeps its manufacturing exemptions intact.

Self-billed installation is different, but not necessarily fatal. If the manufacturer bills for the installation itself -- even while subcontracting the physical labor to someone else -- the manufacturer is treated as a contractor/service provider for that job, because it's charging for manufacturing AND incorporating the item into realty. But this doesn't automatically strip the exemption entirely: instead, the manufacturer owes use tax on the fair market rental value of the equipment, just for the time it was used to fabricate the installed item. The letter is candid about the tradeoff: this can work fine for occasional installation jobs, but could cost more in accrued use tax than the sales tax originally saved if installation work becomes frequent.

Two follow-up questions get quick answers. Billing as a consultant while merely supervising a separate entity's installation does NOT make the manufacturer a contractor -- stand-alone consulting services don't trigger contractor status. But a single lump-sum charge covering materials, fabrication labor, installation labor, profit, and overhead together IS treated as a lump-sum real-property-improvement contract, which disqualifies the fabrication equipment from manufacturing exemptions -- so "free" installation folded into one combined charge doesn't avoid the issue.

What this means for you

Small manufacturers considering occasional installation work

You don't need heavy corporate restructuring to protect your manufacturing exemption for occasional installs -- a genuinely separate entity for installation is the cleanest path, but self-billing for occasional installation while paying use tax on equipment rental value is also a legitimate, letter-sanctioned option if installation stays infrequent.

Sole proprietors weighing a DBA vs. a true separate entity

Note the sharp line the Comptroller draws: a new DBA under your existing sole proprietorship doesn't count as a separate entity for this purpose -- you need an actual partnership or corporation.

Anyone billing a combined lump sum for materials plus installation

Watch out: bundling materials, fabrication, and installation into one lump-sum price is treated as a real-property-improvement contract that can disqualify your fabrication equipment from manufacturing exemptions, even if you'd otherwise qualify.

Common questions

Q: Does forming a new DBA under my existing sole proprietorship protect my manufacturing exemption?
A: No -- the letter specifically requires a genuinely separate legal entity (a partnership or corporation), not another DBA under the same sole proprietorship.

Q: If I subcontract installation but still bill the customer myself, do I lose my manufacturing exemption?
A: Not entirely -- you're treated as a contractor for that job and instead owe use tax on the fair rental value of the equipment for the time used to fabricate the installed item, rather than losing the exemption altogether.

Q: Does supervising installation as a "consultant" create contractor status?
A: No -- stand-alone consulting services don't make you a contractor or jeopardize your manufacturing exemptions.

Q: Does billing one combined price for materials and installation avoid the issue?
A: No -- a single lump-sum charge for materials, fabrication, and installation is treated as a lump-sum real-property-improvement contract, disqualifying the fabrication equipment from manufacturing exemptions.

Q: Does this letter bind the Comptroller for my business structure?
A: No -- this is an informal 2001 letter answering one taxpayer's specific plans, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else.

Citations and references

No statutes or rules were cited by section number in this letter; it applies the Comptroller's general framework distinguishing manufacturers from contractors/real-property-improvement service providers.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200109479L

Original ruling text

September 21, 2001

Dear **:

Thank you for using tax.help to inquire about forming a second legal entity to
incorporate items you manufacture into realty. You asked if this would be
possible without losing the manufacturing exemptions available to you now.

As I understand it, you are a sole proprietor manufacturing operation. You make
corporate furniture and accessories items. Some of the furniture is permanently
affixed to realty. You would like to be able to install the furniture (which
would make you a contractor or a service provider) without losing the
manufacturing exemptions. You asked if you could accomplish this by forming a
second entity to do the installation.

You may form a second legal entity (i.e., a separate partnership or a
corporation but not another DBA under your existing sole proprietorship) to
install the items you manufacture in your sole proprietorship. Your customer
may hire the manufacturing sole proprietorship to manufacture the furniture.
You must either sell the manufactured items to customer or the installation
partnership or corporation. Your customer could then hire the partnership or
corporation to then install the items. By having the partnership or corporation
install the items your sole proprietorship sells to them, you would not lose
the manufacturing exemptions afforded to the sole proprietorship. If you only
subcontract the separate entity to do the installation but you bill for the
installation, you would still be considered a contractor or service provider
rather than a manufacturer. This is because you are charging for the
manufacture and incorporation of the furniture into realty.

However, I should point out that if you do the installation under the sole
proprietorship or if you subcontract and bill for the work provided by a
separate entity, you do not lose the manufacturing exemptions. You would just
be required to pay use tax based on the fair market rental value of the
equipment for the period of time it was used to fabricate the furniture you
incorporate into realty. This may be a viable solution if you do not do much
installation work. It would not be viable if you do a lot of installation
because you could accrue much more in use tax than you would have paid in sales
tax on the original purchase price.

You also asked "What happens if I bill as a consultant while supervising an
installation by a separate entity? Does that make me a "contractor"?

Response: No, consulting is not the same thing as improving realty and
consulting services sold on a stand-alone basis would not make you a contractor
such that you would lose any manufacturing exemptions.

You also asked, "What if installation is done for free?"

Response: A single charge for materials, fabrication labor, installation labor,
profit and overhead, and any other expenses incurred in fabricating and
installing the items produced in your sole proprietorship would be a lump-sum
contract to improve realty and would disqualify the equipment used in
fabricating the items incorporated into realty from any manufacturing
exemptions.

This opinion is based on the facts presented. Other facts, though similar, may
result in different answers.

I hope this information is helpful. I'll be glad to help you if you have
additional questions. You may e-mail your questions to
. My direct telephone line is (512) 475-0037. The
toll-free number is 1-800-531-5441, ext. 5-0037.

Sincerely,

Lindey Osborne
Tax Policy Division

On Tue, 28 Aug 2001 10:40:46 -0500 "**" wrote:

Sirs,

I am a sole proprietor of a manufacturing business (corporate furniture and
accessory items). I would like to be able to provide installation services to
my clients. As a one man business, I can not afford the additional cost and
paperwork time involved in losing my "manufacturer" status and becoming a
"contractor". I see two choices, not providing the service, or forming a
separate company to perform installations. My question is then, how will the
comptrollers office determine the separation of the two entities?

The first and preferred option is creating a new sole proprietorship by:

a.. Registering a new DBA.

b.. Opening a separate bank account.

c.. Operate from a separate location.

d.. Operate at a profit

As I expect to only be asked to actually install (as opposed to simple
delivery) once or twice per year, I could form a joint venture with another
craftsman to install on a per project basis, or other time or result based
term. The joint venture would be codified by contract, but billed through my,
or the other craftsman's existing business and accounts.

Next option would be to form a partnership:

a.. Registering a new DBA.

b.. Opening a separate bank account.

c.. Acquire a partner, active or silent.

d.. Operate at a profit.

The last, and sure option is to form a Close or sub chapter S corporation.
This I know would be a separate legal entity.

This issue just came up as I was preparing a proposal to build and install 3
metal legs that would be attached physically to real property (residential),
and I called the help line for a clarification. This would be a new direction
for my business and would be done mainly as an occasional courtesy for my
clients. My work to date has been strictly furniture type items which are
simply delivered, or millwork items sold to a third party who either installed
or had them installed by a fourth party.

I know that on the surface it sounds like I am asking for advice on how to
skirt the law, but as one of only three woodshops in CITY I have been in that
is complying with fire, safety, EPA, TNRCC, and TX Dept. of Health
regulations, I am just trying to find a way to perform this service without
changing the "manufacturing" nature of my operation, comply with the law, and
remain relatively efficient (very important for a one man shop).

Other related questions are:

a.. What happens if I bill as a consultant while supervising an installation by
a separate entity? Does that make me a "contractor"?

b.. What if installation is done for free?

This is a tough one, I hope the answer doesn't harm the consumer or is
inflationary. Thank you.