Which of a property management company's typical fees are taxable -- standalone building-management services, insurance-related inspections/claims, and markup fees for rebilling contracted repair or construction work?

Plain-English summary

This document preserves an entire three-round email exchange (August, September, and October 2001) between a Texas Comptroller analyst and an office-building property management company, working through several distinct fee scenarios.

Round 1 (standalone management fees). The company charges a single management fee covering lease administration, rent collection, accounting, insurance-claims handling, ad valorem tax consulting, customer service, property inspections, vendor/maintenance coordination, and special-project administration. The Comptroller's answer: most of these -- lease administration, rent collection, accounting, ad valorem consulting, vendor/maintenance coordination, and property inspections unrelated to insurance -- are not taxable on a standalone basis. But insurance-related property inspections and insurance claims handling ARE taxable insurance services under Rule 3.355. If a single bundled fee covers both taxable and nontaxable pieces, the whole fee escapes tax only if the taxable portion is under 5% of the total (Rule 3.355(j)); at 5% or more, the whole fee is taxable unless the taxable services are separately stated on the bill.

Round 1, second question (contracted repair/construction markup). Separately, the company also rebills building owners for outside contractors it hires for construction and large repairs/maintenance, adding roughly a 15% administrative/management markup. The Comptroller's initial answer: yes, taxable -- the sales price of a taxable service includes the cost of labor and services employed (Tax Code § 151.007(a)(2); Rule 3.356(n)), so the markup rides along with the underlying taxable service.

Round 2 (the follow-up). The taxpayer pushed back, citing two other STAR documents (200009664L and 9201L1151C06) suggesting that supervising or coordinating repair/remodeling work could be nontaxable, and described its own oversight duties (bidding the job, inspecting work, paying bills, monitoring progress).

Round 3 (the clarification, this final letter). The Comptroller clarified rather than reversed the position: it depends on what kind of underlying work is being coordinated. A management fee for coordinating new construction or nonresidential real property maintenance is not taxable, because that underlying labor is itself nontaxable. But a management fee for coordinating nonresidential real property repair and remodeling -- a taxable service category -- stays taxable, including the markup, because the whole charge to the property owner (contractor invoice plus markup) is part of the taxable repair/remodel service's sales price. The two cited STAR documents didn't apply to this taxpayer's facts: in 200009664L, the management company wasn't arranging materials or supervising construction labor at all; in 9201L1151C06, the Comptroller's guidance was that supervision-only fees are nontaxable specifically when the manager has NO responsibility for the work performed by others -- which didn't match this taxpayer's active role in contracting, rebilling, and marking up the work.

What this means for you

Property management companies

Break your fees down by category before assuming a blanket answer. Standalone administrative/leasing/vendor-coordination work is generally exempt; insurance-related inspections and claims work is taxable; and fees tied to rebilling outside contractors turn on whether the underlying contracted work is itself a taxable repair/remodel (markup taxable) or nontaxable new construction/maintenance (markup not taxable) -- even if your markup percentage and oversight duties look identical across both.

Building owners paying management fees

If your management company both hires contractors for a repair/remodel job AND actively bids, inspects, and pays for that work (not just passive supervision with zero responsibility), expect the full rebilled amount, including the management markup, to carry sales tax.

Accountants and tax professionals

The 5% de minimis rule in Rule 3.355(j) is the key mechanic for bundled property-management fees that mix taxable insurance-related services with nontaxable general management services -- track the taxable-service share of any single combined fee, and separately state taxable components once that share hits 5% to preserve exemption on the rest.

Common questions

Q: Is a property management fee for handling insurance claims taxable?
A: Yes -- insurance claims handling is a taxable insurance service under Rule 3.355, separate from the company's other, generally nontaxable management functions.

Q: If insurance-related work is bundled into one flat management fee, does that make the whole fee taxable?
A: Only if the taxable (insurance-related) portion is 5% or more of the total fee. Below that threshold, the whole bundled fee is nontaxable; at or above it, the whole fee is taxable unless the taxable services are separately stated.

Q: Is a markup on rebilled contractor work always taxable?
A: No -- it depends on whether the underlying contracted work is a taxable nonresidential repair/remodel (markup is taxable, riding with the underlying service) or nontaxable new construction/maintenance (markup is not taxable).

Q: Can I rely on a prior STAR letter that seems to say supervision fees are nontaxable?
A: Only if your facts genuinely match -- this letter shows the Comptroller distinguishing two prior STAR documents because the taxpayer here actively contracted for, rebilled, and marked up taxable repair work, rather than providing pure hands-off supervision with no responsibility for others' work.

Citations and references

Statutes:

• Tex. Tax Code § 151.007(a)(2) (sales price includes cost of labor/services employed)

Rules:

• 34 Tex. Admin. Code Rule 3.355 (insurance services)
• 34 Tex. Admin. Code Rule 3.355(j) (5% de minimis rule for bundled fees)
• 34 Tex. Admin. Code Rule 3.356(n) (real property services)

Prior STAR guidance distinguished (not controlling on these facts):

• STAR document 200009664L (management company not arranging materials/supervising construction labor)
• STAR document 9201L1151C06 (supervision-only fee nontaxable only where manager has no responsibility for others' work)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200110520L

Original ruling text

October 1, 2001

Subject: Sales Tax On Management Fees

Dear **:

Thank you for your follow-up question concerning the management fees on
construction and large repairs or maintenance.

You indicated that your search on the produced two documents
(200009664L and 9201L1151C06) that indicate that management fees charged by a
property manager for supervising or coordinating taxable nonresidential repair
or remodeling are not taxable.

Your original inquiry is restated below (with emphasis added):

In another context, for construction and large repairs and maintenance, YOUR
PROPERTY MANAGEMENT COMPANY REBILLS FOR SERVICES YOUR COMPANY CONTRACTS OUT (or
does not use your own employees for). The amount billed to the building owner
includes the contractor invoice, plus an additional amount (typically 15%)
which represents an administrative or management fee on the rebilled service.
Is the administrative or management fee in such context subject to sales tax?"

My response was that the management fee is taxable as part of the sales price
of a taxable service as defined in Texas Tax Code Section 151.007(a)(2). I'd
like to clarify this response.

A management fee charged for coordinating or managing contracts for new
construction or nonresidential real property maintenance is not taxable. New
construction and nonresidential real property maintenance labor are not
taxable.

Nonresidential real property repair and remodeling services are taxable. The
total amount that you charge to the property owner is taxable, including the
management fee.

The STAR documents you found do not apply to your fact situation. In STAR
document 200009664L, the management company did not arrange for purchasing of
construction materials or furnishing or supervising construction laborers or
building trade personnel. In your fact situation, your company contracts for
the services, rebills the property owner for those services and adds a
management fee.

In STAR document 9201L1151C06, the comptroller's responded to items (4) and (5)
concerning management fees and commission earned by a property management
company and fees paid by the property owner:

"Management fees and commissions earned by a property management company are
not taxable when the payment is for services that are UNRELATED to a taxable
service.

. . . . . . . . . .

"If the property management company enters into an agreement with the property
owner for supervision only AND IS IN NO WAY RESPONSIBLE FOR THE WORK PERFORMED
BY OTHERS, then the management company could be considered to be providing a
nontaxable service."

(Emphasis added.)

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

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825. My
email address is .

Sincerely,

Eddie C. Washington
Tax Policy Division

On Fri, 28 Sep 2001 14:06:43 -0500 "**" wrote:

Dear Mr. Washington,

Thank you for your response regarding our questions on management fees. We
understand the response to our first issue. We would like to ask for
clarification on our second issue (regarding management fees on construction
and large repairs and maintenance). In doing some research on the
we came across letters 200009664L and 9201L1151C06 which seem to state that the
coordination or supervision of taxable repair or remodeling jobs can be
considered a nontaxable service. Our company's duties in overseeing the repair
or remodeling jobs include bidding the job, inspecting the work, paying the
bills, and monitoring the progress of the job.

In such an instance would the supervision services on taxable repair or
remodeling jobs be not subject to sales tax? Thank you again for your time and
efforts.

September 24, 2001

Subject: Sales Tax on Management Fees

Dear **:

Thank you for your recent email concerning the taxability of management fees.

Your company is in the business of property management of office buildings.
For existing buildings, your company charges a management fee which represents
compensation for lease administration, collections, accounting, handling
insurance claims, ad valorem tax consultation, customer service, property
inspections, vendor and maintenance coordination, and special project
administration. Are the management fees taxable for sales tax purposes?

Answer: Property management services and the fee charged for such services are
not taxable when performed on a stand-alone basis. Services for lease
administration, collections (of rent), accounting, ad valorem consultation,
vendor and maintenance coordination are not taxable. Property inspections that
do not pertain to a policy of insurance are not taxable.

Inspections of property for purposes of insuring the property are taxable
insurance inspections under Rule 3.355 concerning insurance services. Handling
insurance claims is taxable as insurance claims processing.

If a single fee is charged for all of the services and the amounts attributable
to the taxable services are less that 5.0% of the total fee, the fee is not
taxable. However, if the amount attributable to the taxable services are 5.0%
or more of the fee, the total amount is taxable unless the charge for the
taxable services are separately stated. See Rule 3.355(j).

In another context, for construction and large repairs and maintenance, your
property management company rebills for services your company contracts out (or
does not use your own employees for). The amount billed to the building owner
includes the contractor invoice, plus an additional amount (typically 15%)
which represents an administrative or management fee on the rebilled service.
Is the administrative or management fee in such context subject to sales tax?

Answer: Yes. The sales price of the taxable service includes the costs of
labor or services employed. See Texas Tax Code Section 151.007(a)(2) and Rule
3.356(n) concerning real property services.

The referenced Comptroller rules are available at:
. Click on
State Tax Rules and scroll down to the referenced rule(s).

You may view or down load the sales tax law by clicking on the following URL
.

Sincerely,

Eddie C. Washington
Tax Policy Division

On Mon, 27 Aug 2001 14:05:19 -0500 "**" wrote:

A question has arisen regarding sales tax on management fees.

Our company is in the business of property management of office buildings. For
existing buildings, our company charges a management fee which represents
compensation for lease administration, collections, accounting, handling
insurance claims, ad valorem tax consultation, customer service, property
inspections, vendor and maintenance coordination, and special project
administration. Are the management fees taxable for sales tax purposes? In
another context, for construction and large repairs and maintenance, our
property management company rebills for services our company contracts out (or
does not use our own employees for). The amount billed to the building owner
includes the contractor invoice, plus an additional amount (typically 15%)
which represents an administrative or management fee on the rebilled service.
Is the administrative or management fee in such context subject to sales tax?
Thank you for your time in responding to these questions.