Is repair and remodeling labor on fractionally owned vacation homes taxable in Texas, and are the homes treated as residences or as hotels?

Note: This ruling is also indexed on STAR as a sales-tax document under accession 201808007L; it is the same ruling. The docket caption frames it as a "timeshare — undivided interest vs. right to use" question, but the ruling actually turns on whether the homes are hotels or residences — read the holding below, not the caption.

Plain-English summary

A development of 24 fractionally owned homes (each owner holds a 1/13th interest and may occupy a home 27 nights a year, buying extra "bonus nights" for more) hires contractors to repair and remodel the homes. The owner asked whether the labor on those jobs is taxable.

The ruling: yes — the repair and remodeling labor is taxable under Section 151.0047. Normally, repair/remodel labor on a residence is not taxable (only the materials are). But these homes are not "residences" or "residential property" under Rule 3.291(a)(12) — because they meet the hotel definition in Section 156.001. The deciding facts:

• The governing Declaration lets the developer (Taxpayer) rent the homes to the general public as hotel accommodations (Section 4.13), and
• Owners pay the developer for "bonus nights" beyond their allotted 27.

Rule 3.291(a)(12)'s definition of residence expressly excludes "hotels or any other facilities that are subject to the hotel occupancy tax." So the homes are hotels, their repair/remodel labor is taxable, and — for the same reason — charges to the public to occupy the homes and the owners' "bonus night" charges are subject to hotel occupancy tax under Chapter 156 (which the taxpayer was already collecting).

What this means for you

Owners and operators of fractional / vacation / short-term-rental properties

If your property is rentable to the public or otherwise subject to hotel occupancy tax, it is not a "residence" for the repair-and-remodeling rules — so contractor labor on it is taxable, unlike labor on a true home. Contractors billing lump-sum on such jobs should be collecting tax on the full charge (labor + materials); on separated billing, tax applies to both labor and materials here, not materials only.

Contractors

Don't assume a house-shaped structure is a "residence." A property that meets the hotel definition (rentable to the public, subject to hotel tax) makes your repair/remodel labor taxable under Section 151.0047. Confirm the property's status before treating labor as nontaxable.

Common questions

Q: Isn't repair/remodel labor on a home nontaxable?
A: On a true residence, yes — only materials are taxed. But these fractionally owned homes are hotels, not residences, so the labor is taxable too under Section 151.0047.

Q: Why are the homes "hotels"?
A: The developer may rent them to the general public and owners pay for extra "bonus nights," so they meet the Section 156.001 hotel definition — and Rule 3.291 excludes hotels from "residential property."

Q: Are the occupancy charges taxable?
A: Yes. Because the homes are hotels, charges to the public to occupy them and owners' bonus-night charges are subject to hotel occupancy tax under Chapter 156.

Q: Does the timeshare contract type control the answer?
A: No. Despite the caption, the ruling turns on the homes meeting the hotel definition, not on whether owners hold an undivided interest or a right to use.

Q: Can another development rely on this ruling?
A: No. A Texas private letter ruling binds the Comptroller only as to the requesting taxpayer and its specific facts.

Citations and references

• Tex. Tax Code § 151.0047 — makes real property repair and remodeling a taxable service, except on a structure used as a residence.
• Tex. Tax Code § 156.001 — defines "hotel"; the homes qualify because they can be rented to the public.
• Tex. Tax Code § 156.051 — imposes hotel occupancy tax on charges for the use of a hotel room/space.
• 34 Tex. Admin. Code Rule 3.291(a)(12) — defines residence/residential property and excludes hotels and facilities subject to hotel occupancy tax.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/201808013L

Original ruling text

This document is also indexed as a sales tax document - STAR 201808007L

August 13, 2018

RE: Private Letter Ruling No. 20171109103358

Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated Nov. 7, 2017 and additional information we received on Nov. 27, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of real property repair and remodeling of fractionally owned homes.

Facts Presented

** (Taxpayer), is a development consisting of 24 homes. The homes are fractionally owned. Each homeowner holds a 1/13th interest in a home, and may occupy the home for 27 nights each year. Owners may pay a fee for “bonus nights” that allow them to occupy homes for more than their allotted 27 nights per-year. The homes are occupied by owners on a continuous or nearly continuous basis.

Section 4.1 of the Declaration of Covenants, Conditions, and Restrictions (Declaration) for Taxpayer states, “Each Owner shall occupy his Assigned Home or Unit as a single family private dwelling for himself, members of his family, his guests, and invitees…. Unit or Home Owners may not rent or lease their Ownership Interest in a Unit or Home.” Section 4.13 of the Declaration states that Taxpayer may rent any home or unit as a hotel accommodation to members of the general public. Taxpayer has been collecting and remitting hotel occupancy tax on its rentals of the homes.

Taxpayer hires contractors to perform repair and remodeling on homes within the development. The contractors typically bill on a lump-sum basis for labor and materials on these projects and are currently not collecting tax. When the contractors bill separately for labor and materials, the contractors collect tax on the charges for materials, but not on the charges for the labor.

Question, Ruling, and Analysis

Question: Are charges for real property repair and remodeling labor performed on fractionally owned homes within Taxpayer’s development taxable?

Ruling: Yes. Charges for real property repair and remodeling labor performed on the fractionally owned homes within Taxpayer’s development are taxable under Section 151.0047 (“Real Property Repair and Remodeling”). The fractionally owned homes are not “residences” or “residential property” as defined in Rule 3.291 (Contractors).

Analysis:

Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (“Taxable Item”). The term “taxable services” includes only those services listed in Section 151.0101 (“Taxable Services”). Real property repair and remodeling services are included in the list of taxable services. Under Section 151.0047, “real property repair and remodeling” is the “repair, restoration, remodeling, or modification of an improvement to real property other than a structure or separate part of a structure used as a residence.”

Rule 3.291(a)(12) defines a “residence” or “residential property” as “property that is used as a family dwelling, a multifamily apartment or housing complex, nursing home, condominium, or retirement home…. The term does not include hotels or any other facilities that are subject to the hotel occupancy tax.” Section 156.001(a) (Definitions) defines a hotel as “a building in which members of the public obtain sleeping accommodations for consideration. The term includes a hotel, motel, tourist home, tourist house, tourist court, lodging house, inn, rooming house, or bed and breakfast.”

The fractionally owned homes within Taxpayer’s development are not “residences” or “residential property” under Rule 3.291(a)(12) because they meet the definition of a hotel under Section 156.001. Although the Declaration prevents the owners from renting or leasing their ownership interest in the homes, the Declaration gives Taxpayer the right to rent the homes to the general public. See Declaration, Section 4.13. In addition, owners may pay Taxpayer an additional fee for “bonus nights” allowing them to use a home for more than the allotted 27 nights per year.

Section 156.051 (Tax Imposed) imposes a hotel occupancy tax on charges for the use or possession or for the right to the use or possession of a room or space in a hotel. Because the fractionally owned homes within Taxpayer’s development are hotels, charges to the general public to occupy the homes or charges to owners for “bonus nights” are taxable under Chapter 156 (Hotel Occupancy Tax).

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20171109103358.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.