How did Texas define residential property, repair, remodeling, and new construction for the January 1, 1988 tax on real-property repair and remodeling?

Plain-English summary

The letter explained the January 1, 1988 tax treatment of real-property repair and remodeling. It applied to repairmen and remodelers unless they worked exclusively on residential property. Residential property included family dwellings, apartments or housing complexes, condominiums, and retirement homes, but excluded hotels and other facilities subject to hotel occupancy tax.

The Comptroller defined the work categories this way:

• Remodeling or modification meant making over or rebuilding real property in a similar but different way, including replacement or upgrading part of an existing structure.
• Repair meant mending broken, damaged, or defective real property toward its original working order.
• New construction included new improvements, finish-out before initial occupancy, and added square footage outside an existing structure. A new parking lot for an existing shopping center was new construction.

Repairmen and remodelers collected tax on the total sales price unless the property belonged to an exempt entity. The old distinction between lump-sum and separated labor/material contracts no longer applied. A contract combining remodeling and new construction was taxed in full unless new-construction labor was separately stated.

Contracts signed on or before July 21, 1987 and unfinished by January 1, 1988 fell under Rule 3.319. Contracts signed later were taxed on gross receipts for work performed on or after January 1, 1988.

Incorporated property could be bought tax-free, or tax paid at purchase could be credited against tax later collected. A prime repairman or remodeler could give a resale or exemption certificate to a sub-repairman or remodeler. Supplies, tools, and equipment used on the job but not incorporated into the customer's property remained taxable to the provider.

What this means for you

The historical letter made project classification and allocation decisive. Mixed work could become fully taxable unless new-construction labor was separately stated, while tools and consumables remained taxable to the contractor even when incorporated materials received resale treatment.

Common questions

Was a new parking lot at an existing center remodeling? No. The Comptroller classified it as new construction.

Was replacement or upgrading part of an existing structure remodeling? Yes.

Were repair/remodeling charges taxed only on materials? No. The total sales price was taxable unless the property belonged to an exempt entity.

Could subcontracted incorporated materials be bought tax-free? Yes, under the certificate arrangements described in the letter.

What accounting methods could a retailer use? Cash, accrual, or another generally recognized basis that correctly reflected the business; an unusual hybrid required prior written approval.

Citations and references

• 34 Tex. Admin. Code Rule 3.319 (prior contracts)
• 34 Tex. Admin. Code Rule 3.322 (exempt organizations)
• 34 Tex. Admin. Code Rule 3.302(a)(1) (sales-tax accounting and reporting)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0847D14

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

November 17, 1987

Dear **:

Thank you for your letter regarding the taxability of "remodeling or
add-on" construction. Following is a reiteration of your questions and the
appropriate answers.

Question 1: Does this act in fact pertain to non-residential
construction? Also, how will it be determined what is add-on/remodel or new
construction? (Example, An owner acquires and builds new parking lot for his
existing center, yet this paving does not attach to any existing improvements.

Answer: This act pertains to all real property repairmen and remodelers
unless they are working exclusively on residential property. Residential
property is defined as property used as a family dwelling or a multifamily
apartment or housing complex, condominiums or retirement homes. The term does
not include hotels or any other facilities which are subject to the hotel
occupancy tax.

Remodeling, repair and new construction are defined as follows:

Remodeling or modification To make over or rebuild real property in a
similar but different way. Replacement or upgrading any part of an existing
structure is remodeling or modification.

Repair-to-mend or bring back as near as can be to its original working
order real property which was broken, damaged, or defective.

New Construction

All new improvements to real property including finish out work performed
at any time prior to initial occupancy to either the interior or exterior of
the improvement. New construction also includes the addition of new footage
outside the existing structure.

In your example, the new parking lot would be considered as new
construction.

Question 2: When does this become applicable? Most of our contracts are
long-term and in order to pass this cost to the owner/client we need to know at
bid time. Regarding this date, will it be clear as to whether it is contracts
entered into after "the date" or purchases made on existing contracts after
"the date".

Answer: Contracts signed on or before July 21, 1987, but not completed
prior to
January 1, 1988, shall be governed by the provisions of Rule 3.319
(relating to Prior Contracts). Contracts signed after July 21, 1987, are
subject to tax on the gross receipts to the extent it was performed on or after
January 1,1988.

Question 3: Will the sales tax percentage be applied to the total lump
sum contract amount which would include labor, material, equipment and
subcontract amounts? Subcontractors are 65%-80% of our contract amounts. As
you can see this can begin to represent a sizable cost increase for an
owner/client.

Answer: Repairmen and remodelers must collect tax on the total sales
price to their customers unless the property being repaired or remodeled
belongs to an exempt entity. (See Rule 3.322). The distinction previously made
between repair or remodeling contracts which charged a "lump sum" amount for
labor and material and those contracts which "separately stated" charges for
labor and material is no longer applicable to repairmen or remodelers.

A contract which covers both remodeling and new construction will be
taxed in total unless the charge for new construction labor is separately
stated.

Question 4: Will subcontractors bidding to a prime contractor not apply
tax to their material purchasing or will they tax their bottom line to a prime?

Answer: All tangible personal property purchased by the repairmen or
remodeler and incorporated into the real property may either be purchased tax
free or the repairmen or remodeler may pay tax on purchases and take credit
against tax later collected and remitted on the total sales price.

The sub-repairman/remodeler may purchase materials incorporated into the
real property tax-free and the prime-repairman/remodeler may issue a resale or
exemption certificate to the sub-repairman/remodeler.

Question 5: What about items that have "unique" status under current
sales tax law, i.e., fill sand, operated vs. non-operated rented equipment.

Answer: The law does not change on these items. Tax must be paid by a
contractor/repairman/remodeler at the time of purchase on those supplies,
tools, and equipment used to perform a contract but which are not physically
incorporated into the property of a customer.

Question 6: How and when will this tax be paid to the State?

Answer: The sales tax should be collected and reported by the
repairman/remodeler in accordance with Rule 3.302(a)(1).

For sales and use tax purposes, retailers may use a cash basis, an
accrual basis or any generally recognized accounting basis which correctly
reflects the operation of their business. Retailers who wish to use an
accounting system to report tax which is not on a pure cash or accrual basis or
that is not a commonly recognized accounting system should obtain prior written
approval from the Comptroller.

Question 7: Currently, on cost-plus work the owner accrues and pays tax
on material. Will an owner now pay additional tax on labor, material and
equipment?

Answer: As noted in Answer #3, above, repairmen and remodelers must
collect tax on the total sales price to their customers unless the property
being repaired or remodeled belongs to an exempt entity.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
Julie Pesl
Tax Policy Division