When could a new-construction contractor buy final cleanup or other services for resale?

Plain-English summary

The June 30 letter distinguishes how a new-commercial-construction contractor obtained final cleanup. Employee cleanup wages were not taxable, and a de minimis cleanup amount embedded in the overall new-construction charge was not taxed to the customer. A separately stated taxable cleanup charge remained taxable.

A separated contractor could give suppliers resale certificates for materials incorporated into the job and for landscaping, surveying, and final cleanup, then collect tax from the customer. It could not use resale certificates for security, telecommunications, or daily cleanup. A lump-sum contractor was the consumer of all purchased goods and services and could not give suppliers resale certificates.

The STAR record also preserves a February 27 letter discussing the 5% mixed-service rule and security services. The later June 30 letter is the record's final clarification of which services a separated contractor could purchase for resale.

Common questions

Could a separated contractor buy final cleanup for resale? Yes.

Could it do the same for security or daily cleanup? No.

Could a lump-sum contractor issue resale certificates? No.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8906L0944F13

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

June 30, 1989

Dear **:

Mr. Washington asked me to review your letters concerning janitorial
services purchased by a contractor building new commercial structures.

First you point out that the contract requires the contractor clean the
building after finish-out work is completed. The contractor may use his own
employees to clean the building. He may hire a sub-contractor to do the
finish-out and subsequent cleaning. Or he may hire a janitorial service to do
the cleaning.

If his employees clean the building, he will not owe tax on their wages.
Work performed for an employer in the regular course of business within the
scope of the employee's duties and for which the employee is paid his regular
wages is not taxable. And if this charge to the customer is de minimis in
relation to the overall contract to build a new structure, and not separated
from other charges, it is not taxable to the customer.

If he hires a sub-contractor to do the finish-out and subsequent clean
up, the sub-contractor may charge separately for the clean up and collect tax.
Or, if that charge is de minimis in relation to the overall contract with the
general contractor, and not separate from other charges, is not taxable.

And if he hires a janitorial service, he may pay tax on the service. Or
he may give the janitorial service a resale certificate and collect tax from
his customer provided the contract is a separated contract.

When a retailer, including a separated contractor, gives a resale
certificate, he must resell the service or materials and collect tax from his
customer. A retailer cannot give his supplier a resale certificate on goods
or taxable services he is not going to resell to a customer.

If a charge for a taxable service is separated from other charges for
non-taxable services, the retailer or contractor must collect tax on that
service even if the charge is de minimis in relation to the overall contract.

A separated contractor may give his suppliers a resale certificate on
materials incorporated into the job and on certain services. These services are
landscaping, surveying, and the final cleanup. He may not give a resale
certificate on security services, telecommunication services, or daily clean-up
services.

A lump-sum contractor may not give his suppliers a resale certificate.
He is the consumer of all goods and services and used in the contract.

When a contractor is repairing, remodeling, or restoring commercial
buildings, the rules are different. He is performing a taxable service. He
may give his suppliers a resale certificate on all materials incorporated into
the building and on services integral and essential to the performance of the
service. he will then collect tax from his customer on the total contract
price.

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. The
toll-free number is 1-800-531-5441. The regular number is 512/463-4614. Or
you may write me at the Taxability Section of Legal Division. [(FAX}
512-475-0900]

Sincerely,
Adina Whittemore
Taxability Section
Legal Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

February 27, 1989

Dear **:

Thank you for your letter of February 13, 1989, concerning the
taxability of building cleaning services.

My November 4, 1988 response needs clarification in regards to the
cleaning services being 5% or less of the total contract to improve realty when
the contractor performs the cleaning services. Section (i)(4) of Rule 3.356
clearly states that "when nontaxable and taxable services are sold or purchased
for a singe charge and the portion relating to taxable services represents more
than 5.0% of the total charge, the total charge is presumed to be taxable."
(Emphasis added.) This section goes on to state that the presumption can be
overcome by separately stating a reasonable charge for the taxable service.
this section of the rule in no way exempts the separately stated cleaning
services that is 5% or less of the total contract amount.

A contractor improving realty for a single charge is a lump-sum
contractor. A lump-sum contractor is the consumer of the tangible personal
incorporated into the customer's realty. A lump-sum contractor performing the
cleaning service as part of the contract to improve realty will not be
required to collect sales tax on the amount attributable to the cleaning if
that amount is 5% or less of the total contract amount. The lump-sum
contractor is required to pay sales tax on the purchase of the cleaning service
from a third party. The purchase of the cleaning service is a separate, though
related, transaction from the contract to improve realty.

A contractor improving realty under a separated contract is the seller of
the tangible personal property incorporated into the customer's realty. As a
seller, the contractor may issue a resale certificate for the tangible personal
property incorporated into the realty. A separated contractor performing the
cleaning service as part of the contract to improve realty will not be required
to collect sales tax on the amount attributable to the cleaning. Again, if the
contractor makes a separate charge for the cleaning (a taxable service) from
the charge for the nontaxable service (improving realty), section (i)(4) of
Rule 3.356 does not apply. The contractor must collect sales tax on a
separately stated charge for the building cleaning even if it is 5% or less of
the total contract amount.

A contractor improving realty under a separated contract to improve
realty may not issue a resale certificate to a third-party for cleaning the
building. Section 151.056 of the Texas Tax Code allows a separated contractor
to issue a resale certificate for tangible personal property incorporated into
the customer's realty. Section 151.009 defines "tangible personal property" as
personal property that is perceptible to the [human] senses meaning it can be
seen, felt, or touched. The cleaning service is not tangible personal
property. The tax code does go on to define a "taxable item" as tangible
personal property and taxable items. Section 151.010. The legislature,
however, did not amend Section 151.056 to substitute taxable item for tangible
personal property.

I do not agree with your conclusions in the example regarding the
security services. The fact that the contract requires the contractor to
supply 24-hour security at the job site during construction does not make the
contract one for improving realty and for selling security services. The
contractor could not issue a resale certificate for the security service
because the service will not be sold in its entirety. The contractor is the
consumer if this service in that the contractor's equipment is protected as
well as the material incorporated into the realty.

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, you may call tollfree
1-800-252-5555, ext. 3-4683. The regular number is 512/463-4600. You may
write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely
Eddie C. Washington
Tax Correspondence