How did Texas tax fixed-price residential and commercial repair contracts and insurance reimbursements for cost overruns?

Plain-English summary

A contractor sold fixed-price repair contracts for residential and commercial property and bought insurance covering cost overruns. Policy costs were built into the customer price and included in the tax base.

For lump-sum residential repairs, the contractor paid tax on all materials and did not charge tax to the residential customer. A residential insurance claim could include the sales tax paid to material suppliers unless the policy said otherwise, but the contractor did not charge the insurer sales tax on the claim amount.

For commercial repairs, the full customer billing was taxable and the contractor could buy repair materials for resale. Material cost overruns created no additional sales-tax liability. Commercial insurance claims also carried no additional tax when the customer had already been taxed on the total contract billing.

The Comptroller reserved an anti-evasion caveat: tax could be assessed on commercial-repair material purchases when the contract revenue could not reasonably cover the costs and showed an obvious intent to evade tax.

What this means for you

The underlying residential-versus-commercial repair rules determined who paid tax. Insurance reimbursement of an overrun did not become a second taxable customer sale under the described facts.

Common questions

Did a residential lump-sum customer pay sales tax? No. The contractor paid tax on the materials.

Was a commercial repair billing taxable? Yes, in full.

Was sales tax charged to the insurer on a residential overrun claim? No.

Did a commercial overrun reimbursement create more tax? No when tax had already been collected on the customer billing.

Could Texas tax commercial materials despite a resale certificate? The letter reserved that possibility for an obvious tax-evasion arrangement.

Citations and references

• 34 Tex. Admin. Code Rule 3.291 (contractors)
• 34 Tex. Admin. Code Rule 3.357 (real-property repair and remodeling)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9011L1067B11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 30, 1990

Dear ** :

Thank you for your letter concerning repair contracts on real property.

As I understand the facts, your client is a contractor and enters into
repair contracts for both residential and commercial property. Based
on historical data, the client charges a fixed amount for the contract
and collects tax on the total charge to the customer. In some cases
your client purchases insurance policies from third party insurance
companies. These policies would reimburse your client for cost over-
runs on the repair contracts. The costs of the policies are built into
the amounts the client's customers are charged, and are included in the
tax base.

First, let me discuss the repair contracts on residential property. On
these contracts, your client is considered a contractor and subject to
the provisions of Rule 3.291, Contractors. If the customer is billed
a lump-sum amount, with no separation of charges for materials and la-
bor, your client will owe tax on the total cost of all materials used
in the repairs. No tax should be charged to these residential customers.

On the repair contracts involving commercial property, your client will
be considered a repairman per the provisions of Rule 3.357, Real Proper-
ty Repair and Remodeling. You are correct in that the total billing to
the customer will be taxable and the client can issue a resale certifi-
cate and pay no tax on materials used in the repairs. Your client will
not be responsible for any additional sales tax when cost overruns on
materials occur.

When your client files insurance claims for cost overruns on the resi-
dential repairs, the amount of sales tax paid to the material suppliers
can be included in the claim, unless, of course, the policy states oth-
erwise. However, no sales tax need be charged to the insurance company
based on the total amount of the claim. Also, there is no need to in-
clude tax on claims filed on the commercial property overrun claims. If
tax was collected from the customer on total billings for the repair
contract, there is no additional tax liability.

Of course, as we discussed in our telephone conversation, tax could be
assessed on purchases of materials used in commercial repair contracts
when there is an obvious intent to evade the taxes; that is, the client's
revenue from the contract could not reasonably be expected to cover the
costs of the contract.

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

Please write or call if you have any questions. You can call toll-free
at 800-531-5441. Our regular number is 512- 463-3830 and our FAX number
is 512-475-0900.

Sincerely,
Larry Koenig
Taxability Section
Legal Services Division