A general contractor has a separated contract (materials and labor billed separately) to build a new commercial building, and subcontracts landscaping (grass, bushes, trees) and a hardwired burglar alarm system to other companies who install those materials into the realty. How does sales tax apply between the subcontractors, the general contractor, and the customer — and does it matter if the job is residential instead of commercial?

Plain-English summary

A general contractor built a new commercial building under a separated contract with its customer — meaning material and labor charges were billed as separate line items, which matters for how Texas sales tax applies. The general contractor subcontracted two pieces of the job to other companies: one to sell and install landscaping (grass, bushes, and trees), and one to sell and install a hardwired burglar alarm system (security services). In both cases, the subcontractor providing the service could issue a resale certificate for the materials it transferred to the general contractor.

Note: the STAR system's own subject-matter heading for this letter also references "final clean-up" and "surveying" services, but the letter's actual text only discusses landscaping and burglar alarm/security services as the two subcontracted items. This page's subject_title has been rewritten to match what the letter body actually addresses.

The Comptroller's answer treats the landscaping subcontract and the alarm subcontract the same way, since both are subcontracted services whose materials get installed into the realty:

• Between the subcontractors and the general contractor: the subcontractors' full charges — both materials and labor — are taxable in total.
• Between the general contractor and its customer, the general contractor has two options:
  1. Pay sales tax to the subcontractors on those charges, then fold the tax-paid cost into the (nontaxable) labor portion of its bill to its own customer; or
  2. If the general contractor separately states the charges for the taxable subcontracted services (apart from all other charges) in its contract with its customer, it may instead give the subcontractors a resale certificate and collect sales tax directly from its own customer on the total charge for those taxable services.

The same answer applies if the general contractor instead has a separated contract to build, repair, or remodel a residential structure — the residential vs. commercial distinction doesn't change the outcome here.

What this means for you

General contractors on separated contracts

If you subcontract out landscaping, alarm/security installation, or similar work that ends up installed into the customer's real property, your subcontractor's full bill to you (materials and labor) is taxable. You then choose: absorb the tax paid to your subcontractor and bury it in your nontaxable labor charge to your customer, or break out those taxable service charges separately in your own contract and pass the tax through to your customer via a resale certificate to your subcontractor.

Landscaping and burglar alarm/security subcontractors

When you sell and install materials (plants, alarm equipment) for a general contractor who will resell them as part of installing them into real property, you can accept a resale certificate from the general contractor in lieu of charging tax — but only if the general contractor has structured its own contract to separately state those taxable charges to its customer.

Residential remodelers and builders

This same two-option framework (pay tax and absorb it in labor, or separately state and pass tax through via resale certificate) applies equally to separated contracts for building, repairing, or remodeling residential structures, not just new commercial construction.

Common questions

Q: Does my landscaping or alarm subcontractor charge me tax on both materials and labor?
A: Yes — the full charge from the service provider to the general contractor, materials and labor combined, is taxable in total.

Q: As the general contractor, do I have to charge my customer sales tax on the landscaping and alarm work?
A: Not necessarily. You can instead pay sales tax to your subcontractors and simply include that tax-paid cost within your nontaxable labor charge to your customer.

Q: How do I use a resale certificate for these subcontracted services instead?
A: You must separately state the charges for the taxable services (apart from all other charges) in your contract with your customer. If you do, you can give your subcontractor a resale certificate and then collect sales tax from your customer on the total charge for those taxable services.

Q: Does this only apply to new commercial construction?
A: No. The letter confirms the same answer applies to a separated contract to build, repair, or remodel a residential structure.

Q: Does the letter address "final clean-up" or "surveying" services specifically?
A: No — despite those terms appearing in the STAR filing's subject heading, the letter's actual text discusses only landscaping and burglar alarm/security subcontractors. Do not rely on this letter for clean-up or surveying service questions.

Q: Can I rely on this letter for my own contract?
A: No. This opinion is based on the facts presented, and a STAR letter can be relied on only by the taxpayer to whom it was issued. If your facts differ, the answer could change.

Citations and references

No specific statutes or rule numbers were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1185C12

Original ruling text

July 17, 1992

Dear ** :

Thank you for your recent letter asking how to handle the following situation:

General contractor enters into a contract to build a new commercial building.
The contract between the general contractor and its customer qualifies as a
separated contract (under the sale tax provisions) because the charges for
material and labor are separated. General contractor then subcontracts with
another company to sell and install grass, bushes and trees (landscaping
services) and a company to sell and install a hardwired alarm system
(security services). In both situations, the service provider can give a
resale certificate for the materials transferred to its customer.

Question: How should the general contractor handle the sales tax as (1)
between it and its subcontractor and (2) between it and its customer to
whom the tangible personal property installed into the realty will
ultimately be transferred?

Response: The charges between the two service providers and the general
contractor are taxable in total, both materials and labor. However, the
general contractor has two ways the taxable charges may be handled. The
general contractor may pay sales tax to the service providers. The
general contractor would then include the tax paid charges in labor (or
nontaxable) portion of the bill to the contractor's customer. Or, if
the contractor sets out the charges for taxable services separately from
all other charges in the contract with the customer, the contractor may
issue a resale certificate to the service providers and then collect
sales tax from the contractor's customer on the total charge for the
taxable services.

Question: Would the answer be the same if the general contractor entered
into a separated contract to build, repair or remodel a residential
structure?

Response: Yes.

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 me at
463-4633. You may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division