Does a Texas carpet dealer collect sales tax on materials only, or on the whole job, when installing carpet in a residence?

Plain-English summary

A Texas carpet dealer called the Comptroller's office to discuss how he invoiced residential carpet sales and installations. He explained that he separately stated the charges for the materials (carpet) and the labor, and collected tax only on the materials charge. He also faxed in a copy of an actual invoice for review.

The Comptroller staffer confirmed that separately stating materials and labor makes this a separated contract. Under a separated contract, the dealer is treated as the seller of the incorporated material: he should give his supplier a resale certificate instead of paying tax on the carpet, and instead collect tax from his customer on the separately stated materials charge. Labor is not taxed.

After reviewing the faxed invoice, the ruling confirmed the dealer was properly operating as a separated contract and collecting the right amount of tax — but only after "process of elimination," because the invoice didn't clearly break out labor, materials, and tax on separate lines. Instead, it listed a parenthetical notation "(Tax)" next to the materials charge at the bottom, then added the tax onto a combined labor-and-materials total to reach the amount due. The ruling asked the dealer to instead list labor, materials, and tax on separate lines going forward to avoid confusion for customers and auditors.

The letter also addressed what happens if the dealer switches to a lump-sum contract (billing one combined price with no separate stated charges): in that case the dealer is the consumer of the materials, so he should pay tax to his suppliers when buying the carpet and should not collect tax from customers. If a lump-sum dealer buys from an out-of-state supplier that can't collect Texas tax, the dealer must accrue and remit that use tax directly to the Comptroller.

What this means for you

Carpet and flooring dealers/installers

How you word your invoice determines who owes the tax and on what amount:

• Separated contract (materials and labor billed separately): You're the seller of the materials — give your supplier a resale certificate, and collect tax only on the stated materials charge. Labor stays untaxed.
• Lump-sum contract (one combined price): You're the consumer of the materials — pay tax to your supplier when you buy, don't collect tax from the customer, and accrue/remit use tax yourself if an out-of-state supplier can't charge Texas tax.

Invoice formatting matters

Even if your tax treatment is substantively correct, a confusing invoice format can create audit headaches. This dealer's tax liability was correct, but because "Tax" was noted parenthetically next to the materials figure rather than shown as its own line item, the reviewer had to work backward to confirm compliance. Best practice: list labor, materials, and tax as three separate line items.

Accountants and tax professionals

This letter is a useful illustration of the separated-contract vs. lump-sum-contract distinction for real property improvement work in Texas, and a reminder that invoice presentation (not just the correct tax amount) is something the Comptroller's staff and auditors will scrutinize.

Common questions

Q: What's the difference between a separated contract and a lump-sum contract for carpet installation?
A: In a separated contract, the invoice states materials and labor charges separately, and the dealer collects tax only on the materials charge (giving the supplier a resale certificate). In a lump-sum contract, one combined price is charged, and the dealer instead pays tax to the supplier on the materials as the consumer, without collecting tax from the customer.

Q: Does a carpet dealer have to charge tax on labor?
A: No. Under a separated contract, the charge for labor is not subject to tax — only the separately stated materials charge is taxed.

Q: Was this particular dealer's invoice acceptable?
A: The Comptroller's office determined the dealer was properly collecting tax, but only after working through an invoice that listed "(Tax)" in parentheses next to the materials charge rather than as its own line. The dealer was told to list labor, materials, and tax on separate lines going forward.

Q: If a dealer switches to a lump-sum contract, who pays the tax?
A: The dealer, as the consumer of the incorporated materials, pays tax to the supplier at purchase and does not collect tax from the customer. If the supplier is out of state and can't collect Texas tax, the dealer must accrue and remit the tax directly to the Comptroller.

Q: Can other taxpayers rely on this letter?
A: No. Per the disclaimer, only the taxpayer who received this letter can rely on it, and the letter itself notes its opinion "is based on the facts presented" and "could change" if the facts differ.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211L1202G07

Original ruling text

November 3,1992

Dear **:

On Friday, October 30, we spoke on the telephone concerning your manner of
invoicing sales and installations of carpeting in residences. You stated that
you separate the charges for incorporated materials and labor and collect tax
on only the charge for the materials. You also faxed me a copy of an actual
invoice so that I could see what your invoicing looks like in practice.

As you know, when a carpet dealer separately states his charges for materials
and labor on a residential job, he is operating under a separated contract. In
this case the dealer is considered to be the seller of the incorporated
material. He should give his supplier a resale certificate in lieu of paying
tax and collect tax from his customer on the separately stated charge for the
incorporated materials. The charge for labor is not subject to tax.

After examining your invoice, I have determined that you are operating under a
separated contract and properly collecting tax when you invoice your
residential jobs in this manner. However, my determination had to be made by
process of elimination because you did not actually list the charges for labor
and materials plus tax separately. Rather, you listed in parentheses at the
bottom of the invoice "Tax" and the charge for the materials. You then added
the tax due on the materials to the charge for labor and materials to arrive at
the total amount due. If you continue operating under separated contracts, you
should list the charges for labor and materials plus tax on separate lines of
the invoice. This will help avoid confusion for both your customers and our
auditors in the event you should be audited.

You indicated in the course of our conversation that you will probably change
to the lump-sum method in the future. Just remember that when operating under a
lump-sum contract you are considered to be the consumer of the incorporated
materials. You should, therefore, pay tax to your suppliers when you purchase
the materials and should not collect tax from your customers. If your supplier
is located out of state and is not permitted to collect the Texas tax, you will
be responsible for accruing and remitting the appropriate tax directly to this
office.

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

If you have questions, please don't hesitate to write the Tax Administration
Division or call one of our tax specialists toll free at 1-800-252-5555.

Sincerely,

Vic Hinterlang
Tax Administration Division