Does a property manager have to collect sales tax on services like security, janitorial, pool, and lawn care that are purchased from independent contractors?

Subject

Property Manager's Purchases Of Security, Janitorial, Pool, And Lawn Services From Independent Contractors Are Taxable

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9309902L

Plain-English Summary

This letter follows up a telephone conversation about how sales tax applies to services a property manager arranges for a managed property. The Comptroller's staff attorney sent along a copy of Rule 3.356 (Real Property Service) and explained its core distinction: otherwise-taxable services performed by a property manager are not taxed when the manager is considered an "employee" of the property under the rule's criteria. A manager who does not meet those criteria must instead hold a sales and use tax permit and collect tax on the taxable services he provides.

The letter flags two open questions raised in the underlying facts. First, because the taxpayer's client performs services on more than one property, some of those services may not qualify for the employee-services exclusion, depending on the circumstances. Second, the letter notes that it wasn't discussed whether a "handy man" mentioned by the taxpayer is an employee of the property manager, an employee of the property owner, or an independent contractor in his own right — and that this distinction could affect whether his services are taxable.

The letter's central holding is that taxable services purchased by a property manager from independent contractors are taxable. The letter gives concrete examples drawn from the taxpayer's facts: a pool service, a lawn service, and a janitorial service hired by the client. A manager who holds a sales and use tax permit can issue a resale certificate to buy those services tax-free from the third-party provider, but must then bill the services to the property owner and collect the tax from the owner. Alternatively, the manager can simply pay the tax directly to the service provider at the time of purchase.

The letter also lists which real property services are taxable and which are not, per Rule 3.356 and the enclosed Rules 3.291 and 3.357: taxable services include lawn maintenance, landscaping, janitorial and grounds cleaning services (including pool service), waste collection, and repair, restoration, and remodeling of non-residential realty (not including apartments and common areas for tenants), as well as repair, remodeling, restoration, and maintenance of tangible personal property. By contrast, scheduled, periodic maintenance of non-residential realty and repair, restoration, remodeling, and maintenance of residential realty are described as not taxable services.

What This Means For You

If you're a property manager buying services for a managed property: Whether you owe tax on services like security, janitorial, pool, or lawn care from outside contractors depends first on whether you qualify as an "employee" of the property under Rule 3.356's criteria. If you don't meet that test, you need a sales and use tax permit and must collect tax on the taxable services you provide to the owner.

If you manage more than one property: The letter specifically warns that performing services across multiple properties can affect whether the employee-services exclusion applies — some arrangements that qualify for one property may not qualify for another, depending on the facts.

If you use a resale certificate: A permitted manager can issue a resale certificate to a third-party service provider (like a pool, lawn, or janitorial company) to purchase the service tax-free, but the manager must then bill the property owner for the service and collect the tax — or, as an alternative, pay the tax directly to the service provider at purchase.

If you use subcontracted or "handy man" type labor: The letter flags that whether such a worker is an employee of the manager, an employee of the property owner, or an independent contractor can change the taxability analysis — this is a fact-specific determination worth nailing down.

Know which services are taxable: Per the letter, lawn maintenance, landscaping, janitorial and grounds cleaning (including pool service), waste collection, and repair/restoration/remodeling of non-residential realty (excluding apartments and tenant common areas) are taxable real property services. Scheduled, periodic maintenance of non-residential realty and repair/restoration/remodeling/maintenance of residential realty are not.

Q&A

Q: Are services a property manager buys from independent contractors, like a pool or lawn service, taxable?
A: Yes. The letter states directly: "Taxable services purchased by a property manager from independent contractors are taxable," giving pool service, lawn service, and janitorial service as examples.

Q: When are a property manager's own services excluded from tax?
A: Under Rule 3.356, otherwise-taxable services performed by a property manager are not taxed when the manager is considered an "employee" of the property, per the rule's criteria. A manager who doesn't meet those criteria must hold a sales and use tax permit and collect tax on taxable services provided.

Q: How can a permitted property manager buy taxable services tax-free from a third party?
A: The manager may issue a resale certificate to the third-party service provider to buy the services tax free, but must then bill the services to the property owner and collect the tax — or pay the tax directly to the service provider at the time of purchase.

Q: Does managing multiple properties change the tax treatment?
A: It can. The letter notes that because the client performs services on more than one property, some of those services may not qualify for the employee-services exclusion, depending on the circumstances.

Q: Which real property services are taxable versus not taxable per this letter?
A: Taxable services include lawn maintenance, landscaping, janitorial and grounds cleaning (including pool service), waste collection, and repair, restoration, and remodeling of non-residential realty (not including apartments and common areas for tenants). Scheduled, periodic maintenance of non-residential realty and repair, restoration, remodeling, and maintenance of residential realty are not taxable services (see enclosed Rules 3.291 and 3.357).

Original ruling text

September 16, 1993

Dear **:

I enjoyed our telephone conversation yesterday. Enclosed please find Rule 3.356
(Real Property Service), as we discussed. As set out in the rule,
otherwise-taxable services performed by a property manager are not taxed when
the manager is considered an "employee" of the property. A manager who does not
meet the criteria in the rule must hold a sales and use tax permit and collect
tax on taxable services he provides.

You said your client performs services on more than one property. Depending on
the circumstances, some of those services may not qualify for the
employee-services exclusion. Also, we did not discuss whether the handy man is
an employee of the property manager (his wife?) or the property owner, or
whether he is an independent contractor in his own right. This may affect the
taxability of his services, too.

Taxable services purchased by a property manager from independent contractors
are taxable. (For example, you said your client hires a pool service, a lawn
service, and perhaps a janitorial service.) - A manager who holds a sales and
use tax permit may issue a resale certificate to a third-party service provider
to buy his services tax free. The manager must then bill the services to the
property owner and collect tax. The manager also has the option of paying tax
directly to the service provider at the time of purchase.

As we discussed, not all services are taxable. For example, taxable services
include lawn maintenance, landscaping, janitorial and grounds cleaning services
(including pool service), waste collection, repair, restoration and remodeling
of non-residential realty (not including apartments and common areas for
tenants), and repair, remodeling, restoration and maintenance of tangible
personal property. In contrast, scheduled, periodic maintenance of
non-residential realty and repair, restoration, remodeling and maintenance of
residential realty are not taxable services. (See enclosed Rules 3.291 and
3.357.)

I hope you find this information helpful. If you have any questions about the
enclosed material, feel free to call me at 512/463-3889. You can obtain written
advice by sending a letter to the Comptroller of Public Accounts, Tax
Administration Division, Capitol Station, Austin, Texas, 78774. Please let me
know if I can be of further assistance.

Sincerely,

John Christian
Legal Counsel
General Law Section