Are materials and labor exempt when contracting to improve real property for a tax-exempt organization, and is disaster-repair labor still exempt after October 1, 1993?

Subject

Exempt-Organization Realty Improvement Contracts And The October 1, 1993 Disaster-Repair Labor Exemption Cutover

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1271E11

Plain-English Summary

This letter answers two separate questions from a contractor about sales and use tax on contracts to improve real property.

The first question concerned improving real property for tax-exempt organizations. The taxpayer asked whether all exempt organizations are exempt from tax on both materials and labor regardless of the type of work or contract. The Comptroller's response ("Response A") confirms an exemption, but with a specific scope: the purchase of tangible personal property for use in a contract to improve realty belonging to an organization exempted under Tax Code Section 151.309 or 151.310 is exempt, but only if the property is necessary and essential to the performance of the contract and is completely consumed at the job site. This exemption applies whether the contract separates the charges for incorporated material and labor or is a lump sum, and whether the work is new construction, repair, or remodeling of an existing improvement. However, the letter is explicit that the exemption does not apply to the purchase or rental of machinery, equipment, or their accessories, nor to repair or replacement parts for machinery or equipment.

The second question concerned labor to repair property damaged by an event for which a casualty claim could be filed — asking whether contracts signed, or bids submitted, before October 1, 1993 but not completed by that date would still receive the prior exemption. The Comptroller's response ("Response B") explains that the prior exemption for this type of repair labor was replaced by Tax Code Section 151.350, and because that section contains no exemption for contracts already in place, labor to repair damage to real or tangible property performed on or after October 1, 1993 is taxable unless it qualifies under Section 151.350 or some other exemption. The letter states it is enclosing the text of Tax Code Sections 151.350 and 151.311 as addendums. Labor performed on or before September 30, 1993 remains exempt if it qualified under Rule 3.357(c)(5) (the version dated 12/92). For jobs straddling the effective date, the letter states plainly: repair labor performed prior to October 1, 1993 is exempt, and repair labor performed on and after October 1, 1993 is taxable — the job is split at that date.

The letter closes with the Comptroller's standard caveat that the opinion is rendered based on the facts submitted and that other facts, though similar, may yield different results.

What This Means For You

If you contract with exempt organizations to improve real property: Only the tangible personal property that is necessary and essential to the job and completely consumed at the job site qualifies for the materials exemption under Sections 151.309/151.310. Machinery, equipment, accessories to equipment, and repair/replacement parts for machinery or equipment remain taxable even on an exempt organization's job, regardless of how the contract is structured (lump-sum vs. separated) or what kind of work is performed (new construction, repair, or remodeling).

If you were performing casualty-related repair work around October 1, 1993: The letter draws a hard line at that date. Labor performed on or before September 30, 1993 could still be exempt under the old Rule 3.357(c)(5) (12/92 version). Labor performed on or after October 1, 1993 is taxable unless it separately qualifies under new Tax Code Section 151.350 or another exemption — having a contract signed or a bid submitted before October 1 does not, by itself, preserve the old exemption for work completed after that date.

If a job spans the effective date: Per this letter, you must split the job — treat labor performed before October 1, 1993 as exempt and labor performed on or after October 1, 1993 as taxable, rather than applying one tax treatment to the entire project.

Q&A

Q: Are all exempt organizations automatically exempt from tax on all materials and labor for any type of contract?
A: Not exactly as broadly as asked. The letter states the purchase of tangible personal property for use in a contract to improve realty belonging to an organization exempted under Section 151.309 or 151.310 is exempt only if the property is necessary and essential to the contract and completely consumed at the job site — machinery, equipment, their accessories, and repair/replacement parts for machinery or equipment are excluded from the exemption.

Q: Does it matter whether the contract is lump-sum or has separated charges for materials and labor?
A: No. The letter states the exemption applies whether the contract separates the charges for incorporated material and labor or not, and whether the contract is for new construction, repair, or remodeling of an existing improvement to real property.

Q: If I signed a contract or submitted a bid for casualty-related repair labor before October 1, 1993, is that labor still exempt if completed later?
A: The letter says no blanket protection exists — there is no prior contract exemption preserved under new Tax Code Section 151.350, so labor to repair damage performed on or after October 1, 1993 is taxable unless it qualifies under Section 151.350 or some other exemption.

Q: What if a repair job was partly done before and partly after October 1, 1993?
A: The letter states jobs in progress as of October 1 will be split: repair labor performed prior to October 1, 1993 is exempt, and repair labor performed on and after October 1, 1993 is taxable.

Q: What determined whether pre-October 1, 1993 casualty repair labor was exempt?
A: Per the letter, labor performed on or before September 30, 1993 is exempted if it qualified under Rule 3.357(c)(5), version dated 12/92.

Original ruling text

October 26, 1993

Dear ****:

Thank you for your recent letter which is restated in part with
response below.

A. Improving Real Property for Exempt Organizations:

Am I correct in stating that all exempt organizations are exempt
from taxes on materials and labor regardless of the type of work
(whether repair, new construction, etc.) or type of contract
(whether separated or lump sum) or type of organization? Only
property not completely consumed at the job site and rental
equipment is taxable on jobs for tax exempt entities.

Response A: The purchase of tangible personal property for use in a
contract to improve realty belonging to an organization exempted under
151.309 or 151.310 is exempt. The tangible personal property must be
necessary and essential to the performance of the contract and must be
completely consumed at the job site. This exemption applies whether
the contract separates the charges for incorporated material and labor
or not or if the contract is for new construction or repair or
remodeling of an existing improvement to real property. The exemption
does not apply to the purchase or rental of machinery, equipment, or
their accessories. The exemption does not apply to repair or
replacement parts for machinery or equipment.

B. Labor to Repair Damage Caused by a Natural Disaster:

Do contracts signed but not completed before October 1, 1993, receive
the exemption for labor used in repairing property lost or damaged by
incidents for which a casualty claim could be filed?

Do bids submitted but work not completed before October 1, 1993
receive the exemption for labor used in repairing property lost or
damaged by incidents for which a casualty claim could be filed? What
type of proof do we need (if any) for "disaster areas" declared by the
Governor or President? (i.e. newspaper article, something signed,
etc.)

Response B: The exemption for labor to repair property damaged in such
a way that a casualty claim could be filed was replaced by Tax Code
Section 151.350. Since there is no prior contract exemption in that
section, labor to repair damage to real or tangible property performed
on or after October 1, 1993, is taxable unless it qualifies for the
exemption in Tax Code Section 151.350 or some other exemption applies.
I am enclosing the text of Sections 151.350 and 151.311 as addendums
to this letter. Labor that was performed on or before September 30,
1993, is exempted if it qualified under Rule 3.357(c)(5) (version
dated 12/92).

Jobs in progress as of October 1 will be split. Repair labor performed
prior to October 1, 1993, is exempt. Repair labor that is performed on
and after October 1, 1993, is taxable.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.

If you have questions or need more information, please call or write.
You may reach me by calling toll free, (800) 531-5441 (ext. 34680). My
direct line number is (512) 463-4680. The number for FAX transmissions
is (512) 475-0900. You may write to me in care of Tax Administration
Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9311088L.4 and/or 9311088L