Does the prior-contract exemption cover casualty-damage repair labor after the October 1993 law change?

Plain-English Summary

Before October 1, 1993, the Comptroller had an administrative rule (not a statute) providing that labor to repair nonresidential real property damaged by fire, flood, explosion, natural disaster, or other accident — the kind of damage for which a casualty insurance claim could have been filed — was treated as new construction and was not taxed. A customer having such repairs made was supposed to give the repair contractor an exemption certificate; without one, the contractor had to presume the work was taxable.

Effective October 1, 1993, that broad administrative rule was replaced by a real statute: Tex. Tax Code § 151.350. The new law is much narrower than the old administrative practice, and — critically — there is no "prior contract" exemption that lets a contract signed before October 1, 1993 keep the old, broader tax treatment for work performed after that date. Under Sec. 151.350, repair labor is exempt only if (1) the labor charge is separately itemized, and (2) the damaged property is located within an area that the Governor or the President has formally declared a disaster area. Materials used in the repair are taxable regardless of when the work is performed.

This letter walks through a real example: a casualty repair job under a contract signed August 1, 1993, with work continuing until February 1, 1994. Labor performed before October 1, 1993 could still qualify for the old exemption. Labor performed on or after October 1, 1993 is taxable unless it independently satisfies Sec. 151.350's stricter test. If the labor charges for the pre- and post-October 1 periods aren't separately stated, the entire lump-sum labor charge becomes taxable.

What This Means For You

If you are a contractor (or a customer hiring one) to repair storm, fire, flood, or other casualty damage, the date the work is actually performed — not the date the contract was signed — controls the tax treatment. Work finished before October 1, 1993 can still fall under the old administrative exemption. Work performed on or after that date needs to independently qualify under Sec. 151.350: the property must be in a declared disaster area, and the labor charge must be separately itemized on the invoice from materials and from any non-qualifying labor. Failing to separately state labor charges for straddling contracts can cause the whole job — including labor that would otherwise have qualified — to become taxable. Materials are always taxable, whether the job spans the October 1, 1993 cutoff or not.

Q&A

Q: If I signed my repair contract before October 1, 1993, does my whole job stay exempt even though work continued into 1994?
A: No. There is no prior-contract exemption. Only the portion of labor actually performed before October 1, 1993 can qualify under the old rule; labor performed on or after that date is taxable unless it meets the narrower Sec. 151.350 requirements.

Q: What does Sec. 151.350 require for repair labor to be exempt?
A: The labor charge must be separately itemized, and the repaired property must be located within an area declared a disaster area by the Governor (under Chapter 418, Government Code) or by the President (under 42 U.S.C. § 5141).

Q: Are materials used in a casualty repair job ever exempt?
A: No. Sec. 151.350 exempts only qualifying labor charges; tangible personal property (materials) transferred as part of the repair remains taxable in all cases.

Subject

Casualty Losses — Prior Contract Exemption Not Available For Repair Labor Due To Fires/Floods/Natural Disasters — If Performed On Or After 10/1/93

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9407L1313E12

Citations

• Tex. Tax Code § 151.350 (Labor to Repair Certain Property — the narrower statutory exemption that replaced the Comptroller's pre-October 1, 1993 administrative rule)
• 34 Tex. Admin. Code Rule 3.291 (Contractors)

Original ruling text

July 29, 1994

Dear ****:

I am responding to your letter requesting clarification of the October 1,
1993, revision on casualty repair construction. This response applies to
both state and local taxes.

Effective October 1, 1993, the Comptroller's administrative Division was
replaced by Sec. 151.350 of the sales tax code. The administrative
provision that did not tax the labor to repair nonresidential realty
damaged by natural disasters or other accidents is restated below.

Repairing property lost or damaged by fire, flood, explosion, natural
disasters, or other accident for which a casualty claim could have been
filed if the property was insured will be considered new construction.
See Rule 3.291 concerning Contractors. A person having property repaired
under this paragraph should issue the service provider an exemption
certificate in lieu of tax. The service provider's presumption is that
all work is taxable until an exemption certificate is issued.

This administrative provision was broadly interpreted. The statutory
exemption is much narrower than the administrative provision, and there
is no prior contract exemption to the narrower statute exemption. I have
reprinted the new statute section below.

Sec. 151.350. Labor to Repair Certain Property.

(a) Labor to repair real or tangible personal property is exempted from
the taxes imposed by this chapter if:

(1) the amount of the charge for labor is separately itemized; and (2)
the repair is to property damaged within a disaster area by the
condition that caused the area to be declared a disaster area.

(b) The exemption under this section does not apply to tangible personal
property transferred as part of the repair.

(c) To this section, "disaster area" means:

(1) an area declared a disaster area by the governor under Chapter
418, Government Code; or (2)an area declared a disaster area by
the president of the United States under 42 U.S.C. Section 5141.

History: Section added effective October 1, 1993.

In your scenario, a casualty loss occurred; a contract was signed on
August 1, 1993; and the casualty repair began. This repair was not
completed until February 1, 1994. You requested a statement regarding
the proper tax treatment of this labor.

Labor to repair property damaged by a casualty loss that was performed
before October 1, 1993, fell under the administrative provision and
qualified for exemption from tax. Labor performed on and after October
1, 1993, became taxable unless it met the more strict requirements of
Sec. 151.350. The materials were and continue to be taxable.

This scenario could have been billed/contracted in several ways. If the
amount charged for labor performed on and after October 1, 1993, was not
separately stated from all other charges, the total amount billed/contracted
becomes taxable. Here are a few examples:

1) Lump-sum Labor & Materials Total Job $xxxxx.xx = Total taxed.

2) Labor to 9/30/93 $xxx.xx = Not taxed
Labor 10/01/93 to 2/1/94 $xxxx.xx = Taxed
Materials (Total Job) $xxxx.xx = Taxed

3) Materials - Total Job $xxxx.xx = Taxed
Labor - Total Job $xxxx.xx = Taxed

4) Labor & Materials to 9/30/93 $xxxx.xx = Not taxed
Labor 10/01/93 to 2/1/94 $xxxx.xx = Taxed
Materials 10/01/93 to 2/01/94 $xxxx.xx = Taxed

• This charge refers to the lump-sum charge to the customer. In this case,
  the service provider must pay tax on materials incorporated before October 1,
  1993.

5) Labor to 9/30/93 $xxxx.xx = Not taxed
Labor 10/01/93 to 2/1/94 $xxxx.xx = Taxed
Materials to 9/30/93 $xxxx.xx = Taxed
Materials 10/01/93 to 2/1/94 $xxxx.xx = Taxed

This opinion is based upon the facts presented. If there are additional
or different facts, this opinion may change. If you have other questions
or require additional information. You may also write to Tax
Administration Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9407531L