Is Texas sales tax due on the installation of permanent accent lighting in residential and commercial landscapes, and how does the contract type affect the tax?

Plain-English summary

A landscaping business asked the Comptroller's office how Texas sales tax applies to installing accent lighting permanently attached to the landscapes (hardscape) of residential and commercial customers.

Because the lighting is permanently attached to the customer's property, it counts as an improvement to real property. That means the labor to install it is never taxable, whether the job is residential or commercial. What is taxable — and how — depends on the type of contract the business uses for the job.

Under a lump-sum contract, the contractor is treated as the consumer of the lighting fixtures, wiring, consumable supplies, and equipment used on the job. The contractor pays sales or use tax to its suppliers when it buys the materials (or accrues tax on items pulled from a tax-free inventory), and charges the customer no tax at all.

Under a separated contract, the contractor is treated as the seller of the materials incorporated into the customer's property. The contractor must collect tax from the customer on the agreed contract price of those materials (which must be at least the contractor's purchase price), while the labor charge stays untaxed. The contractor can buy the materials tax-free from its suppliers by issuing a resale certificate, but still owes tax on consumable supplies and equipment used to do the job.

New construction jobs are treated the same whether the property is residential or commercial, so invoices for new installations don't need to separate the two. Repairs to an existing lighting system are different: nonresidential repairs are fully taxable (both labor and materials), while labor on residential repairs is not taxable (materials are still taxed the same way as for new construction). The entrance to a residential subdivision is treated as residential property for these purposes.

What this means for you

Landscaping and lighting contractors

Whether you owe or collect tax turns on your contract type, not just on the fact that the lighting is "installed." If you use a lump-sum contract, you're the consumer of the materials and pay tax to your suppliers — your customer never sees a tax line for the lighting. If you use a separated contract, you become the seller of the materials and must collect tax from the customer based on the contract price of the materials, while still buying those materials tax-free yourself with a resale certificate.

Business owners hiring lighting installation

For new landscape lighting installations, it typically doesn't matter whether your property is residential or commercial — the tax treatment is the same. It matters more once you need a repair to an existing system: nonresidential customers pay tax on both labor and materials for repairs, while residential customers pay tax only on the materials, not the labor.

Accountants and tax professionals

Watch for the repair/new-construction distinction and the residential/nonresidential split, since they change which invoices need itemized labor and material lines. Also note that a residential subdivision's entrance is treated as residential property, which affects how repair work there should be billed and taxed.

Common questions

Q: Is labor to install permanent landscape lighting taxable in Texas?
A: No. Because the lighting is permanently attached to the property, installation labor is treated as an improvement to realty and is not taxable, for either new residential or commercial construction.

Q: How are the lighting fixtures and wiring themselves taxed?
A: It depends on the contract type. Under a lump-sum contract, the contractor pays tax as the consumer of the materials and the customer owes no tax. Under a separated contract, the contractor collects tax from the customer on the agreed contract price of the materials (at least equal to the contractor's cost).

Q: Does it matter if the job is residential or commercial?
A: Not for new construction — both are treated the same. It matters for repairs to an existing lighting system: nonresidential repairs are taxable on both labor and materials, while residential repair labor is not taxable (materials are still taxed).

Q: Is the entrance to a residential subdivision treated as residential or commercial property?
A: Residential.

Citations and references

No specific statutes or administrative rules are cited in the text of 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/9411L1324F12

Original ruling text

November 7, 1994

Dear **:

Thank you for your letter of October 25, 1994. You asked that we address the
taxability of installation of accent lighting in the landscapes of residential
and commercial customers.

Lighting that is permanently attached to a customer's property (i.e.,
hardscape) is an improvement to realty. As a permanent improvement, the labor
to install the lighting is not taxable. The materials incorporated into the
realty (e.g., lighting and wiring) are taxed in accordance to the type of
contract you enter with your customer. You may choose either a lump-sum or
separated contract.

Contractors performing lump-sum contracts are consumers of all materials
incorporated into the realty, consumable items, and equipment purchased or
leased to perform the contract. As the consumer, you must pay tax to suppliers
at the time the materials are purchased or accrue tax on materials removed from
a valid tax-free inventory. No tax is due from your customer. This seems to
describe the situation given in your letter.

Contractors performing separated contracts are considered sellers of all
materials physically incorporated into the realty being improved. As a seller,
you must collect tax from your customer based upon the agreed contract price of
the incorporated materials. The agreed contract price of the materials must be
equal to or exceed the purchase price of the materials. Again, no tax is due on
the labor charge. You may purchase materials incorporated into the customer's
realty tax free by issuing a resale certificate to suppliers. You owe tax on
the purchase or rental of consumable supplies and equipment used to perform the
job.

Because residential and nonresidential new construction jobs are treated the
same, your invoices do not need to distinguish between residential and
commercial accounts for these jobs. However, if you are asked to perform a
repair on an existing lighting system, you will be required to distinguish
between residential and nonresidential jobs. The reason is that nonresidential
real property repairs are taxable to your customer in total, labor and
materials. Labor to perform residential real property repairs is not taxable.
The materials are taxable and are taxed the same as materials for new
construction jobs.

The entrance to a residential subdivision will be treated as residential
property.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Tax Administration Division

NOTE: Previous Accession Number 9411716L