Is an indoor plant care and maintenance business subject to Texas sales tax, and does taxing an existing service contract violate the Constitution's ban on impairing contracts?

Plain-English summary

A taxpayer in the business of caring for indoor plants for a number of small companies wrote to the Comptroller's office asking about their sales tax responsibilities. The taxpayer already paid sales tax on tangible property purchased for use in the business, but raised four specific questions.

First, the taxpayer asked whether applying sales tax to their services would violate the U.S. Constitution's prohibition on states impairing the obligation of contracts. The Comptroller answered no: courts have held that contracts are entered into with the expectation that tax laws may change, and transactions occurring under a contract after a change in the statute are subject to the new tax (absent a specific prior-contract exemption), even though the tax cannot be collected retroactively on transactions that already occurred.

Second, the taxpayer asked whether the sales tax is really an income tax requiring voter approval. The Comptroller answered no: the sales tax is an excise tax authorized under the Texas Constitution, while an income tax is measured by income rather than gross receipts.

Third, the taxpayer asked whether the plant care service itself is taxable. The Comptroller answered yes: in 1984 the Legislature imposed tax on the maintenance of tangible property, including indoor plants. A three-year prior-contract protection applied to contracts already in place when the tax passed (with renewals during that window treated as new, taxable contracts), but after 1987 all maintenance charges became taxable regardless of when the original contract was signed.

Fourth, the taxpayer asked whether they must pay tax on supplies purchased to provide the service. The Comptroller answered "yes and no": supplies that are transferred to the customer as part of the taxable service (the letter gives the example of plant stakes left with the customer's plants) can be purchased tax-free using a resale certificate. Supplies the provider uses but does not transfer to the customer (the letter gives the example of a leaf cleaner) are taxable when purchased.

What this means for you

Businesses providing plant care or similar maintenance services

Maintenance of tangible personal property — including indoor plant care — has been a taxable service in Texas since 1984 (fully taxable, without regard to contract date, since 1987). If you provide this kind of service, you generally need to collect sales tax on your charges to customers.

Businesses with contracts signed before a tax law changed

Signing a contract before a new tax takes effect does not exempt later performance under that contract from the tax. The Comptroller's position, grounded in case law described in the letter, is that parties contract with the understanding that tax laws can change, and only transactions that already occurred before the change remain untaxed — unless the legislature includes an explicit prior-contract exemption (as it did here, for three years after the 1984 law).

Businesses buying supplies used to perform a taxable service

Whether you owe tax on your own supply purchases depends on whether the item ends up with the customer. Items physically transferred to the customer as part of the service (like plant stakes left in place) can be bought tax-free with a resale certificate. Items you use yourself and keep (like a leaf cleaner) are taxable when you buy them.

Common questions

Q: Does taxing my existing contract violate the Constitution's ban on impairing contracts?
A: No. The letter explains that courts have found contracts remain subject to a state's tax laws even when the tax was enacted after the contract was signed, because parties are assumed to expect that tax laws may change. The tax cannot be applied retroactively to transactions that already happened, but it does apply to transactions occurring under the contract after the law changes, unless a prior-contract exemption applies.

Q: Is the sales tax actually a disguised income tax that needs voter approval?
A: No. The letter states the sales tax is an excise tax authorized under the Texas Constitution, distinct from an income tax, which is measured by income rather than gross receipts.

Q: Is indoor plant maintenance taxable?
A: Yes. The letter states that in 1984 the Legislature imposed tax on maintenance of tangible property such as indoor plants, with a three-year grandfather period for existing contracts, and that after 1987 all such maintenance charges became taxable regardless of when the underlying contract was signed.

Q: Do I pay tax on the supplies I use to perform plant maintenance?
A: It depends. Under the letter, supplies transferred to the customer as part of the taxable service (e.g., plant stakes left in place) may be purchased tax-free with a resale certificate. Supplies you keep and use yourself rather than transfer to the customer (e.g., a leaf cleaner) are taxable when you purchase them.

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/9503844L

Original ruling text

March 14, 1995

Dear **:

On March 6, 1995, you asked for an opinion from our office concerning your tax
responsibilities under the sales tax act. As I understand the facts, you are
in the business of caring for indoor plants for a number of small companies.
When you purchase tangible property for use in your business you pay sales tax
on it.

I have summarized your questions as follows:

1. If the sales tax is applied to my services, is there a violation of the
   U.S. Constitution which forbids states from passing laws which impair the
   obligation of contracts?

Answer: No. This issue has been addressed by the courts which have found that
contracts are subject to the tax laws of a state even though the taxing
provision was passed after the contract was signed. The basic assumption by
the courts is that contracts are entered into with the expectation that tax
laws affecting the responsibilities of the parties to the contracts may change.
Undoubtedly, the courts have also been concerned about protecting the ability
of states to raise revenue. Without this interpretation, tax revenue would be
dramatically decreased because long term contracts would be executed for the
purpose of avoiding taxes. This does not mean the tax can be collected on
transactions that have already occurred, but transactions occurring under the
contract after the change in the statute are subject to the change in the
absence of a prior contract exemption.

2. Is the sales tax an income tax which cannot be imposed without voter
   approval?

Answer: No. The sales tax is an excise tax which is authorized under the
Texas Constitution. An income tax is a tax measured by income, not gross
receipts.

3. Is the service I perform subject to sales tax?

Answer: Yes. In 1984, the Legislature imposed a tax on the maintenance of
tangible property, such as indoor plants. When the tax was passed, a
provision was included that would protect existing contracts for three years.
If the contract was renewed during the three-year period, it was considered a
new contract and subject to the tax. Without this prior contract provision, a
person providing this service would have been required to collect the tax on
contracts executed prior to as well as after the imposition of the tax. After
1987, all charges for the maintenance of tangible property became taxable
regardless of when the initial contract was executed.

4. Must I pay tax on the supplies which I purchase to provide the service?

Answer: Yes and No. The sales act provides that if an item is purchased for
use in performing a taxable service and is transferred to the customer as part
of the service, it may be purchased tax-free under a resale certificate.
Therefore, when you purchase supplies that are passed on the customer, you may
purchase them tax-free by giving a resale certificate to your supplier. If
the supply item is not transferred to your customer, you must pay tax on it
when you purchase it from the supplier. For example, if you purchased plant
stakes with which to support customer's plants and did not intend to remove
them, you could buy them tax-free because they would be transferred to the
customer as part of your taxable service. On the other hand, if you bought a
leaf cleaner, you would be required to pay tax on the cleaner because you use
it and do not transfer it to the customer.

**, I realize that tax laws are often complicated and difficult for
anyone other than a tax specialist to understand. However, maintenance of
indoor plants is subject to the sales tax, and there are no constitutional
provisions which prohibit its imposition. Should you have any further
questions, please feel free to write me at 111 East 17th Street, Austin, Texas
78774, or call me at 1-800-531-5441, extension 5-0220.

Sincerely,

Glen D. Hunt
Director, Tax Administration

cc: Joe Galvan, Manager, Tax Administration