How does Texas sales and use tax apply to a company that installs, repairs, and remodels exterior lighting permanently placed in the landscaping and hardscaping of residential and commercial property?

Plain-English summary

This 1995 letter from the Texas Comptroller's Tax Policy Division (signed by Joe A. Galvan, Jr., Manager, Tax Administration) responds to a company ("Corporation C") in the real estate exterior lighting business that asked how sales and use tax applies to its work installing, repairing, and remodeling exterior lights permanently placed in the landscaping and hardscaping of residential and commercial property.

The Comptroller's answers turn on two variables: (1) whether the work is original construction versus repair/remodeling, and (2) whether the property is residential or non-residential.

• Original installation (new construction) of exterior lighting — whether on residential or non-residential property — Corporation C acts as a contractor improving real property. It is not providing landscaping services.
• Repair or remodeling of exterior lighting on residential property — Corporation C is still treated as a contractor (i.e., as new construction), not as performing a taxable service.
• Repair or remodeling of exterior lighting on non-residential (commercial) property — this is a taxable real property repair/remodeling service.
• The company's work can fall into more than one category depending on the specific job.
• When acting as a contractor with separately stated material charges, Corporation C must collect tax from customers on those separately stated material charges, using the local tax rate in effect at the job site, and may credit state and matching local sales tax it already paid to its suppliers.
• When acting as a lump-sum contractor (single charge for materials and labor on new construction), Corporation C correctly pays tax to its suppliers and should not separately bill its customers for tax — the tax and profit are recouped in the lump-sum charge.
• When performing taxable repair/remodeling work on non-residential property, Corporation C must collect tax on its total charge for materials and labor, based on the rate in effect at its own place of business (plus any use tax owed based on the customer's location, per the Comptroller's local tax collection guidelines), with credit again available for supplier taxes paid.
• Common areas, entrances, and park areas of residential developments (primarily single-family homes and/or apartments) are treated as residential property, so lighting repair/remodel work there is treated as new construction, not a taxable service.

What this means for you

Exterior lighting contractors and landscapers

Whether you owe or collect tax depends on both the type of work (new installation vs. repair/remodel) and the type of property (residential vs. non-residential). Installing new exterior lighting is always contractor work, regardless of property type. Repairing or remodeling existing exterior lighting is contractor work (new-construction treatment) on residential property, but a taxable real property service on non-residential/commercial property.

Businesses billing lump-sum versus separated contracts

If you separately state your material charges as a contractor, you must collect tax on those charges at the job-site local rate. If you bill lump-sum for a new-construction job, you pay tax to your suppliers instead and should not add a separate tax line to the customer's invoice.

Businesses working in residential developments

Lighting work in common areas, entrances, and park areas of residential developments is treated the same as work on individual residences — as new construction — even though these areas may feel more like "commercial" or shared space.

Accountants and tax professionals

When a client's repair/remodel work on non-residential property is taxable, the applicable rate is based on the seller's place of business (plus destination-based use tax considerations), which differs from the job-site-rate rule that applies to separately stated contractor material charges. Credits are available in both scenarios for state and matching local tax already paid to suppliers, limited to work performed in the same local taxing jurisdiction.

Common questions

Q: Is an exterior lighting company a "contractor" or a real property service provider?
A: It depends on the work. Original installation of exterior lighting (residential or non-residential) and repair/remodeling of exterior lighting on residential property are treated as contractor work. Repair or remodeling of exterior lighting on non-residential property is a taxable real property repair/remodeling service.

Q: Does this company's work always fall into a single tax category?
A: No. The letter confirms the company's work can fall into more than one category depending on the specific job and property type.

Q: How is tax collected when acting as a contractor with separately stated material charges?
A: Tax must be collected from the customer on the separately stated material charges, using the local tax rate in effect at the job site. Credit is available for state and matching local sales tax already paid to suppliers, to the extent the work is performed in that same local jurisdiction.

Q: What about a lump-sum contract for new construction?
A: The contractor correctly pays tax to its suppliers on materials and should not make a separate tax charge to the customer; tax and profit are built into the lump-sum price.

Q: How is tax handled for taxable repair/remodeling of non-residential property?
A: The contractor must collect tax on its total charge for materials and labor, based on the rate in effect at its own place of business, plus any use tax due based on the customer's location. Credit is again available for supplier taxes paid in the same local jurisdiction.

Q: Are common areas of residential developments treated as residential or commercial property?
A: Residential. Common areas, entrances, and park areas of developments comprised primarily of single-family homes and/or apartments are treated as residential property, so lighting repair/remodel work there is treated as new construction.

Citations and references

No specific statutes, rules, or cases are cited by name in the ruling text itself; the letter references Comptroller's Rule 3.291 (contractors improving real property), Rule 3.357 (repair, remodeling, restoration, or maintenance of real estate), and Rule 3.356 (real property services) as the framework the requester asked about, without restating their text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505L1350C13

Original ruling text

May 30, 1995

Dear**:

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

Corporation C, a Texas business corporation, is engaged in the real estate
lighting business. The company's business operations are described in detail
on the enclosure labeled Exhibits. From your review of those operations and
methods, please respond to the following.

1. Is Corporation C a contractor constructing improvements to real property,
   subject to the provisions of Comptroller's Rule 3.291, or is it performing
   services such as the repair, remodeling, restoration or maintenance of real
   estate subject to the provisions of Comptroller's Rule 3.357 or real property
   services subject to the provisions of Comptroller's Rule 3.356?

Response: Corporation C is acting as a contractor when it makes original
exterior lighting improvements to residential or non-residential real property
or when it repairs or remodels exterior lighting on residential real property.
Corporation C is performing taxable services when it repairs or remodels
exterior lighting improvements on non-residential improvements to real
property. Corporation C is not providing landscaping services.

2. Does the company's work fall into more than one category. for example, is
   Corporation C considered to be a contractor in connection with certain of its
   work and to be performing real property repairs. etc., or real property
   services in connection with other work?

Response: Yes. Please refer to the response to question 1.

3. From a review of the enclosed Exhibits, is the company correctly handling
   its sales and use tax obligations with respect to the work described (in
   responding to this question, you should note that the company currently pays
   sales tax on all of its purchases of items used in the performance of its work)?

Response: The answer will vary depending on the type of work done.

When acting as a contractor separately stating charges for materials:

a. Corporation C must collect tax from its customers on its separately
stated charges for materials.

b. The tax rate in effect at the job site will determine the amount of local
tax due.

c. Corporation C may take credit on its return for state sales taxes paid to
its suppliers and for local taxes to the extent the work is performed in
the same local taxing jurisdiction in which the work is performed.

Corporation C is correct in paying tax to its suppliers when acting as a lump-
sum contractor (i.e., making a single charge for materials and labor on a new
construction contract). However, it should not make a separate charge to its
customers for tax on the transaction. Corporation C will recoup all of its
costs, including tax, and profit in its lump-sum charge to its customer.

When doing repair or remodeling work on non-residential property:

a. Corporation C must collect tax from its customers on its total charge for
materials and labor.

b. The tax rate is based on the rate in effect at Corporation C's place of
business plus any use tax that may be due based on the customer's place
of business. Please refer to the enclosed Guidelines for Collecting
Local Sales and Use Tax.

c. Corporation C may take credit on its return for state sales taxes paid to
its suppliers and for local taxes to the extent the work is performed in
the same local taxing jurisdiction in which the work is performed.

4. In addition to the jobs described on the enclosures, Corporation C
   performs similar lighting work in the "common areas", "entrance areas",
   and "park areas" of residential developments (i.e., developments
   primarily comprised of single family homes and/or apartments);
   accordingly, how should it handle sales taxes in connection with its work
   in those areas?

Response: Common areas, including entrances to apartments and residential
developments, are considered to be residential property. Accordingly, work to
repair or remodel exterior lighting improvements in these areas is treated as
new construction.

I hope this satisfactorily addresses your questions. Let me know any time I
can be of service to you.

Sincerely,

Joe A. Galvan, Jr.
Manager, Tax Administration

NOTE: Previous Accession Number 9505135L