A fabric awning manufacturer/installer asked whether it's a manufacturer or a contractor, how to tax mixed-use supplies like screws and grommets, whether awning storage and reinstallation is taxable, and whether it still qualifies for the manufacturer utility tax exemption.

Plain-English summary

A firm that manufactures and installs fabric awnings for both residential and commercial customers asked the Comptroller's Tax Policy Division a series of questions about how it should be classified and taxed. The Comptroller's response walks through each question:

Manufacturer or contractor? You're a manufacturer when you produce items that will be sold without installation, or that keep their identity as tangible personal property and don't become improvements to realty. But an administrative hearing held that custom-made canvas awnings attached to apartment complexes by lacing could still be an improvement to realty (not tangible personal property) if the intent behind the attachment was to make a permanent improvement that would run with the property. So the degree of physical attachment isn't the whole test — intent matters.

Commercial vs. residential jobs. The auditor's practice of charging sales tax on commercial installs and repairs (absent a resale/exemption certificate), while treating residential installs as tax-paid-on-materials, was correct — but only for "existing commercial realty." Initial finish-out or new construction on commercial buildings isn't taxable under Rule 3.357, and is treated like residential work: taxability depends on whether the contract is lump-sum or separated, per Rule 3.291(b)(3) and (4).

Mixed-use bulk supplies (screws, grommets, thread). For a contractor doing lump-sum residential work (improvements to realty), the firm may pay tax on a pro-rata percentage of miscellaneous supply items that get mixed between taxable and non-taxable uses (e.g., the ~40% residential share of a box of screws). Any percentage used is subject to audit verification, and will be accepted if it's the most reasonable and accurate method of apportionment.

Winter storage service. Charges for removing and reinstalling awnings in connection with taxable cleaning or repair are taxable. But separately stated storage charges are not taxable, and charges for removal and reinstallation done solely for storage (no cleaning/repair) are not taxable either.

Apartments vs. hotels. Apartments are generally residential structures because occupants live there under initial terms longer than 29 consecutive days; hotels are commercial structures.

Manufacturer utility tax exemption. The Comptroller can't address utility company rate-classification arrangements, only tax consequences. If the predominant use (on a meter-by-meter basis) of electricity and gas is for manufacturing — which does not include manufacturing items that will be installed as improvements to realty — the firm still qualifies for the sales tax exemption on that utility usage. A new usage study would be needed to account for any contractor-type (installation) activity.

Why the classification changed. The state hasn't changed the definitions of "contractor" or "manufacturer." Rather, a taxpayer challenged an auditor's treatment of awnings as tangible personal property (based largely on degree of attachment), and an Administrative Hearing Decision agreed that awnings could become an improvement to realty. A contractor performs improvements to realty by incorporating materials into it — so if the firm's awnings become improvements to realty when installed, the firm is acting as a contractor for those jobs.

What this means for you

Awning, canopy, and canvas-covering businesses

Whether you're taxed as a manufacturer selling tangible personal property or as a contractor improving realty can depend on the intent behind how a custom awning is attached, not just the attachment method itself. If your installs are meant to be permanent (running with the property), you may be a contractor for that job, which changes how sales tax applies to materials, labor, and mixed-use supplies.

Businesses with mixed commercial/residential contracting work

Commercial finish-out and new construction get the same lump-sum-vs-separated analysis as residential work — they are not automatically taxed the way ordinary commercial repair/remodel work is. Track which of your commercial jobs are new construction/initial finish-out versus work on existing commercial realty, since the tax treatment differs.

Businesses claiming the manufacturer utility tax exemption

If you both manufacture goods and install some of them as improvements to realty, your utility exemption depends on whether manufacturing is still your predominant use of electricity/gas on a meter-by-meter basis — installation-related manufacturing doesn't count toward that predominant-use test. A change in your business mix may require a new utility study.

Common questions

Q: Is a company that makes and installs custom fabric awnings always a manufacturer?
A: No. It's a manufacturer for items sold without installation or that stay as tangible personal property. But if a custom awning is attached with intent to permanently improve the realty (so it runs with the property), it can be an improvement to realty instead, making the installer a contractor for that job.

Q: How is tax handled on small mixed-use supplies like screws and grommets bought in bulk?
A: A contractor performing lump-sum residential work (improvements to realty) may pay tax on a pro-rata percentage of such supplies reflecting the taxable/non-taxable mix (e.g., a residential-use percentage of total gross receipts). The percentage is subject to audit verification and will be accepted if it's the most reasonable and accurate method available.

Q: Is charging for taking down, storing, and reinstalling awnings for the winter taxable?
A: Charges tied to taxable cleaning or repair are taxable. Separately stated storage charges are not taxable, and removal/reinstallation done only for storage (without cleaning or repair) is not taxable.

Q: Are apartment complexes treated as residential or commercial for this purpose?
A: Apartments are generally residential structures because occupants live there under express initial terms longer than 29 consecutive days. Hotels are commercial structures.

Q: Does installing awnings as a contractor affect a firm's manufacturer utility tax exemption?
A: Yes, potentially. The exemption requires that the predominant (over 50%) meter-by-meter use of electricity and gas be for manufacturing, and manufacturing items that will be installed as improvements to realty does not count toward that manufacturing use. A new usage study may be needed if the business mix changes.

Q: Can this firm rely on this letter if its facts change?
A: No. The opinion is based on the facts presented, and if there are additional or different facts, the opinion may change.

Citations and references

• Rule 3.357 (treatment of contractors performing new construction/commercial finish-out)
• Rule 3.291, Subsections (b)(3) and (4) (lump-sum vs. separated contracts on residential structures and new construction)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9607L1426A12

Original ruling text

July 9, 1996

Dear **:

Thank you for your letter of June 25, 1996, concerning the taxability of
fabric awnings.

Your firm manufactures and installs fabric awnings to both residential and
commercial accounts. You also manufacture various custom made products.

You asked me to address the following questions;

1. Are we a contractor, or a manufacturer?

Response. You are a manufacturer when producing items that will be sold
without installation or that maintain their identity as tangible personal
property and do not become improvements to realty. An administrative
hearing held that canvas awnings that were custom made and attached to
apartment complexes by lacing could still be improvements to realty and
not tangible personal property if the intent of the attachment was to make
an improvement to realty that would run with the property.

2. If we are a contractor, the auditor said we charge sales tax on work
   that we sell and install to commercial accounts, repair brought into our
   plant, etc. unless we have a resale or exempt certificate on file. If we
   install our product on a residential home, we do not charge the customer
   sales tax but we pay the tax on the materials we purchased for the
   particular job. Correct?

Response. Correct, providing that you understand that the commercial realty
should be termed "existing commercial realty." Performing commercial jobs as
initial finish out or new construction are not taxable under enclosed Section
3.357. These are treated in the same manner as residential work in that the
taxability will depend on whether the contract is lump-sum or separated. For
guidance on lump-sum and separated work on residential structures and
commercial and residential new construction, see enclosed Rule 3.291
Subsections (b)(3) and (4). Your statement concerning residential work was
correct for lump-sum jobs.

3. Since we custom make our products we order our fabric for each job on a
   per job basis so keeping up with the basic material bought will not be a
   problem. The problem we have is in the small items used on a daily basis
   that we buy in bulk such as screws, grommets, thread, etc.. As we are a
   small business we are not able to purchase double the amount of screws, etc.
   to be able to separate one box for commercial and one for residential. We
   have figured out that our residential gross receipts equal around 40% of
   our total gross receipts. If we purchase a box of screws for example at
   $50.00 a box can we say that 40% of those screws will be used on residential
   work and pay sales tax on that amount?

Response. If you were operating as a separated contractor or were installing
tangible personal property, this would not be a concern. So I presume that
you are perform lump-sum residential work that qualifies as improvements to
realty. You may pay tax on a pro-rata amount of miscellaneous supply items
that are mixed (taxable and non taxable use). Any percentage arrived at
would be subject to verification during an audit. The auditor will accept
this method and resulting percentage if he/she finds that it is the most
reasonable and accurate method of apportionment.

4) We offer storage to all of our customers during the winter. Mostly they
are old customers that we have been doing business with for many years. Our
service includes going out and taking down their awnings off their homes,
bring them in to our shop, repairing them or cleaning them if needed,
storing them for the winter and then reinstalling them in the spring. As
most of these are residential customers, is this taxable or not?

Response. The charges for removing and reinstalling in connection with
taxable cleaning or repairing are taxable. Separately stated charges for
storage are not taxable. Charges for removal and reinstalling for storage
only are not taxable.

5. If we sell to an apartment complex and install the awning to their
   buildings is this considered residential or commercial?

Response. Apartments are generally considered residential structures
as the occupants live there for express initial terms of longer than 29
consecutive days. Hotels are commercial structures.

6) When a survey was made of our business in 1991 it was determined by
the utility companies that over 50% of our gas and electricity usage was
for manufacturing use and that we were a true manufacturer so we have been
paying a manufacturer rate on electricity and gas with no sales taxes. This
would put a considerable burden on us if this set up with the utilities were
changed. Contractors that do no manufacturing on their own do not have the
same cost problems with the utility company that any change in our set up
would bring. As we manufacture practically everything we sell can we keep
our status quo with the utility companies?

Response. This office can only speak to the tax consequences and not any
arrangements concerning utility company usage rates. If the predominant
usage, on a meter by meter basis, of your electricity and gas is for
manufacturing (which does not include the manufacturing of items that you
will install as improvements to realty) than you will still qualify for the
sales tax exemption. A new study would need to be performed that takes
these uses as a contractor into account.

7) Our final question is how the state can change us from a manufacturer to
a contractor? Since we have been in business for over 70 years as a
manufacturer, doing business the same way day in and day out, year end and
year out we question the legal aspects of this decision.

Response. The state has not markedly altered the definitions or activities
of a contractor or a manufacturer. A taxpayer challenged the treatment of
awnings as tangible personal property that the auditor had treated as
tangible personal property largely due to the degree of affixation. An
Administrative Hearing Decision agreed with the taxpayer that the awnings
could and did indeed become an improvement to realty. A contractor performs
improvements to realty by incorporating materials to realty. If the awnings
are improvements to realty and your firm installs them, you are considered
a contractor.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line
is 512/475-0613. You may also write to Tax Policy Division, Comptroller
of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division