If I perform scheduled, periodic maintenance on real property and incorporate materials into it, am I a contractor for tax purposes -- and does it matter whether the property is residential or nonresidential?

Subject

Maintenance Of Residential And Nonresidential Real Property — Person Performing Maintenance Meets Definition Of Contractor

Plain-English summary

A taxpayer asked the Comptroller's Tax Policy Division about the tax status of a person who performs maintenance services on real property under a contract that qualifies as "scheduled and periodic" maintenance under Rule 3.357(a)(4). Two questions were asked: whether such a person is a contractor (versus someone performing a non-taxable service) when the property is residential, and whether the answer changes for nonresidential (commercial) property.

Residential property. Rule 3.291(a)(3) defines a contractor as a person who "repairs, restores, or remodels residential real property" and, in doing so, "incorporates tangible personal property into the property being improved." The letter confirms that performing this work on a scheduled and periodic basis does not change that classification -- the person is still a contractor.

Nonresidential property. The answer is the same. A person who incorporates tangible personal property into commercial realty during scheduled and periodic maintenance is also considered a contractor. The letter adds a practical detail for this scenario: on separated contracts, contractors may purchase the items they incorporate into the realty tax-free for resale, but they must then collect sales tax from their customers on the separately stated charge for those materials.

The letter closes with the Comptroller's standard caveat that the answer is based on the facts presented and that different facts, even if similar, could produce a different result.

What this means for you

Businesses performing scheduled/periodic maintenance on residential property

If your maintenance work incorporates tangible personal property (materials) into residential real property, you're a contractor under Rule 3.291(a)(3) -- regardless of whether the work is a one-time job or done on a recurring, scheduled basis.

Businesses performing scheduled/periodic maintenance on commercial (nonresidential) property

The same contractor classification applies. If you incorporate materials into commercial real property as part of scheduled and periodic maintenance, you are a contractor, just as with residential work.

Contractors using separated contracts

On a separated contract, you may buy the materials you incorporate into the realty tax-free for resale (using a resale certificate), but you must collect tax from your customer on the separately stated charge for those materials.

Common questions

Q: Does performing maintenance on a scheduled, recurring basis change whether I'm a "contractor" instead of someone providing a non-taxable service?
A: No. Rule 3.291(a)(3) still classifies you as a contractor if you incorporate tangible personal property into the real property you're maintaining, whether the work is one-time or scheduled and periodic.

Q: Is the answer different for nonresidential (commercial) property versus residential property?
A: No. The letter states the answer is the same for commercial realty -- incorporating materials during scheduled and periodic maintenance makes you a contractor either way.

Q: If I'm a contractor performing this work under a separated contract, how is tax handled on the materials?
A: You may purchase the incorporated items tax-free for resale, but you must collect tax from your customer on the separately stated charge for those materials.

Q: Does this letter say whether lump-sum contracts are treated differently?
A: The letter only addresses separated contracts; it does not discuss lump-sum contract treatment.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.357(a)(4) (definition of "scheduled and periodic" maintenance)
• 34 Tex. Admin. Code Rule 3.291(a)(3) (definition of a contractor for residential real property improvements)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701211L

Original ruling text

January 6, 1997

Dear **:

Thank you for your letter of December 20, 1996, concerning maintenance services
on residential and nonresidential property.

For purposes of your inquiry, you asked me to assume that the contract meets
the definition of "scheduled and periodic" maintenance in Rule 3.357(a)(4).

Question 1: Is a person who maintains residential property a contractor, or is
a person performing a non-taxable service?

Response. Rule 3.291(a)(3)defines a contractor as a person "...who repairs,
restores, or remodels residential real property, and who in making the
improvement, incorporates tangible personal property into the property being
improved." The fact that the work is performed on a scheduled and periodic
basis would not alter this treatment.

Question 2: Is the answer different if the property is non-residential?

Response. No. Persons that incorporate tangible personal property into
commercial realty during scheduled and periodic maintenance are considered
contractors. They may purchase items incorporated into realty for resale when
performing separated contracts. They would collect tax from their customers on
the separately stated charge for materials.

This opinion is based on the facts presented. Different facts though similar,
may result in different answers.

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