When a building job mixes new construction, residential remodeling, and nonresidential remodeling, how is Texas sales tax calculated on the combined contract?

Plain-English summary

A contractor working on one building had three different jobs going at once: converting a commercial floor to residential space, remodeling an already-residential floor, building a brand-new roof over previously open terraces (new construction), and remodeling the roof of a mechanical room (a nonresidential improvement). The Comptroller walked through how Texas sales tax applies to each piece -- and how billing method changes the answer.

New construction and residential repair/remodeling are taxed the same way: materials incorporated into the building are taxable, but labor to install them is not. Under a lump-sum contract (one combined charge for materials and labor), the contractor is treated as the consumer of the materials and owes tax when buying them -- the customer's invoice isn't taxed at all. Under a separated contract (materials and labor billed separately), the contractor is treated as the seller of the materials and must collect tax on the materials charge; the separately stated labor charge stays untaxed.

Nonresidential repair/remodeling is taxed more broadly: the entire charge -- both materials and labor -- is taxable, with no split.

Because the nonresidential mechanical-room roof work was less than 5% of the total contract, and the whole job (all three categories) was billed as one lump sum, the entire job came out nontaxable under the Comptroller's 5% de minimis rule. That rule only works with true lump-sum billing, though -- a "cost-plus" contract counts as separated, and if the nonresidential remodeling charge is ever broken out separately, tax must be collected on that specific charge.

What this means for you

Contractors billing mixed jobs (new construction + residential + nonresidential)

Your billing method is doing as much work as the classification of the job itself. A single lump-sum invoice for everything can make a small nonresidential component (under 5% of the total) disappear from taxability entirely -- but the moment you separately state any charge, that protection can be lost for that portion.

Contractors on cost-plus contracts

Treat cost-plus billing as "separated," not lump-sum, for purposes of the 5% rule -- it won't get you the de minimis exemption even if the nonresidential share is small.

Accountants and tax professionals

This letter is a clean map of the three parallel doctrines: (1) new construction/residential remodeling's materials-taxable-labor-exempt split by billing method, (2) nonresidential remodeling's all-in taxability, and (3) the 5% de minimis carve-out for small nonresidential components of an otherwise lump-sum job.

Common questions

Q: Is labor to install a new roof taxable in Texas?
A: For new construction or residential repair/remodeling, no -- only the materials are taxable, and only the contractor (lump-sum) or customer (separated) owes that tax depending on billing method. For nonresidential repair/remodeling, the entire charge including labor is taxable.

Q: What is the 5% rule mentioned in this letter?
A: If a small nonresidential repair/remodeling component (here, under 5% of the total contract) is combined into an otherwise lump-sum job with new construction/residential work, the whole job can be treated as nontaxable -- but only if it's genuinely billed lump-sum, not separated or cost-plus.

Q: Does a cost-plus contract count as lump-sum for the 5% rule?
A: No -- this letter treats cost-plus contracts as separated contracts, so the 5% de minimis rule doesn't apply to them.

Citations and references

This letter doesn't cite a specific statute or rule number in its text -- the analysis is based directly on the Comptroller's stated policy for contractor billing, new construction, residential/nonresidential repair and remodeling, and the 5% de minimis rule as described in the letter itself.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9912919L

Original ruling text

December 1, 1999

Dear **:

Thank you for your recent fax regarding non-residential and residential real
property repair and remodeling, new construction, and Texas sales tax.

You stated that one floor of a building is being converted from commercial
space to residential space. Another floor is currently residential space and
is being remodeled. A new roof will be constructed over previously open
terraces. Additionally, there will be remodeling of the roof of a mechanical
room.

If a contractor is adding new square footage (the new roof over existing open
terraces), he is performing new construction. The materials incorporated into
the realty are taxable but the labor to install the materials is not. If the
contractor performs new construction under a lump-sum contract (a single charge
for materials and labor), he is the consumer of the incorporated materials and
owes sales tax on the materials when they are purchased. The lump-sum charge
to the customer is not taxable.

If the new construction is performed under a separated contract (a separate
charge for the incorporated materials and a separate charge for the labor), the
contractor is considered the seller of the incorporated materials. He must
collect sales tax on the charge for the incorporated materials to the customer.
The separately stated charge for labor is not taxable.

If a contractor is remodeling existing residential real property (existing
residential space or conversion to residential space), he is performing
residential repair and remodeling. The materials incorporated into the realty
are taxable but the labor to install the materials is not. If the contractor
performs residential repair and remodeling under a lump-sum contract (a single
charge for materials and labor), he is the consumer of the incorporated
materials and owes sales tax on the materials when they are purchased. The
lump-sum charge to the customer is not taxable.

If the residential repair and remodeling is performed under a separated
contract (a separate charge for the incorporated materials and a separate
charge for the labor), the contractor is considered the seller of the
incorporated materials. He must collect sales tax on the charge for the
incorporated materials to the customer. The separately stated charge for labor
is not taxable.

Remodeling an existing nonresidential improvement to realty (mechanical room
roof) is taxable as nonresidential repair and remodeling. The total charge
(labor and materials) is taxable.

You stated that the charge for remodeling the mechanical room roof is less than
5% of the total contract. Based on that presumption, if the entire job
(residential remodeling, new construction, and remodeling of nonresidential
real property) is billed "lump sum," the total charge is not subject to Texas
sales tax.

Generally, a "cost-plus" contract is a separated contract. The 5% rule is not
applicable if there is a separate charge for the taxable service.

If the contractor separates the charge for remodeling the roof of the
mechanical building from the new construction and residential repair and
remodeling, he must collect tax on that charge.

This opinion is based on the facts presented. Additional or different facts
may yield different results.

You may call me toll free 1-800-531-5441, extension 5-9787, if you have any
questions or need more information. The direct line is 512/305-9787. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Philip Knisely
Tax Policy Division