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Texas Construction Taxation: Sales & Use Tax Explained

author photo of Susan Goertz

If you are a construction company and/or contractor with Texas activity - and you are trying to make sense of sales and use tax issues - this post is one to bookmark.

The post includes an overview of key issues - and also includes a link to a very helpful Texas Construction Tax FLOWCHART (below) which provides a helpful visual element.

Texas Tax Rule 3.29 - How Contractors Should Tax Their Customers - Explained Visually:

Texas Tax Rule 3.291 outlines the rules for how contractors should tax their customers and how they should pay tax on the materials and other consumables that are used in construction jobs. This rule is quite simply one of the most difficult rules to get right. Contractors as well as the auditors who audit them have a hard time applying the rules properly. There are a lot of idiosyncrasies in the rule itself along with policies and procedures employed by the State during the audit process. There are also a large number of blogs and magazine articles out there that can be two or three thousand words long that try to explain how a construction company should collect and remit tax to the state. There is even a book being sold for $80.00 by a Texas CPA firm that you can buy if you wish. What is missing though is a simple flow chart which allows the contractor, estimators, controller or bookkeeper who works for the contractor to apply the appropriate taxability to a job depending on the many factors that must be considered. We’ve developed that flowchart that we share with all our contracting clients and would like to now share it with you—for free. Click the following link to access the Texas Construction Tax FLOWCHART.

Hierarchy of Prevailing Documents in a Texas Sales and Use Tax Audit:

Contractors have varying ways in which they keep their records. Some have complete and organized job files, and some don’t. Depending how the records are retained and organized, it can be very challenging during an audit for an auditor to make an appropriate decision about the job - which for some contractors can be detrimental. A very important part of the contractor rule that many (if not most) contractors are completely unaware of, is that there is a hierarchy of documents. In other words, if your invoice says one thing and your contract says another, which is the one that counts? In an audit by the State of Texas Comptroller’s Office the hierarchy of prevailing documents is:

  1. Contract
  2. Bid
  3. Invoice

Unfortunately, during an audit, it is not simply what you know happened—it’s what you can prove happened. If a contract exists it usually has all the information needed to prove the work was commercial or residential, new construction or remodel, billed lump sum or separated. These factors are very important in determining whether tax is due on the contract or if the contractor pays tax on the materials that are incorporated into the job. A bid typically has less detailed information and an invoice often even less. You do not want to leave it to the discretion of the auditor as it may not go in your favor.

A Sample "Gotcha" ? Consider Fence Construction:

What might appear to be a “new construction” fence may not be. If the fence is bolted down (for example) to a retaining wall or concrete footings, the State considers that fence tangible personal property and it is fully taxable; both labor and material. Also, if you have 100 feet of fence and you tear down 80 feet of that fence and replace with all new material, it’s considered a remodel, not new construction. If you leave any part of the existing fence, it’s considered remodel.

There are other nuances to the state tax laws concerning the construction industry so if you are unsure you can take advantage of our free 30-minute consultation offer and get some expert advice.

Susan Brown-Goertz is the Senior Partner of Brown Goertz & Co., a firm which offers state and local transaction services including refund engagements, compliance, sales and use tax planning, due diligence, audit representation, exposure analysis, and taxability matrices. Susan has extensive experience in the hospitality, technology, construction and manufacturing sectors.

Do you have questions about TEXAS (and/or multi-state) sales tax - or does your business need assistance with other tax issues? Susan welcomes inquiries from SalesTaxSupport.com users and offers a complimentary 30 minute consultation to established businesses with sales or use tax issues or concerns. Please use the "Request a Consultation" link on FIRM PROFILE page to submit your question or consultation request.

Other recent “Texas (TX)” posts by Susan Goertz:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

23 Responses to Texas Construction Taxation: Sales & Use Tax Explained

  • Posted by Ozzie on January 18, 2018 1:07pm:

    Thank you in advance

    • Posted by Author photo of Susan Goertzsusangoertz on January 19, 2018 4:03am:

      Hi Ozzie. Thank you for your comment and I applaud you for being proactive and learning about compliance before you get started. Many companies only learn about compliance once they are audited and find out they've been doing things wrong for many years.

      I'd like to suggest that we schedule a meeting so that I can understand what you've done so far and then we can discuss what needs to be done and the steps to take along with how to bill your customers and how to pay your vendors for materials or any subs that you contract. I assume you are local to the DFW area? If not, we have offices in San Antonio, Houston and Austin and we can accommodate a meeting with you in those cities as well. Please call me at 469-742-1159. Thank you!

  • Posted by Ozzie on January 18, 2018 1:06pm:

    Hi hope you can help me please?! I just recently passed and recieved my Texas tacl air conditioning license b for residential
    And Im totally trying to do everything the right way but i am confused. What forms or steps am i suppose to take or fill out? And my understanding is if i pay taxes on ac equipment or parts i do NOT charge residential homeowner taxes is that correct? If so do i need to apply for lump sum contract if so where or how?

  • Posted by Jeff on January 7, 2018 8:12am:

    We sell and install custom of patio covers here in Texas. We do lump sum billing, just completed first year as an LLC. with no tax exempt status. Will we receive any notices from the state regarding our sales tax status or a request for any information regarding sale taxes? Thank You!

    • Posted by Author photo of Susan Goertzsusangoertz on January 7, 2018 8:55am:

      Hi Jeff. I looked at your website and it appears that you only do residential work? If that's the case, you don't need a sales tax permit. You don't have taxable sales and you don't need a resale certificate to buy materials tax free. More than likely, the State will leave you alone.

      If you do any remodel commercial work (add a patio to a commercial building), then you would need to get a sales tax permit.

      Hope that helps. Please let me know if you have additional questions or if you need further clarification.

      Susan Brown-Goertz

  • Posted by Michelle on January 5, 2018 9:54am:

    We are installing terminals/point of sales systems in a new construction store in TX. They claim we are not supposed to charge tax on labor installing the systems. Is this correct and what can I use to back it up?

    • Posted by Author photo of Susan Goertzsusangoertz on January 5, 2018 10:24am:

      Hi Michelle. So that I can fully understand the scope of the install, can you tell me what specifically is being installed? Is it just POS terminals or is there cabling as well? Do you bill your customers separated (labor is billed on a separate line or invoice from the cost of the POS system) or do you bill them lump sum for the install (POS and labor together). Is there a contract or quote that preceeds the invoice?

      Susan

      • Posted by Michelle on January 5, 2018 10:53am:

        It is broke out on the invoice seperately. We will not be installing the network system. Just installing and setting up the terminals/computers (cash registers).

        • Posted by Author photo of Susan Goertzsusangoertz on January 5, 2018 2:15pm:

          Cash registers / terminals are tangible personal property (TPP) in Texas. If you are selling them the TPP, the cost of installation whether separately stated or not is also taxable. If you did not sell them the TPP and are simply installing it, that is considered third party installation and is not taxable. Hope that helps. Please let me know if you need more.

          Susan

  • Posted by Michelle on January 5, 2018 9:40am:

    We have a client in Tx building a new store we are installing point of sales systems/cash registers into the new building. The client says we shouldnt be charging tax on the installation labor. Is this correct?

  • Posted by Garnet on January 2, 2018 3:19pm:

    We're hurricane Harvey victims. Our losses are extensive, bordering on $500,000.00. Insurance will pay about 70% of the vlosses. Paying a sales tax on the reconstruction is an added burden. Is there any relief?

    • Posted by Author photo of Susan Goertzsusangoertz on January 2, 2018 3:24pm:

      Hi Garnet. Are you damages to personal property or real property? If real property, is it commercial property or residential?

      Susan

      • Posted by Garnet on January 5, 2018 12:24pm:

        All commercial properties. One large office building and 2 vacation rental houses. All real property claims.

        • Posted by Author photo of Susan Goertzsusangoertz on January 5, 2018 2:25pm:

          The labor to repair the property is exempt. The contractor(s) should separately state the labor and materials on your contract / invoice. You should give them an exemption certificate and specify the reason the the exemption as "Repair of XXX due to Hurricane Harvey, a declared natural disaster".

          You can download an exemption form here:

          https://comptroller.texas.gov/taxes/sales/forms/

          Susan

  • Posted by Ana on December 28, 2017 7:31am:

    Hello,
    If a contractor does a fence replacement for an HOA, would it be considered residential or commercial work?

    • Posted by Author photo of Susan Goertzsusangoertz on December 28, 2017 9:45am:

      Hi Ana,
      HOAs are considered residential in Texas.

      Please let me know if I can assist you further. Thank you!

      Susan

  • Posted by Marshall on December 21, 2017 11:09am:

    We are starting a company that will purchase construction equipment to rent to other companies. We will charge sales tax on the rentals. Do we pay sales tax for the machines when we purchase them?

    • Posted by Author photo of Susan Goertzsusangoertz on December 28, 2017 9:31am:

      Hi Marshall.

      I assume your question is for Texas only?

      If you are renting the equipment without an operator, you would charge your customer tax and provide a resale certificate to the company where you purchase the equipment (e.g. purchase the equipment tax free).

      If you are providing an operator with the rented equipment, you are providing a non-taxable service and would not charge your customer tax. You would then need to pay tax on the equipment at the time of purchase.

      Also, note that repairs to the equipment is taxable or non-taxable as well using the above criteria.

      If you will sometimes rent with an operator and sometimes without, then you need to determine divergent use on the purchases. If this is the case, please reach out to me so we can help you determine the best way to insure that you are compliant without paying too much use tax.

      Hope that helps. Please let me know if I can assist you further.

      Susan

      • Posted by Author photo of Susan Goertzsusangoertz on December 28, 2017 9:44am:

        Marshall,
        One more caveat. If you are renting the equipment with an operator and billing lump-sum for the service (not breaking out labor and equipment), then it is non-taxable. If your invoice lists one price for the equipment and one for the operator, then the equipment is considered rented to the customer and is taxable.

  • Posted by Judy on December 12, 2017 2:39pm:

    If we work in Texas, New Construction, do we pay tax on the contract or just materials?

    • Posted by Author photo of Susan Goertzsusangoertz on December 12, 2017 6:23pm:

      Hi Judy. I would like to ask you a few more questions so that I can give you a complete answer. Please call my office at 469-742-1159 at your convenience and we'll make sure you get the correct answer based on your situation.

  • Posted by Kevin on October 10, 2017 7:57am:

    Hello,
    I was hoping you could tell me a good Sales and/or Franchise tax seminar to attend in Houston or around that area in late 2017/early 2018. Do you offer any such seminars?

    • Posted by Susan on October 10, 2017 4:28pm:

      Hi Kevin. Honestly, a review of your company, your products and services, contracts, invoices and processes would be much more beneficial to you. A seminar that is offered across many different industries would be too vague and leave you with more questions than answers. We do offer training specific to clients and their businesses. Two companies in the same industry may have different tax treatments depending on the products / services they offer, how they contract with their customers, how they bill their customers and how they interact with their vendors. We should have a phone conference to discuss your needs and how my firm can assist you in ensuring compliance in Texas and the other states where you interact business.

      I have availability Thursday morning and Friday morning if you are available for a call?

      Thank you for your request and I look forward to speaking with you.

      Susan Goertz
      Brown Goertz & Co.

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