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. What is missing though is a simple explanation that people can connect with. In conjunction with this explanation, we have created a 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:
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.
Make sure you know the difference between New Construction and Remodel
One definition of New Construction is the obvious - from the ground up construction. A building where there previously was not a building. New construction is also the first build-out of a space; even if that building or suite has been sitting empty for five years since the building was first built, the first finish out is considered New Construction. Anything after that, is Remodel. Even if you gut the entire space and finish it out again, that's a remodel. If all the walls of a building are taken down and only the slab remains, the subsequent work to rebuild the building is New Construction.
One not so obvious example to be aware of plagues fence contractors. What might appear to be a New Construction fence may not be. If the fence is bolted down 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.
Residential versus Commercial
I've recently consulted with quite a few contractors who aren't fully versed in what qualifies as residential and what is commercial property. The State of Texas considers any property where people live for more than 30-days residential. Let's take a deeper look at apartments. Apartments are residential. Any common areas of the apartment complex are residential; the pool, the fitness center, the clubhouse, the gate leading into the complex. The only area of an apartment complex that would be considered commercial and therefore subject to different taxation than residential is the sales office. Many apartment complexes have the sales office in the clubhouse. If you are doing work for an apartment complex and there is work to do for both common areas and the sales office, you should bill those separately. If it's remodel work, the sales office work would be fully taxable where the common area work would be taxable depending on how you billed the job.
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.
Other recent “Texas (TX)” posts by Susan Goertz:
- Taxing Texas Brewers - Overturn Returnable Containers Law!
- BIG Sales & Use Tax Savings – Found in SMALL Town Wisdom
- Detrimental Reliance & Texas Sales-Use Tax: 4 Key Considerations
- Texas Construction Taxation: Sales & Use Tax Explained