[musical introduction]
Welcome to the Comptroller's Contractor Video Series.
This video discusses the tax responsibilities for contractors
who perform residential repair, remodeling and restoration work.
If you don't understand the terms used in this video,
please watch the Contractor Overview Video.
As previously discussed in our Contractor Overview Video,
repairing real property means
mending or bringing the broken, damaged or defective real property
back, as near as possible, to its original working order.
Remodeling or restoring real property means rebuilding, replacing,
altering, modifying or upgrading existing real property.
For tax purposes, repairing, remodeling or restoring real property
are all treated the same.
The labor to repair, remodel, restore or maintain residential real property
are not taxable.
The incorporated materials into the real property are taxable.
The taxing responsibilities for residential repair, remodeling and restoration work
are identical to new construction.
Who pays tax on the incorporated materials depends on how you bill your customer.
As a contractor,
you can bill your customer using either a lump-sum or separated contract.
Your tax responsibilities are different for each one.
Under a lump-sum contract – also called a fixed-rate or flat price by the industry –
you can charge a single price for both the incorporated materials and labor.
If you bill your customer using a lump-sum contract,
you must pay tax to your suppliers
on the incorporated materials, equipment and consumables when you buy them.
The retailer will generally charge you sales tax based on their place of business.
If you bought incorporated materials tax free
because you either removed these items from your inventory,
or you bought these items from outside of Texas,
then you must self-assess and pay the use tax by reporting the cost of the items
on either your sales tax return ... or on a use tax return.
You determine the local use taxes due based on where the item is first stored or used.
For example, if the item is shipped directly to the jobsite,
then local use tax is due based on the jobsite location.
If you had the items delivered to your place of business
before you took them to the jobsite,
then local use tax is due based on your place of business.
Under a lump-sum contract,
you do not charge sales tax on either the incorporated materials
or labor to your customer.
If you only perform lump-sum residential real property repair,
remodeling or restoration work,
you do not need a sales tax permit.
If, however, you regularly buy incorporated materials from out-of-state suppliers,
then you may want to apply for a sales tax permit
to more easily report your use tax on these purchases.
Here's an example.
Robert, the subcontractor,
is taking measurements for new cabinets.
He will be remodeling this kitchen for his general contractor.
Robert decides to bill the general contractor a flat price of $20,000
for the cabinetry and labor.
When Robert goes to his material supply vendor,
he pays sales tax on all the lumber, nails, screws and other incorporated materials.
He also pays sales tax on equipment and consumables he uses to complete his job.
When Robert bills the general contractor,
he does not charge any tax on the $20,000 bill.
Under a separated contract known as the time and materials invoice,
you itemize charges for labor and incorporated materials.
If you bill your customer using a separated contract,
you must apply for a sales tax permit.
When you bill your customer under a separated contract,
you can give a properly completed resale certificate to your vendors
when you buy taxable incorporated materials and subcontractor services
resold to the customer to complete the construction work.
You must still pay tax when you buy equipment and consumables
that you will use in performing your residential repair,
remodeling and restoration work.
You must either collect tax from your customer on the incorporated materials
or accept a resale certificate from another contractor
instead of collecting the sales tax.
When you collect the local tax,
you will collect it based on the tax rate at the jobsite location.
You can use our tax rate locator available on our website
to search for sales tax rates by physical address.
Let's cover another example.
Robert again will be remodeling this kitchen in Austin, Texas
for his general contractor.
But this time he decides to bill using a separated contract.
He charges $15,000 for the cabinetry
and $5,000 for the labor.
When Robert goes to his material supply vendor,
he gives a resale certificate for the lumber, nails, screws
and other incorporated materials.
He pays sales tax on the equipment and consumables he uses to complete his work.
When Robert bills the general contractor,
he must either charge and collect the tax on the incorporated materials
or accept a resale certificate.
In this example,
the general contractor billed the customer using a lump-sum contract.
The general contractor must pay sales tax on the incorporated materials.
Robert collects sales tax of $1,237.50
on the $15,000 material charge.
Again, no sales tax is due on the labor.
In summary,
for residential repair, remodeling and restoration lump-sum contracts,
you do not collect sales tax on either the incorporated materials
or labor from your customer.
You pay sales tax
when you buy the incorporated materials, equipment and consumables.
If you only perform residential repair, remodeling and restoration work
and only bill your customer using a lump-sum contract,
you do not need a sales tax permit.
For separately stated contracts,
you must collect the sales tax on incorporated materials
or accept a resale certificate from your customer.
You must give a resale certificate when you buy incorporated materials;
you must pay sales tax when you buy equipment or consumables;
and you must get a sales tax permit.
Again, if you bill your customer using a separated contract,
you must apply for a sales tax permit.
You can apply online on our website,
visit one of our local field offices
or print an application which is available on our website.
Thanks for watching our video.
You should now understand your tax responsibilities
when you perform residential real property repair, remodeling or restoration work.
If you need to, you can watch this video again to review the information presented.
For more information about contractors and Texas sales and use tax,
you may review our tax publications for contractors on our website,
or feel free to contact us here.
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