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Simplifying Sales and Use Tax: A 4-part checklist

image Stephanie Thomas, CPA Principal Thomas, Thomas & Thomas PC, Houston, TX

AUSTIN - For many of the construction firms we work with, sales tax is the bane of their existence. Texas has some of the most complicated, confusing rules that if not applied properly, can lead to steep penalties.

 

 

 

 

 

        Determining the property type, project type, contract type and entity type will help you determine your sales tax responsibilities.  Once those questions have been answered, understanding your sales tax responsibilities will be a lot simpler.
1.    What type of property is it?
Commercial business – Commercial property is non-residential property.  Examples include restaurants, manufacturing plants, office buildings, hospitals, malls, hotels, etc.
Residential - A residential property includes property used as a family dwelling, multi-family apartment or housing complex, nursing home, condominium, or retirement home.
2.    What type of entity is it?
Taxable entity – entity is not exempt from Texas sales and use taxes.
Tax exempt entity- governmental, educational, charitable or religious entity that is exempt from Texas sales and use taxes.
3.    What type of project is this?
New construction -  all new improvements to realty, including initial finish out work to the interior and exterior of the improvement.  It also includes the addition of new usable square footage to an existing building.  
Repair/Remodeling/Restoration -  to rebuild, repair, replace, alter, modify or upgrade existing realty. 
A mix - is a project that has both elements. For example, adding a wing to an existing building has both new construction and repair/ remodeling elements.
4.    What type of contract is it?
Lump sum contract – the charge for labor and incorporated materials is one charge.
Separated or line item contract- the charge for incorporated materials is separately stated from the charge for labor.
How to Use the Checklist to Charge
Clients

    The answers to these questions determine how clients are invoiced and when sales or use tax is due on purchases.  The following information is general and reflects current Texas sales tax rules for repair/remodeling projects performed on commercial property for taxable entities.
    Repair/remodeling/restoration projects on commercial property for taxable entities are taxable, with few exceptions. Sales tax should be invoiced as a separate line item on the total charge, except separately stated unrelated services charges. The applicable tax rate is based on the jobsite.
    In most instances, the contract type for commercial, repair/remodeling projects does not matter.  However, there are exemptions for labor, if the repair/remodeling project is performed pursuant to a separated contract in a designated disaster area or the property listed in the National Register of Historic Places.
    For example, Thomas Construction is the general contractor on a commercial, remodeling project with a XYZ Corp, a taxable entity. The property is listed in the National Register of Historic Places.  If the construction services are performed pursuant to a separated contract, Thomas Construction only charges sales tax on the separately stated incorporated materials charge.  If the service is performed pursuant to a lump sum contract, Thomas Construction should charge sales tax on the entire charge.
Sales Tax the Contractor Should Pay
    The contractor can purchase incorporated materials and subcontractor services tax-free by issuing a properly completed Texas resale certificate to subcontractors and material suppliers. Sales tax is due on consumable supplies and equipment rentals. 
Conclusion
    Determining the project type, property type, contract type and entity type will help you determine your sales tax responsibilities. Once those questions have been answered, understanding your sales tax responsibilities will be a lot simpler.
DISCLAIMER:
    The information provided above is general in nature and is not legal advice.  The provider of the information makes no representation regarding the law and/or its application to any entity’s specific situation.   Because state tax laws, policies, and applications are dynamic, please consult with a state tax professional for a complete rendition of the law as it may apply to your specific situation at a particular time.
  
  Since 1998, Stephanie Thomas, CPA has helped clients with sales and use tax issues. Thomas, Thomas & Thomas, PC is a CPA firm that works exclusively in state tax issues only, helping clients all over the country address sales and use tax audits, minimize sales and use tax deficiencies, and understand how to comply with applicable sales and use tax laws. If you have more questions regarding sales and use tax, refer to Stephanie’s book, Texas Taxes For The Construction Industry, which can be found at www.thomaspc.com or contact Stephanie directly at (281) 469-1103.


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Author Info

Reesa Doebbler reesa@constructionnews.net