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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 - While many construction firms find sales and use tax laws to be almost impossible to understand, answering four simple questions about your construction project will help you understand your Texas sales and use tax responsibilities.

 

 

 

 

    Identifying the property type, project type, contract type and entity type at the beginning of a project will help you determine your sales tax responsibilities.  Once those questions have been answered, understanding your sales tax responsibilities will be a lot simpler.
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.
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.
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.
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 relating to new construction projects performed for taxable entities.
    Determining the contract type is very important for new construction projects.  If the new construction project is performed pursuant to a lump sum contract, the contractor pays sales tax on the incorporated materials, consumable supplies and equipment rentals.  Sales tax is not invoiced to the customer.  If the new construction project is performed pursuant to a separated contract, the contractor can purchase incorporated materials tax free by issuing a resale certificate to the supplier.  The contractor must pay sales tax on consumable supplies* and equipment rentals.    The contractor must charge sales tax on the invoiced incorporated materials charge.  The applicable tax rate is based on the jobsite location.
    Please note that consumable supplies can be purchased tax free under certain circumstances.  For additional information, regarding this issue refer to 34 TAC Rule 3.291(b)(2)(B).
    Sometimes projects have both new construction and remodeling elements. If your project has both new construction and remodeling elements, the five percent rule applies.  If the remodeling portion of the total project is less than five percent and not separately stated, the project is treated in the same manner as a new construction project.  If the remodeling portion is greater than or equal to five percent of the total project and not separately stated, the project is treated as a repair/remodeling project.  If the repair/remodeling portion is separately stated, that portion is treated as a repair/remodeling project.
Conclusion:  Determining the project type, property type, contract type and entity type will help you understand your sales tax responsibilities and avoid common headaches associated with sales and use tax compliance.
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 Texas Taxes for The Construction Industry, a tax guide for contractors in Texas, which can be found at www.thomaspc.com or contact Stephanie directly at (832) 559-1564.


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Author Info

Reesa Doebbler reesa@constructionnews.net