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Home | Columnists | Accounting | Accounting - Sales and Use Tax and the Texas contractor: Solve the riddle! (Pt. 3)

Accounting - Sales and Use Tax and the Texas contractor: Solve the riddle! (Pt. 3)

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

AUSTIN - As you know, sales tax rules in Texas vary depending on project type, contract type, property type and entity type. Let me refresh your memory on the four simple questions a contactor must ask at the beginning of the project to determine sales tax:

 

 

 

 

• What type of project is it (new construction or repair/remodeling)? 
• What type of property (residential or commercial) is it?
• What type of contract is it (lump sum or separated)? 
• What type of entity is it (tax exempt or taxable entity)?
    The answers to these questions will guide the way you charge and remit sales tax. See my articles from June and July for more details.
    Now, let’s focus on the guidelines for construction projects for sales tax exempt entities (also known as governmental agencies and charitable, educational, and religious organizations).  Contractor’s sales tax responsibilities are relatively simple when working on a project for a sales tax exempt entity. Separately stated sales tax is never invoiced, regardless of contract type, property type or contract. Also, contractors may purchase certain items tax-free for use in the project. 
    The following information is general and reflects current Texas sales tax rules only.
    Sales Cycle:  Invoicing for a sales tax exempt entity.
    A contractor does not invoice sales tax exempt entities sales tax.
    Purchases Cycle:  Sales tax the contractor should pay.

    If the project is for a sales tax exempt entity, the contractor may purchase incorporated materials, subcontractor labor and consumable supplies tax-free.  The consumable supplies must be necessary and essential to the performance of the contract and completely consumed at the jobsite. An exemption certificate should be issued to subcontractors, incorporated material suppliers and consumable supply suppliers in
order to purchase these items tax-free.    
    The contractor may purchase taxable services tax-free if the following requirements are met:
• the contract expressly requires the service to be provided or purchased by the contractor
• the service is integral to the performance of the contract
•  the service is performed at the jobsite  
    If all of these criteria are applicable, the contractor may issue an exemption certificate to the taxable service provider in order to purchase the service tax-free.
Tools, equipment rentals, silt fencing, scaffolding, etc. are taxable to the contractor regardless of the entity type (i.e. exempt or taxable). These items are tax exempt only if the exempt entity, not the contractor, purchases them.  Note: There is an exemption for silt fencing components purchased by the contractor for use on tax exempt projects only. For additional information regarding this or other exemptions, please contact me or the Texas Comptroller of Public Accounts.
    Required Documentation
It is important that the contractor obtain the appropriate documentation that their client is exempt from sales tax.  A purchase voucher, invoice or contract is sufficient proof of the exempt status of a governmental entity. For all non-governmental tax exempt entities, obtain a properly completed exemption certificate as soon as possible. We also recommend you confirm their exempt status online via the Exempt Organization Search and Verification link in the Searchable Taxpayer Information database on the Texas Comptroller of Public Accounts website.
    Understanding your sales and use tax responsibilities will help you avoid any sticky issues with your customers and the Texas Comptroller of Public Accounts. If you have questions or concerns about your sales tax obligations regarding tax exempt or any other type of construction project, please feel free to contact me.

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.


Brief Bio: Stephanie Thomas, CPA has helped clients with sales and use tax issues exclusively since 1998. Each month, Stephanie teaches Texas Taxes for the Construction Industry. Her new online class series starting in September will help construction companies and contractors understand their sales tax requirements. Her firm, Thomas, Thomas & Thomas, PC is a CPA firm that addresses state
tax issues only. They help 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.  Stephanie can be reached at (832) 559-1564 or Stephanie@thomaspc.com.


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Carol Wiatrek meditor@constructionnews.net