Contractors need to be keen on sales tax regulations during the purchase of construction materials. Different contractors utilize different contract types and construction materials which bring a difference in tax obligations. Yes, Texas sales tax on commercial remodels also has to do with the supplies a commercial construction company or contractor uses to remodel or construct a new commercial structure.
Commercial construction involves real property like medical facilities, office buildings, warehouses, shopping centers, manufacturing buildings, parking garages, and restaurants, including other commercial buildings. As a commercial construction contractor, you need to research any information relating to taxes for the provision of services and purchase of supplies for commercial construction. (Katy, 2020)
Commercial remodeling activities that are taxable
As a commercial construction contractor, any amount you charge for renovation or remodeling commercial buildings is taxable in Texas. The activities that attract taxes include;
- Refurbishing the appearance of an existing commercial building
- Reconstructing an entire commercial building
- Replacing major components of an existing commercial building; replacement of minor components during maintenance is not taxable.
- Renovating components of a commercial building
- Repainting and reroofing during renovation or remodeling
Construction materials, supplies, and equipment that contractors use in any of the above activities are also taxable. However, labor associated with new construction, completing, remodeling, and renovation of any commercial construction is not taxable. (Viator, 2019)
ProTip Takeaway: Minor activities that occur during the maintenance of a commercial building do not attract any taxes.
Understanding your tax responsibility
Now that you know that commercial construction is taxable in Texas, it will help if you know different aspects of the activities that you do in commercial construction that attract taxes. Each aspect is associated with different tax obligations that you must follow as a contractor.
Contracts
Understanding your tax responsibility is the first step toward assessing the contract type you utilize. The two types of contracts contractors utilize are separated contracts and lump-sum contracts. Well, what tax responsibilities come along with these types of contracts? (Hegar, n.d.)
Lump-sum contracts
Just as the name entails, a lump-sum contract entails the entire payment at a specific time. In lump-sum contracts, a contractor calculates all the cost for the entire renovation or remodeling of a particular commercial building and bills it in one lump sum to the client. The client, in return, needs to make the payment at once during a specific time.
The lump-sum contract does not involve separate billing of materials or labor that come along in new construction, remodeling, or renovating a particular commercial building. The lump-sum contract states that a contractor is a consumer. That implies; the sum amount the contractor charges a client is not taxable. The taxable amount comes when the contractor purchases materials, equipment, or other commercial building construction supplies.
Any real property services that contractors conduct, do not attract any taxes. The lump-sum contract also states that a contractor does not, under any circumstance, have an obligation to get tax on labor and construction materials, equipment, and supplies from the client. As the taxable service provider or the consumer, you pay tax through the materials you purchase to construct that client's commercial building.
As a contractor using the lump-sum contract, you must use tax for ant equipment, construction tools, and supplies you use to remodel, renovate or build a new commercial building. Any incorporated material that a contractor purchases from a supplier is also taxable during the time of purchase. A contractor needs to accrue any tax-free material; material erases from an inventory or materials and supplies they purchase outside Texas.
Separated Contracts
In a separate contract, the total price a contractor charge is placed into not less than two amounts. One charge for the labor of remodeling or making a new commercial construction, and a second charge for materials the contractor used to do the commercial construction task. A separated contract involves progress billing to separate the two charges.
In this contract, the contractor is the retailer of any material he/she use in the construction. That implies; that the contractor should get sales taxes from the clients on the total amount he/she charges for the construction.
The contractor still has to pay tax on purchasing materials, equipment and supplies, and tools utilized in the commercial construction activity in the separate contract. The contract entails that a home builder, the contractor in a separate charge contract, resells consumable materials to the clients. On the other hand, the client needs to pay the tax for the incorporated material that the contractor asks to collect.
ProTip Takeaway: Client-contractor contract is the priority; invoices and bids come after. Invoices and bids, both separated and lump-sum, do not alter the contract into a lump-sum or vice versa. Anything was written, whether bids, invoices, or contracts, when the others are unwritten, direct the contractor's tax responsibility.
Consumables, Equipment, and Incorporated materials
Whether it's new construction, remodeling, or repair, contractors have to use consumables, equipment, and incorporated materials in any commercial construction project. Each of these elements has its tax obligation. Therefore, it would be best if a contractor understands each of the aspects to know the tax responsibility. (ZASALT, 2018)
Consumables
Consumables are any single-use, non-reusable, or non-durable items that a contractor use in a particular commercial construction project. For consumables, the contractor and the team use them once and then disposes of them. Consumables are not durable items; you use them one single time, and they get damaged because of their nature.
Some of the consumable items that contractors use in commercial construction projects include; barricade tapes, drop cloths, natural gas, disposable gloves, chalks, electricity, and other non-reusable items. Any durable item used more than once is not consumables, even the contractor's rents or leases.
Incorporated materials
Material is not items that you use to do the commercial construction projects, but items used to become part of the commercial building. Incorporated materials that contractors use incorporates together to make the permanent building or real property. Contractors use incorporated materials in new construction, remodeling, and also renovation of commercial real property.
Incorporate materials that become part of the property including mortar, brick, lumber, drywall, lighting items, air conditioning components, paint, flooring tiles, wood, and carpets. Anything that's not consumable and becomes permanent in the construction is an incorporated material. They are usually durable items that can last for some time.
Equipment
Any item that's not consumable or incorporated material is equipment. Equipment is items that a contractor uses to install the incorporated material to become part of the building. Equipment is durable items that can last long even after the commercial construction project and include; hammers, screwdrivers, saws, drills, or any other machinery type. Equipment that contractors utilize can either be rented, leased, or bought.
ProTip Takeaway: For consumables, equipment, and incorporated materials, a contractor must pay tax while purchasing. For a commercial property for resale, there is an exemption to buy the items tax-free, and the tax will apply during the resell of the property. A contractor may use the tax while purchasing the items or collect tax from the clients for the resold items depending on the contract type. The contractor can also place the items in a tax-free inventory.
Commercial construction activity
Contractors can perform different activities in commercial construction. The type of activity you do will determine your tax obligation. Therefore, it will help if you know about the activity you perform to direct you in knowing your tax responsibility. (ZASALT, 2018)
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New commercial construction
In the new commercial construction project, you are starting the construction from scratch. That involves measuring the square footage, making the foundation, and building the structure to finish the property. New construction can also involve adding a particular component like a parking lot or playground to an existing real property.
Remodeling and renovation
Remodeling a commercial property involves modifying the structure's design, upgrading components, and repairing broken components of a commercial property. Renovation involves repairing through rebuilding or restoration of a broken or commercial property.
ProTip Takeaway: Remodeling, new construction, or renovating a commercial property means you are a taxable service provider. The tax is applicable for the total amount that a contractor charges, both for items used and the labor cost. That means that all these commercial construction activities are taxable, whether the contractor is under a lump sum or a separate contract. The contractor will collect the clients' tax for any incorporated material they use in a particular commercial construction project.
Commercial remodeling cost
PROJECT | AVERAGE PRICE |
Restaurant remodeling | $150 - $750 per square foot |
Office building remodeling (Video) Sales Tax Overview for Contractors | $15,000 or $100 per square foot |
Health facility remodeling | $250 - $300 per square foot |
Industrial Building remodeling | $120 - $450 per square foot |
Apartment complexes remodeling | $ 60 -$150 per square foot |
Read Also: Can you change a commercial property to residential?
Remodeling and Construction Project
In Texas, there are tax obligations associated with commercial construction. It is essential to confirm tax requirements. At Smart Remodeling LLC, we know our tax responsibility as the BEST RESIDENTIAL AND COMMERCIAL REMODELING in HOUSTON. Reach out to us to help with any commercial construction-related questions.
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FAQs
Is new commercial construction taxable in Texas? ›
As a commercial construction contractor, any amount you charge for renovation or remodeling commercial buildings is taxable in Texas.
Is new construction tax exempt in Texas? ›the distinctions between residential and non-residential property is important because the charge for any type of residential construction labor (new construction or repair and remodeling) is not taxable.
Is construction work taxable in Texas? ›You then collect state sales tax, plus any local tax, from your customer on the amount you charge for the materials. Your charge for the materials must be at least as much as you paid for them. The construction labor is not taxable.
What is considered new construction in Texas? ›The initial finish out of each additional floor before initial occupancy or use is considered new construction. New construction also includes the addition of new, usable square footage to an existing structure.
Is new residential construction taxable in Texas? ›Real property services are taxable services, but they are not taxable if purchased by a homebuilder as part of a contract to build a new residential structure or other improvement next to the new residential structure and used in the residential occupancy of the structure.
Do contractors have to pay sales tax in Texas? ›A contractor must accrue and remit use tax on the sales price of equipment purchased, leased, or rented for use in Texas from an out-of-state seller unless the out-of-state seller collected Texas use tax.
What is exempt from sales tax in Texas? ›Common Texas sales tax exemptions include those for necessities of life, including most food and health-related items. In addition, goods for resale, such as wholesale items, are exempt from sales tax, as well as newspapers, containers, previously taxed items, and certain goods used for manufacturing.
Is installation labor taxable in Texas? ›No tax is due on charges for labor to install items such as ceiling fans, programmable thermostats or central air conditioning units in residential property or during a new construction project.
What is not taxed in Texas? ›For example, flour, sugar, bread, milk, eggs, fruits, vegetables and similar groceries (food products) are not subject to Texas sales and use tax. Tax is due, however, on non-food items such as paper, pet, beauty and hygiene products; clothing; books; and certain edible items.
What type of labor is taxable in Texas? ›Services such as shoe shining or repair, appliance repair, furniture refurbishing or upholstering, jewelry repair or cleaning and dog grooming are taxable. See Rule 3.292, Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property.
Is concrete taxable in Texas? ›
Ready-mix concrete is a taxable manufactured product. Because ready-mix is processed with special equipment while being transported, the seller delivers the product to the buyer's job site. The seller should collect sales tax based on the total charge, which includes any transportation or delivery fee.
Are engineering services taxable in Texas? ›Engineering Services
No tax is due when an engineer uses a customer's rough sketches or specifications to develop comprehensive specifications. Instead, the engineer must pay tax on goods and taxable services used to provide the service.
The services provided by architects and engineers are exempt from Texas sales tax. Custom designs are therefore sales tax exempt.
Is demolition work taxable in Texas? ›The taxability of remodeling depends on the type of property (residential or nonresidential). If you perform residential remodeling, you are a contractor. For residential remodeling, the remodeling labor and demolition services are not taxable, but the incorporated materials and waste removal services are taxable.
Does the state of Texas have a building code? ›Texas is a home rule state. Building code adoption takes place at the local level. However, Texas' municipal building, residential, fire, plumbing, mechanical, fuel gas and swimming pool and spa codes are promulgated through legislation and found in state statute.
Is landscaping labor taxable in Texas? ›Taxable Services
Landscaping and lawn care service providers, arborists and other tree care service providers must have a Texas Sales and Use Tax Permit and collect sales tax on the total amount charged for these services.
Nonresidential real property is any real property that is neither residential rental property nor property with a class life of less than 27.5 years.
Are maintenance contracts taxable in Texas? ›(C) A contract that includes maintenance and repair or restoration will be taxable in total if the charges for repairs and/or restoration services exceed 5.0% of the total charges and are not separately identified to the customer in the contract or billing.
Is mechanical labor taxable in Texas? ›Repair Labor
There is no sales tax on the labor to repair to a motor vehicle. For example, the labor to repair or replace a tire, battery, muffler or shock absorber is not subject to sales tax.
Separate Contractor means a contractor, other than the Contractor or any of its subcontractors, to whom the Government has awarded a contact for construction of a portion of the project.
What is a stipulated sum contract in construction? ›
A stipulated sum contract, also called a lump sum or fixed price contract, is the most basic form of agreement between a contractor and owner. This contract should be used if the scope and schedule of the project are appropriately defined to allow the contractor to fully estimate project costs.
What businesses are tax-exempt in Texas? ›| Organization | Sales Tax | Motor Vehicle Tax |
|---|---|---|
| Educational – Public College/University | Yes | Texas schools only |
| Federal Tax Exemption 501(c)(3), (4), (8), (10) or (19) | Yes | No |
| Religious | Yes | Restrictions apply * |
| Texas State and Local Government Agency | Yes | Yes |
- General Residence Homestead.
- Age 65 or Older or Disabled.
- Manufactured and Cooperative Housing.
- Uninhabitable or Unstable Residence.
- Temporary Exemption for Disaster Damage.
This includes purchases from Texas or out-of-state sellers, or items taken out of inventory for use, items given away, and items purchased for an exempt use but actually used in a taxable manner. Taxable purchases do not include inventory items being held exclusively for resale.
Are service charges taxable? ›Please note: Service charges may be considered taxable. For specific tax questions related to your business, be sure to consult with a tax professional.
Do interior designers charge sales tax in Texas? ›✅ Interior Design Services: A separately stated charge for interior-design services is not taxable. ❌ Design Services + Sale of Furniture: A charge for interior design is taxable if it is included in a lump-sum billing for the sale of tangible personal property.
Is installation of tangible personal property taxable in Texas? ›Tangible personal property (TPP) is taxable unless specifically enumerated as exempt. TPP can include items commonly considered intangible such as electricity. Services are non-taxable unless specifically enumerated as taxable.
What cities in Texas have no property tax? ›The City of Stafford holds the unique distinction of being the largest city in Texas to abolish city property taxes. This includes both commercial and residential properties. In addition to a lack of city property taxes, the State of Texas has no state property taxes.
Why Texas has no state tax? ›The Texas Constitution forbids personal income taxes. Instead of collecting income taxes, Texas relies on high sales and use taxes. When paired with local taxes, total sales taxes in some jurisdictions are as high as 8.25%. Property tax rates in Texas are also high.
Are barns tax exempt in Texas? ›Most buildings and structures used on a farm or ranch, and the materials used to construct them, are taxable. General purpose and storage buildings such as hay barns, machine shops, bunkhouses, kennels, offices and livestock barns are not exempt.
What is taxable service? ›
"Taxable Service" means any service provided or to be provided to a client by any person in relation to business auxiliary service. (Section 65 (105) (zzb) of the Finance Act, 1994)
Is Texas origin based sales tax? ›Texas is an origin-based sales tax state. So if you live in Texas, collecting sales tax is fairly easy. Collect sales tax at the tax rate where your business is located. The Texas sales tax rate is 6.25%.
Is pressure washing taxable in Texas? ›Pressure washing is taxable as the restoration or maintenance of tangible personal property (see Rule 3.292). Pressure washing buildings, sidewalks, and parking lots is taxable as building or grounds cleaning (see Rule 3.356).
Are portable buildings taxable in Texas? ›A sale, lease, or rental of a portable building is a taxable sale of tangible personal property. Sales tax is due on the total sales price charged by the seller, including charges for delivery and installation or set-up, even if separately stated on the invoice issued to the purchaser.
Do contractors charge sales tax on labor in NY? ›Introduction. A contractor or subcontractor must charge sales tax to its customers if the work performed is repair, maintenance, or installation work.
What is the sales tax rate in Texas? ›The Texas state sales and use tax rate is 6.25 percent, but local taxing jurisdictions (cities, counties, special-purpose districts and transit authorities) also may impose sales and use tax up to 2 percent for a total maximum combined rate of 8.25 percent.
What are the different tax liabilities and tax slabs of a practicing architect? ›Architects can claim deductions through sections 80C to 80U for Life Insurance premiums, tuition fees of their children, fixed deposit and mutual fund for a maximum of Rs. 1,50,000 per year. In addition to this, they can claim deductions for medical and health insurance policies up to a maximum limit of Rs.
Is dog grooming taxable in Texas? ›Pet grooming and cleaning are taxable services. These service providers must also have Texas sales tax permits and collect and remit sales tax on their services.
Is inspection service taxable in Texas? ›Reason(s): Response is incomplete; Testing and inspection services performed on a stand-alone basis are not a taxable service. These services become taxable when performed in conjunction with a taxable repair, restoration or maintenance activity of tangible personal property. See Rule 3.292(b)(1).
Is equipment repair taxable in Texas? ›Sales or use tax is due from the purchaser on the entire charge for a service to repair, remodel, maintain, or restore tangible personal property, including any separately stated charge for materials, parts, labor, consumable supplies, or equipment.
What is the Texas Property Tax Code? ›
The Texas Property Tax Code (TPTC) contains statutes regulating the assessment, taxation, exemptions, appeal options, hearing procedures for Texas property tax appeals, judicial appeals for Texas property taxes, timely payment of Texas property taxes, and penalties for late payment of property taxes.
Who regulates construction in Texas? ›In Texas, several regulatory agencies govern the practice of construction including: Texas Department of Licensing and Regulation (TDLR), Texas Department of Insurance (TDI), State Energy Conservation Office (SECO), Texas Commission for Environmental Quality (TCEQ) and Texas State Board of Pluming Examiners.
Which building code applies to all commercial buildings in a municipality built in Texas in or after 2006? ›(b) The International Building Code applies to all commercial buildings in a municipality for which construction begins on or after January 1, 2006, and to any alteration, remodeling, enlargement, or repair of those commercial buildings.
Does Texas require building permits? ›Permits are required for nearly all improvements done to a residential or commercial property. Fences, driveways, roofing, swimming pools, as well as any electrical, mechanical, plumbing or general construction of a structure requires a building permit.
What services are exempt from sales tax in Texas? ›Leased or purchased machinery, equipment, replacement parts, and accessories that have a useful life of more than six months, and that are used or consumed in the manufacturing, processing, fabricating, or repairing of tangible personal property for ultimate sale, are exempt from state and local sales and use tax.
What items are exempt from sales tax in Texas? ›For example, flour, sugar, bread, milk, eggs, fruits, vegetables and similar groceries (food products) are not subject to Texas sales and use tax. Tax is due, however, on non-food items such as paper, pet, beauty and hygiene products; clothing; books; and certain edible items.
Is installation taxable in Texas? ›No tax is due on charges for labor to install items such as ceiling fans, programmable thermostats or central air conditioning units in residential property or during a new construction project.
What services require sales tax in Texas? ›Services such as shoe shining or repair, appliance repair, furniture refurbishing or upholstering, jewelry repair or cleaning and dog grooming are taxable. See Rule 3.292, Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property.
Are engineering services taxable in Texas? ›Engineering Services
No tax is due when an engineer uses a customer's rough sketches or specifications to develop comprehensive specifications. Instead, the engineer must pay tax on goods and taxable services used to provide the service.
To be exempt from withholding, both of the following must be true: You owed no federal income tax in the prior tax year, and. You expect to owe no federal income tax in the current tax year.
What does tax-exempt mean for a business? ›
Tax-exempt status means that an organization is exempt from paying federal corporate income tax on income generated from activities that are substantially related to the purposes for which the entity was organized (i.e., to the purposes for which the organization was granted tax-exempt status).
Is landscaping labor taxable in Texas? ›Taxable Services
Landscaping and lawn care service providers, arborists and other tree care service providers must have a Texas Sales and Use Tax Permit and collect sales tax on the total amount charged for these services.
Goods that are subject to sales tax in Texas include physical property, like furniture, home appliances, and motor vehicles. Prescription and nonprescription medicines, groceries, and gasoline are tax-exempt. Some services in Texas are subject to sales tax.
What is taxed in Texas? ›Texas charges a sale and use tax of 6.25% on most taxable sales unless the sale is exempt. Some examples of items that are exempt from sales and use taxes are groceries, over the counter medicines, and vitamins. Local tax governments may charge up to an additional 2% tax for a maximum combined rate of 8.25%.
Is concrete taxable in Texas? ›Ready-mix concrete is a taxable manufactured product. Because ready-mix is processed with special equipment while being transported, the seller delivers the product to the buyer's job site. The seller should collect sales tax based on the total charge, which includes any transportation or delivery fee.
Is demolition taxable in Texas? ›The taxability of remodeling depends on the type of property (residential or nonresidential). If you perform residential remodeling, you are a contractor. For residential remodeling, the remodeling labor and demolition services are not taxable, but the incorporated materials and waste removal services are taxable.
Is fabrication labor taxable in Texas? ›Persons who fabricate, custom manufacture, or process tangible personal property that the customer furnishes, either directly or indirectly, must collect tax on such fabricating, custom manufacturing, or processing charge.
What is the sales tax in Texas 2022? ›What is the sales tax rate in Price, Texas? The minimum combined 2022 sales tax rate for Price, Texas is 8.25%.
Is Interior Design a taxable service in Texas? ›✅ Interior Design Services: A separately stated charge for interior-design services is not taxable. ❌ Design Services + Sale of Furniture: A charge for interior design is taxable if it is included in a lump-sum billing for the sale of tangible personal property.
What taxes do small businesses pay in Texas? ›Texas is among only five states that do not levy any business tax, personal income tax or fee on sole proprietors, allowing them to invest more of their profits back into their businesses. (The others are Alaska, Florida, South Dakota and Wyoming.) Texas also exempts many other small businesses from any tax obligation.