34 TAC §3.357
The Comptroller of Public Accounts proposes a new §3.357,
concerning nonresidential real property repair, remodeling, and restoration;
real property maintenance. The new section incorporates changes made to Tax
Code, §§151.0047, 151.311, and 151.429, by prior legislation. The
new section includes definitions of consumable items, equipment, exempt contract,
incorporated materials, and prior contract. The change to §151.0047 excludes
increased capacity at petrochemical plants and refineries from the definition
of real property repair and remodeling. The change to §151.311 broadens
the entities included in exempt contracts and restricts the exemption to incorporated
materials, qualifying consumables, and qualifying taxable services. The change
to §151.429 provides for a refund of tax paid to service providers on
restoration or remodeling of structures used by an enterprise project. The
substance of existing §3.357 has been reorganized and other changes are
included for clarification.
James LeBas, Chief Revenue Estimator, has determined that for the first
five-year period that the rule is in effect, there will be no significant
fiscal impact on the state or units of local government.
Mr. LeBas has also determined that for each year of the first five years
that the rule is in effect, the public benefit anticipated as a result of
enforcing the rule will be in providing taxpayers with additional information
regarding their tax responsibilities. This rule is adopted under the Tax Code,
Title 2, and does not require a statement of fiscal implications for small
businesses. There is no significant anticipated economic cost to individuals
who are required to comply with the proposed rule.
Comments on the proposal may be submitted to Bryant K. Lomax, Manager,
Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.
This new section is proposed under Tax Code, §111.002, which
provides the comptroller with the authority to prescribe, adopt, and enforce
rules relating to the administration and enforcement of the provisions of
Tax Code, Title 2.
The new section implements Tax Code, §§151.0047, 151.311, and
151.429.
§3.357.Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance.
(a)
Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
indicates otherwise.
(1)
Consumable items -- Nondurable tangible personal property
that is used to improve real property and that, after being used once for
its intended purpose, is completely used or destroyed. Examples include, but
are not limited to, nonreusable concrete forms, nonreusable drop cloths, barricade
tape, natural gas, and electricity. Consumable items do not include incorporated
materials, machinery, equipment, accessories to machinery and equipment, repair
and replacement parts of machinery and equipment, or any rented or leased
item.
(2)
Contractor -- Any person who builds new improvements to
residential or nonresidential real property; completes any part of an uncompleted
structure that is an improvement to residential or nonresidential real property;
makes improvements to real property as part of periodic and scheduled maintenance
of nonresidential real property; or repairs, restores, maintains, or remodels
residential real property; and who, in making the improvement, incorporates
tangible personal property into the real property that is improved. The term
includes subcontractors but does not include material men, suppliers, or persons
who provide taxable real property services. Contractors should refer to §3.291
of this title (relating to Contractors). Persons who provide real property
services should refer to §3.356 of this title (relating to Real Property
Service). Persons who repair, restore, or remodel chemical plants or petrochemical
refineries should refer to §3.362 of this title (relating to Labor Relating
to Increasing Capacity in a Production Unit in a Petrochemical Refinery or
Chemical Plant).
(3)
Disaster area -- An area that the Governor of Texas declares
a disaster under the Government Code, Chapter 418, or that the President of
the United States declares a disaster under 42 United States Code, §5141.
(4)
Equipment -- Tangible personal property that is used in
the performance of a contract to improve real property, such as tools, machinery,
implements, accessories, repair and replacement parts, or any item that is
rented or leased. Equipment includes all items that do not meet the definitions
of consumable items or incorporated materials.
(5)
Incorporated materials -- Tangible personal property that
loses its distinct and separate identity when incorporated into real property.
Examples of incorporated materials include framing lumber, bricks, concrete,
doors, and windows.
(6)
Labor -- For the purposes of this section, labor means
all components of a transaction or contract directly related to the remodeling,
repair, or restoration other than those components attributable to materials
incorporated into the realty. Unrelated components, such as charges by engineers
and architects, are also part of the labor component unless separately stated
to the customer.
(7)
Maintenance on real property -- For operational and functional
improvements to realty, maintenance means scheduled, periodic work that is
necessary to sustain or support safe, efficient, continuous operations, or
to prevent the decline, failure, lapse, or deterioration of the improvement.
Taxable real property services that are described by §3.356 of this title
(relating to Real Property Service) do not qualify as maintenance. Maintenance
does not include work to remodel, modify, upgrade, perform major repair, or
restore, even if the work is scheduled or periodic.
(A)
As it relates to maintenance, the term "scheduled" means
anticipated and designated to occur within a given time period or production
level.
(B)
As it relates to maintenance, the term "periodic" means
ongoing or continual or at least occurring at intervals of time or production
that are reasonably predictable.
(C)
The scheduled shutdown or turnaround of a manufacturing
or processing plant is considered to be maintenance within the meaning of
this definition.
(8)
New construction -- All new improvements to real property
including initial finish out work to the interior or exterior of the improvement.
An example is a multiple story building that has had only its first floor
finished and occupied. 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.
Examples are the addition of a new wing onto an existing building, or the
addition of a new mezzanine level within an existing building. Reallocation
of existing square footage inside a structure is remodeling and does not constitute
the addition of new, usable square footage. For example, the removal or relocation
of interior walls to expand the size of a room, or the finish out of an office
space that was previously used for storage, is remodeling. Raising the ceiling
of a room or the roof of a building is not new construction unless new, usable
square footage is created.
(9)
Prior contract -- A written contract, or a written bid
that becomes a written contract, into which the parties enter before the effective
date of the applicable section of the Tax Code. See §3.319 of this title
(relating to Prior Contracts).
(10)
Real property -- Land, including structures and other
improvements that are embedded into or permanently affixed to the land.
(11)
Remodeling or modification -- To rebuild, replace, alter,
modify, or upgrade existing real property. However, the replacement of an
item that is within an operational and functional improvement to realty is
not taxable remodeling or modification when the work is scheduled and periodic
maintenance as defined in paragraph (7) of this subsection. Improvements to
manufacturing or production units of chemical plants or petrochemical refineries
that meet the definition of increased capacity are not remodeling or modification
services. See §3.362 of this title (relating to Labor Relating to Increasing
Capacity in a Production Unit in a Petrochemical Refinery or Chemical Plant).
Work that is performed after the initial finish out has been completed is
remodeling even when the improvement has not been occupied or used. For example,
a prospective tenant wants the unit of a completely finished out shopping
complex repainted before the tenant leases the unit. The repainting is remodeling.
Partial demolition of existing nonresidential realty is taxable remodeling.
The complete demolition of an existing nonresidential improvement to real
property is neither remodeling nor modification and is not taxable.
(12)
Repair -- To mend or bring back real property that was
broken, damaged, or defective as near as possible to its original working
order. However, minor repair work that is performed on operational and functional
improvements to realty is not taxable repair if the work is done in accordance
with paragraph (7) of this subsection.
(13)
Residential property -- Property that is used as a family
dwelling, multifamily apartment or housing complex, nursing home, condominium,
or retirement home. The term includes homeowners association-owned and apartment-owned
swimming pools, laundry rooms, and other common areas for tenants' use. Common
areas of mixed residential and nonresidential property are allocated or prorated
based on the ratio of residential to nonresidential use of the property. The
term does not include any commercial area open to nonresidents, retail outlets,
hospitals, hotels, or any other facilities that are subject to the hotel occupancy
tax.
(14)
Restoration -- An activity that is performed to bring
back real property that is still operational and functional but that has faded,
declined, or deteriorated, as near as possible to its original condition.
Minor restorative work that is performed within the meaning of paragraph (7)
of this subsection is maintenance, not restoration.
(15)
Unrelated service. A service is unrelated if:
(A)
it is not the repair, remodeling, or restoration of nonresidential
real property, nor a service or labor that is taxable under any other provision
of the Tax Code, Chapter 151;
(B)
it is of a type that is commonly provided on a stand-alone
basis; and
(C)
the performance of the service is distinct and identifiable.
Examples of unrelated services that may be excluded from the tax base are
the creation of engineering plans or architectural designs, new construction,
increased capacity, and maintenance on real property.
(b)
Tax responsibilities of persons who repair, remodel, or
restore nonresidential real property.
(1)
All persons who repair, restore, or remodel nonresidential
real property must obtain Texas sales and use tax permits. Persons who construct
new improvements to realty, perform maintenance on real property, or repair,
restore, or remodel residential real property should refer to §3.291
of this title (relating to Contractors).
(2)
All persons who repair, restore, or remodel nonresidential
real property must collect tax on the total sales price to the customer less
separately stated charges for unrelated services. The total sales price does
not include Texas sales or use tax that the service provider must collect
from customers. See §3.286 of this title (relating to Seller's and Purchaser's
Responsibilities). The service provider may, in good faith, accept valid resale,
exemption, or direct payment exemption certificates in lieu of tax. Previously,
lump-sum and separated contracts were treated differently for tax purposes.
This distinction is no longer valid when the contract is for the repair, remodeling,
or restoration of nonresidential real property.
(3)
A contract that involves both nonresidential repair, restoration,
or remodeling and new construction is taxable in total unless the charge for
new construction labor is separately stated to the customer as outlined in
paragraph (7) of this subsection. An example is remodeling a restaurant's
kitchen at the same time that a new dining area outside the existing structure
is added. Work on the kitchen is taxable as remodeling, while the construction
of the new dining area is nontaxable new construction. Minor repair, restoration,
or remodeling that is performed in connection with new construction is not
taxable if the portion of the charge that is attributed to repair, restoration,
or remodeling is 5.0% or less of the overall lump-sum charge. All separately
stated charges for repair, restoration, remodeling, or other taxable services
are taxable, even if they constitute 5.0% or less of the total contract price.
(4)
All persons who repair, restore, or remodel nonresidential
real property owe tax at the time of purchase on all machinery, equipment,
materials, and supplies that are used but not incorporated into the realty.
The service provider is not entitled to a credit for tax paid on taxable items
that are used but not incorporated into the realty.
(5)
Items used in performing repairs, remodeling, or restoration
for exempt entities.
(A)
Persons who repair, remodel, or restore real property or
make improvements to real property for entities exempted by Tax Code, §151.309
or §151.310, may claim an exemption for tangible personal property used
in those activities if the tangible personal property is incorporated into
real property in the performance of the contract.
(B)
Person who repair, remodel, or restore real property or
make improvements to real property for entities that are exempted under Tax
Code, §151.309 or §151.310, may claim an exemption for the purchase
of taxable services that are used in those activities if the service is performed
at the job site and if the contract requires the specific service to be provided
or purchased by the person who makes the improvement to realty, or the service
is integral to the performance of the contract.
(C)
Persons who use consumable items in the improvement of
realty that is repaired, remodeled, or restored for entities that are exempt
under Tax Code, §151.309 or §151.310, may claim an exemption for
the purchase of a consumable item if use of the item is necessary for the
performance of the contract and the item is completely consumed at the job
site.
(D)
Persons who repair, restore, or remodel real property may
issue a properly completed exemption certificate in lieu of tax for the purchase
of items that are identified in subparagraphs (A) through (C) of this paragraph.
The exemption certificate must show the service provider as the purchaser
and must identify the exempt entity for whom the improvements are made and
the project for which the items are purchased.
(6)
Repair, restoration, or remodeling that is performed upon
a structure that is used both for residential and commercial purposes is taxable
in total unless the labor on the residence is separately identified. The labor
to repair, restore, or remodel the residence will not be taxable if separately
stated. The charge for repair, restoration, or remodeling to common areas
of mixed residential and nonresidential property is taxed based upon the ratio
of residential to nonresidential use of the property.
(7)
If a combination of repair, restoration, or remodeling
and new construction is performed under the same contract, and the repair,
restoration, or remodeling portion exceeds 5.0% of the overall charge, then
the parties to the contract must separately identify taxable and nontaxable
labor along with the charges that apply to each or else the entire contract
is presumed to be for repair, restoration, and remodeling and is taxable.
Both parties must retain documentation that clearly defines the work that
is performed to show that, had the new construction and remodeling been done
independently, the charge for each would reasonably approximate the amount
allocated. Examples of acceptable documentation are written contracts that
detail the scope of work, bid sheets, tally sheets, schedules of values, and
blueprints. If no written contract clearly shows agreement on the taxable
and nontaxable work that is performed, then the customer and the service provider
must prepare a written certification that verifies the allocation of charges
for repair, restoration, or remodeling and new construction. The comptroller
may recalculate the charges if the allocation appears unreasonable, and either
party may be held responsible for the additional tax due.
(8)
Repainting is presumed to be a restoration or remodeling
activity. Either party may overcome the presumption by showing that the scope
of the work meets the definition of maintenance found in subsection (a)(7)
of this section. Persons who perform repainting or other restoration activities
should collect sales tax on the total charge to the customer unless the customer
provides a properly completed exemption certificate as outlined in subsection
(c)(2) or (4) of this section.
(9)
If a combination of taxable services (e.g., repair of nonresidential
property), nontaxable services (e.g., new construction, residential repair,
or maintenance), and nontaxable unrelated services are sold or purchased for
a single charge and the portion that relates to taxable services represents
more than 5.0% of the total charge, the total charge is presumed to be taxable.
The service provider may overcome this presumption by submission of documentary
evidence that establishes the percentages of the total charge that relate
to taxable services and to nontaxable services. Examples of acceptable documentation
include written contracts that detail the scope of work, bid sheets, tally
sheets, schedules of values, and blueprints.
(c)
Tax responsibilities of persons who perform maintenance
on real property.
(1)
A person who performs maintenance on real property and
incorporates tangible personal property into the realty acts as a contractor
and is subject to §3.291 of this title (relating to Contractors).
(2)
A person who performs maintenance on real property and
does not incorporate tangible personal property into the realty as part of
that service provides nontaxable services and owes tax on all taxable items
that are used to perform those services.
(d)
Exemptions, exceptions, and exclusions.
(1)
A person who performs taxable services has the burden of
obtaining an exemption certificate for any exemption that a customer claims.
However, if the customer is a governmental entity, a purchase order from the
governmental entity is sufficient documentation.
(2)
Maintenance on real property is a nontaxable service.
(A)
To qualify a purchase as nontaxable real property maintenance,
a service provider's customer must prove by way of maintenance schedules or
work orders or other similar forms of evidence that the services meet the
definition of maintenance on real property that is stated in subsection (a)(7)
of this section. If the service provider does not have a written contract,
but is only hired on a per job basis, then the service provider must presume
that the service is repair or restoration and must therefore collect tax.
If the customer has documentation to prove that the service qualifies as maintenance,
then the customer may issue to the service provider an exemption certificate
in lieu of paying tax or provide the documentation required to overcome the
presumption. The certificate must state that the labor is maintenance as defined
in subsection (a)(7) of this section, rather than repair or restoration as
defined in subsection (a)(13) and (15) of this section, and that the customer
is liable for any additional tax that is due in the event that the comptroller
determines that a taxable service was performed.
(B)
Repairs or restoration that are performed under a claimed
maintenance contract will not change a nontaxable maintenance contract into
a taxable repair or restoration contract so long as the charges that are attributable
to the repairs or restoration are 5.0% or less of the overall charge. Note:
The 5.0% test applies to each contract and subcontract. For example, if five
different companies provide lump-sum contracts for services, then each contract
stands alone for the purposes of determining whether the taxable services
are 5.0% or less of that contract. In the absence of a written contract, the
5.0% test will apply to the total charge billed by each service provider.
(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. All separately stated charges for repair,
restoration, remodeling, or other taxable services are taxable, even when
the taxable services constitute 5.0% or less of the total contract price.
(3)
The modification of parts of existing structures solely
to support the addition of new space will not change a new construction contract
into a remodeling contract so long as the charges that are attributable to
remodeling are 5.0% or less of the overall charge. Examples are conversion
of a one-story building into a two-story building with the addition of a stairway
to the existing structure to provide access to the new space, or the removal
of an existing wall to allow the addition of structural support in the process
of construction of a new room outside of the existing structure. Contracts
with remodeling charges that exceed 5.0% are taxable in total unless the charges
for remodeling are separately identified to the customer. However, see subsection
(b)(9) of this section.
(4)
A service provider may accept a properly completed exemption
certificate in place of tax for the separately stated charges for labor to
remodel, restore, or repair buildings that are listed in the National Register
of Historic Places. The service provider is a contractor under §3.291
of this title (relating to Contractors).
(5)
A service provider may accept a properly completed exemption
certificate in lieu of tax for both materials and labor charges from an entity
that is exempt under Tax Code, §151.309 or §151.310(a)(3), (4),
or (5), or that is exempt under Texas Civil Statutes. A service provider may
accept a properly completed exemption certificate for both materials and labor
charges from an entity that is exempted by Tax Code, §151.310(a)(1) or
(2), if the repair, restoration, or remodeling appears reasonably related
to the exempt purpose of the organization. See §3.322 of this title (relating
to Exempt Organizations).
(6)
A service provider who enters into a contract with a nonexempt
entity to improve real property for the primary use and benefit of an entity
that is exempted under Tax Code, §151.309 or §151.310, may accept
a properly completed exemption certificate in lieu of tax. If the improvement
is for the primary use and benefit of an entity that is exempted under Tax
Code §151.310(a)(1) or (2), then the primary use and benefit must relate
to the exempt purpose of that entity.
(7)
A service provider who enters into a contract with a nonexempt
entity to add improvements to real property that will become government property
may accept a properly completed exemption certificate if the nonexempt entity
dedicates the real property and the improvement to a governmental entity before
any work begins and the governmental entity accepts the real property and
the improvement. If, at a later date, the governmental entity fails to accept
the improvement, the non-exempt entity will owe tax on the service.
(8)
A service provider may accept a properly completed exemption
certificate from a manufacturer for separately stated charges for equipment
that qualifies for the manufacturing exemption. See §3.300 of this title
(relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).
(9)
The labor to repair real or tangible personal property
that is damaged within a disaster area by the condition or occurrence that
caused the area to be declared a disaster area is exempt from tax if the charge
for labor is separately stated to the customer. The materials that are used
to perform the repairs are taxable. A person who has property repaired under
this paragraph should issue to the service provider an exemption certificate
in lieu of tax. The service provider must presume that all work is taxable
until the customer issues an exemption certificate that covers the separately
stated labor portion of the bill. If the charge for the repair is lump-sum,
the total charge is taxable.
(10)
No sales tax is due on the wages or salary paid by an
employer to an employee who provides the labor to repair, remodel, or restore
real property that belongs to and is used by the employer. A person is considered
the employee of the employer if the employer pays the person's wages or salary,
withholds applicable federal taxes from the employee's wages or salary, pays
employment-related benefits such as health insurance, and exercises direct
control over the work that the employee performs.
(e)
Resale certificates.
(1)
Persons who repair, restore, and remodel real property
may issue a resale certificate in lieu of tax to suppliers of tangible personal
property only if the tangible personal property will be incorporated into
the customer's realty. For example, a repairman or remodeler purchases paint
to repaint a repaired or remodeled area. The paint is transferred to the customer
as a part of the finished job. The repairman or remodeler may purchase the
paint tax free by issuing a resale certificate. Tax is due on the total amount
that is charged the customer, including amounts that are charged for the paint
and for the services. A resale certificate may not be issued for materials
and supplies used or consumed by the repairman or remodeler that are not incorporated
into the customer's realty.
(2)
A resale certificate may be issued for a service if the
buyer intends to transfer the service as an integral part of taxable services.
A service will be considered as an integral part of a taxable service if the
service purchased is essential to the performance of the taxable service and
is of a type without which the taxable service could not be performed. Examples
of services for which a resale certificate may be issued in lieu of tax are
landscaping and surveying services if the landscaping or surveying is performed
upon the property that is remodeled.
(f)
Local taxes. Local taxes (city, county, transit authority,
city transit department, and special purpose districts) apply to services
in the same way as they apply to tangible personal property.
(1)
Generally, service providers must collect local sales taxes
if their place of business is within a local taxing jurisdiction, even if
the service is actually provided at a location outside that jurisdiction.
(2)
Transit sales taxes do not apply to services that are provided
outside the boundaries of a transit area.
(3)
If the service provider's place of business is outside
a local taxing jurisdiction but the service is provided to a customer who
is located within a local taxing jurisdiction, then local use taxes apply
and the service provider is required to collect the local taxes.
(4)
For information on the collection and reporting responsibilities
of providers and purchasers of taxable services, see §3.374 of this title
(relating to Collection and Allocation of the City Sales Tax), §3.375
of this title (relating to City Use Tax), §3.424 of this title (relating
to Collection and Allocation of Transit Sales Tax), and §3.425 of this
title (relating to Transit Use Tax).
(g)
Use tax. If a seller of a service is not engaged in business
in Texas or in a specific local taxing jurisdiction, and is not required to
collect Texas tax, then the Texas customer must report and pay the use tax
directly to the Texas comptroller.
(h)
Enterprise project. An entity that qualifies as an enterprise
project may qualify to claim a refund of sales tax that is paid on the total
charge for nonresidential repair, restoration, or remodeling. See §3.329
of this title (relating to Enterprise Projects, Enterprise Zones, and Defense
Readjustment Zones).
(i)
Prior contracts. Prior contracts that are signed before
the effective date of a statutory change that affects nonresidential real
property repair, remodeling, and restoration shall be governed by the provisions
of §3.319 of this title (relating to Prior Contracts).
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State, on July 19, 2001.
TRD-200104181
Martin Cherry
Deputy General Counsel for Tax Policy and Agency Affairs
Comptroller of Public Accounts
Earliest possible date of adoption: September 2, 2001
For further information, please call: (512) 463-3699