- Real Property: fixed property, typically buildings and land.
- Tangible personal property: property that you can see, weigh, measure, or touch, and can be relocated such as furniture and office equipment.
- Materialmen: an individual who provides materials for a construction or renovation project.
LECTURE SCRIPT (you can also turn on close captioning by clicking the CC button):
The first question that should be asked when deciding the taxability of a construction service is, “Who is Considered a Construction Contractor?”
Every state has a somewhat different definition.
Texas defines a contractor as follows:
“A contractor is a person who makes an improvement on real property and as a part of that service, incorporates tangible personal property into the property improved.”
Let’s break this definition down.
Real property is defined as fixed property, typically buildings and land.
Tangible personal property is defined as property that you can see, weigh, measure, or touch.
For tax purposes, it’s usually described as something that can be relocated, such as furniture and office equipment.
For example, a contractor may install new ceiling fans (tangible personal property) to improve a client’s real property (their home).
So, a contractor is someone who makes an improvement on buildings and land, and as part of that service, incorporates tangible personal property, such as a chandelier or solar panels, to improve the property.
It’s important to note that Texas’s definition of a contractor includes subcontractors.
Subcontractors are hired by and work for a contractor.
For example, a contractor takes responsibility for seeing that a building is constructed and signs a contract to do so.
Next, he retains subcontractors to perform specialty work such as installing plumbing, laying carpet, making cabinetry, and so on.
Texas limits the definition of contractor in significant ways for sales tax purposes.
Although a contractor's construction services are not taxable, sales tax IS imposed on some construction related services.
The Texas definition of contractor is intertwined with the type and taxability of the services provided, so the definition is limited in some surprising ways.
Because of this, a builder or repairperson who provides a variety of construction-like services may not be considered a contractor and, accordingly, the services will be taxable when the project does not fit certain conditions.
Conversely, when the project does meet certain conditions, that same builder or repairperson would be considered a contractor whose services are not taxable.
In other words, Texas distinguishes between the types of projects in which a builder or repairperson engages when both:
· Defining who is a contractor and,
· Imposing sales tax on services
For the purpose of imposing sales tax on construction and construction-related services, the definition of contractor does not include those who repair or remodel nonresidential real property.
For example, a professional who performs a remodel on an office building would not be considered a contractor.
The Texas definition also excludes materialmen (an individual who provides materials for a construction or renovation project), suppliers, or persons who provide taxable real property services.
The key distinctions are between residential versus nonresidential real property and new construction versus repair or remodeling.
Contractors who perform nontaxable services include those who:
· Build new improvements
· Complete any part of an uncompleted new structure that is an improvement to real property, residential or nonresidential
· Repair, restore, maintain, or remodel residential real property, and in making the improvement, incorporate tangible personal property
· Make improvements to nonresidential real property as part of periodic and scheduled maintenance
Even though they may be performed by the same person, Texas does not consider the person a contractor for the repair, restoration, or remodeling of nonresidential real property which includes any of the following types of projects performed on such property:
· Rebuilding or upgrading any part of an existing structure
· Replacing any part of an existing structure (this does not include the minor replacement of parts during maintenance of the real property, such as replacing a belt on a machine)
· Repairing damaged or defective parts of an existing structure
· Real property services (as defined in the Texas sales tax law), which include:
o Landscaping and lawn and yard maintenance
o Trash removal and garbage collection
o Building or grounds cleaning, janitorial, or custodial services
o Structural pest control service
o or surveying of real property
Simply put, Texas considers that a person is a contractor if they build new improvements to real property or they make repairs or perform remodels to residential real property.
A few examples would be:
· A professional building a new house in a residential neighborhood
· A professional performing a kitchen remodel to a residential home
Note that the contractor's charges for labor are not taxable.
On the other hand, someone who either repairs or remodels nonresidential real property or performs real property services is not considered a contractor, but, rather someone who performs taxable services.
Accordingly, the total amount someone charges for either repairing or remodeling nonresidential real property, IS taxable, since they are providing a real property service.
In summary, you learned how Texas defines a contractor and professionals who provide taxable services, and that the same person considered a contractor on one job, might not be considered a contractor on other jobs providing taxable services.
In the next lecture, we’ll take a look at the different ways Texas treats these contractors.