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If you do repair or remodeling work in Texas, one thing becomes immediately clear: the tax rules can be surprisingly nuanced. Labor for residential projects is treated very differently from labor for nonresidential work. Understanding the distinction can save you headaches, avoid surprises on tax day, and even shape how you structure contracts.
Residential Real Property
Labor charges for repairing, remodeling, restoring, or maintaining residential properties are not subject to Texas sales tax. That includes family homes, apartment complexes, nursing homes, condominiums, and retirement communities. Materials, however, are still taxable.
For contractors, this means you might pay sales tax when purchasing materials, but you do not charge sales tax on labor if the contract is a lump sum. If you itemize labor and materials separately, you can use resale certificates to avoid double taxation on the materials. Proper recordkeeping here is key, especially if you are ever audited.
Nonresidential Real Property
The rules flip for commercial work. Labor and materials are generally taxable for offices, hospitals, warehouses, retail shops, restaurants, industrial facilities, and similar properties. The total charge for the job, including labor, must include sales tax unless a specific exemption applies, such as disaster-related repairs.
Multi-use properties,part residential, part commercial, require careful accounting. Labor for the residential portion can be exempt, but only if it is clearly separated from the commercial portion.
Other Notes to Keep in Mind
New construction labor, whether residential or commercial, is generally not taxable. Building permits, when listed separately, are also exempt. Contractors must have a Texas sales tax permit and are responsible for collecting and remitting the tax. Special exemptions exist for government contracts and certain disaster relief repairs.
How Lump-Sum vs. Separated Contracts Affect Tax
The way you write your contracts changes your tax responsibilities.
Lump-Sum Contracts
A single price for the entire job sounds simple, but it comes with nuances. Contractors pay sales tax on all materials at purchase and do not charge sales tax to the customer on labor for residential work. This simplifies things for the customer but can make it harder to exclude non-taxable services later if the Texas Comptroller questions your approach. Good records are essential.
Separated Contracts
Itemizing labor and materials creates clarity. You buy materials tax-free with resale certificates and only collect and remit sales tax on the materials portion. Residential labor remains non-taxable. For nonresidential jobs, both labor and materials are usually taxable and should be listed separately.
Separated contracts give customers transparency, improve audit defense, and make it easier to manage exemptions or multi-use properties. It also ensures that you have a clear paper trail if the tax authorities ever review your work.
Need Help with Texas Construction Sales Tax?
At Arnold CPA, we provide expert guidance to ensure compliance and minimize your tax burden.
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