Construction Sales Tax in Texas

The complexity of various construction sales tax regulations makes tracking sales tax difficult and cumbersome.  However, the liability remains and states and local tax authorities are aggressive in auditing large construction projects due to the relative ease of collecting additional tax revenue.  Properly set-up, an accounting system should track all aspects of the construction sales tax.  In addition, the contracts and billing needs to follow certain protocols to avoid creating additional liabilities.

Construction Sales Tax Liability

Different sales tax rules apply for different type of sales:  construction, remodel, service, repair and maintenance.  As an overriding guideline, if a client provides a tax exempt or resale certificate, tax is not due per any of the following rules.

Service, repair and maintenance

Tax is due on the full amount of the billing for any repair, service or parts sales, to be charged at the rate of the provider’s tax district provided the client is in the state of Texas.  Out of state shipments are not taxable in Texas, but may be taxable in the ship to state if you have “nexus” in that state.  If parts are shipped to the client and the freight is billed to the client, then the freight charge is taxable.  Out of state service should be reviewed and will likely cause a tax filing with the service site address.  Engineering design services are not taxable, unless lumped into a taxable construction remodel contract.

Construction and Remodel

This area divides into residential and non-residential.  Apartments and Multi-Family structures are considered residential.

  Residential Non-Residential
New Construction Material Tax Only Material Tax Only
Repair/Remodel Material Tax Only Full Contract Taxed

Residential

Construction sales tax is to be paid on all materials used in residential work at the tax rate of the job site.    Billing, if tax is itemized, should include the actual tax on materials only.  Generally, tax should not be itemized on the billing.  All amounts itemized as sales tax are to be remitted to the proper taxing authority.  So if actual tax is less than the amount itemized, the actual amount itemized must be paid to the taxing authority.  Conversely, if the tax is more than the itemization, then a change order is needed to increase the tax amount.  The itemized billings increase client knowledge of profitability and cost and should be avoided.  On a residential job, tax should be treated as a cost and budgeted accordingly.  If the actual tax on materials is different from the budget, then it will be a favorable or unfavorable variance to the budget.  The budgeted tax needs to be at the tax rate of the job site.

Non-Residential

Non-Residential work divides into new construction and remodel.  New construction follows the same rules as residential above.  Tax should generally not be itemized.

Remodel work is taxed at the full contract price.  The contract price should not include the sales tax.  This will allow the tax to be assessed at the local job site rate without limiting or creating a variance to the actual rate.

Accounting systems should track both methods of liability for sales tax:  billing and material cost.  Tax codes should be set-up for each taxing authority, so that as tax is billed or due on material purchases, the tax paid, collected or liability created can be reconciled and ultimately reported.

At the job set-up, the local tax rate should be verified using Texas construction sales tax search at :

https://ourcpa.cpa.state.tx.us/atj/addresslookup.jsp

If the entire job is taxable as a remodel, then each contract line of the schedule of values should be set-up as taxable using the sales tax group for the job site.  This will add sales tax to future billings and track the liability amount to be paid to each taxing authority.

photo credit: Subway Construction in Downtown Washington, D.C. Noise from Air Compressors and Jackhammers Can Cause Irreversible Hearing Loss. 07/1972 via photopin (license)

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