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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER OSTATE AND LOCAL SALES AND USE TAXES
RULE §3.357Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance. (Tax Code, §§151.0047, 151.0101, 151.056, 151.058, 151.311, 151.350, 151.429)

(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 Cont'd...

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