|(a) Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
(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
(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
(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
(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
(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
(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
(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
(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...