10 May New Construction Tax Responsibilities for Contractors
This article discusses the tax responsibilities for contractors who perform new construction work. If you haven’t already watched our overview video or if you don’t understand the terms used in this video, please watch the Contractor Overview video. As previously discussed in the Contractor Overview video, new construction means building all new improvements to either residential or nonresidential property and includes adding new square footage or finishing out existing buildings.
When you perform new construction work, your labor charges are not taxable, but the incorporated material charges are taxable. Who pays tax on the incorporated materials depends on how you bill your customer. As a contractor, you can bill your customers using either a lump-sum contract or a separated contract. Your tax responsibilities are different for each one. Under a lump-sum contract, also called a “fixed rate” or “flat price” by the industry, you charge a single price for both the incorporated materials and labor. If you bill your customer using a lump-sum contract, you must pay sales tax to your suppliers on the incorporated materials, equipment and consumables when you buy them.
The retailer generally charges sales tax based on their place of business. If you bought incorporated materials tax-free because you either removed these items from your own inventory or you bought these items from outside of Texas, then you must self-assess and pay the use tax by reporting the item’s cost on either: your sales tax return or use tax return. You determine the local use taxes due based on where the item is first stored or used.
For example, if the items were shipped directly to the jobsite, then local use tax is based on the jobsite location. If you had items delivered to your place of business before you took them to the jobsite, then local use tax is due based on your place of business. Under a lump-sum contract, you do not charge sales tax on either the incorporated materials or labor to your customer. If you only perform lump-sum, new construction work, you do not need a sales tax permit. If, however, you regularly buy incorporated materials from out-of-state suppliers you may want to apply for a sales tax permit in order to more easily report the use tax on your purchases.
Here’s an example. Richard is installing some ducting into a new home. He will be building this room out for his general contractor. Richard decides to bill the contractor a flat price of $20,000 for the ducting material and labor. When Richard goes to his supply vendor, he pays sales tax on the lumber, ducting, nails, screws, and other incorporated materials. He also pays sales tax on the equipment and consumables he uses to complete his construction work. When Richard bills the general contractor, he does not charge any tax on the $20,000 bill. Under a separated contract, also known as a “Time and Materials” invoice, you itemize the charges for labor and materials. If you bill your customer using a separated contract, you must apply for a Texas sales tax permit.
When you bill your customer under a separated contract, you can give a properly completed Resale Certificate to your vendors when buying taxable incorporated materials and subcontracted services resold to the customer to complete the construction work. You must still pay tax when you buy equipment and consumables that you will use in performing your work. You must either collect tax from your customer on the incorporated materials or accept a resale certificate from another contractor instead of collecting the sales tax. When you collect the local sales tax, you will collect it based on the jobsite location. You can use our Sales Tax Rate Locator available on our website to search for tax rates by physical address. Now, let’s look at another example. Richard, again, is installing some duct work into a new home in Austin, Texas. He will be building this room out for his general contractor, but this time, he decides to bill the general contractor under a separated contract. He charges $15,000 for the ducting material and $5,000 for the labor.
When Richard goes to his supply vendor, he gives a resale certificate for the lumber, ducting, nails, screws, and other incorporated materials. He pays sales tax on the equipment and consumables he uses to complete his construction work. When Richard bills the general contractor, he must either charge and collect the tax on the incorporated materials or accept a resale certificate. In this example, the general contractor billed his customer using a lump-sum contract. The general contractor must pay sales tax on the incorporated materials charged on the subcontractor’s separated invoice. Richard charges the sales tax amount of $1,237.50 on the $15,000 materials charge. Again, no sales tax is due on the labor. In summary, for new construction lump-sum contracts, You do not collect sales tax on either materials or labor from your customer. You pay sales and use tax when you buy the materials, equipment or consumables.
If you only perform new construction jobs and your contracts are all lump-sum contracts, then you do not need a sales tax permit. For separated contracts, you collect sales tax on the incorporated materials or resale certificate from your customer. You give a resale certificate to your supplier when you buy incorporated materials. You pay sales and use tax to your supplier when you buy equipment or consumables. And you must get a sales tax permit. While real property services are generally taxable services, these services are not taxable when you buy them as part of a contract to build a new residence or other improvement next to a new residence. Please note that this does not apply to new commercial construction work. Nontaxable real property services for new residential construction are: landscaping, lawn maintenance, surveying waste collection, pest control and janitorial services. Tax exemptions for real property services provided when constructing these new improvements apply only when building a new residence such as a home, condo or apartment or other improvements next to these residences. Here’s some examples of new residential real property improvements.
Be aware new improvements do not include repairs, renovations or interior remodeling. If you are a contractor building a new residential structure under a lump-sum contract, you are the end user of real property services you buy. When building a new residence under a lump-sum contract, you do not owe tax on these purchases of these services and you must give your service provider a properly completed exemption certificate.
Note: If the Comptroller’s office determines that these services are taxable, you will be liable for the taxes. If you’re a contractor building a new residence under a separated contract, you do not owe tax on purchases of real property services. Instead, you must give your service provider a properly completed exemption certificate or other proof showing that the residence is new and include these costs in the labor portion of the contract.
Again, if you bill your customer using a separated contract, you must apply for a sales tax permit. You can apply online on our website, visit one of our local field offices or print out and mail in an application, which is available on our website.
You should now understand your tax responsibilities when performing your new construction work.