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

   1. (1) Contractor--A person who builds new structures, completes any part of an uncompleted new structure which is an improvement to real property, or makes an improvement to residential property. Contractors should refer to §3.291 of this title (relating to Contractors).
   2. (2) Disaster area--An area declared a disaster by the Governor of Texas under the Government Code, Chapter 418, or the President of the United States under 42 United States Code §5141.
   3. (3) 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.

   4. (4) Maintenance on real property--For operational and functioning improvements to realty, maintenance means scheduled, periodic work 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 covered by §3.356 of this title (relating to Real Property Service) do not qualify as maintenance.

      1. (A) As it relates to maintenance, the term "scheduled" means anticipated and designated to occur within a given time period or production level.
      2. (B) As it relates to maintenance, the term "periodic" means ongoing or continual or at least occurring at intervals of time or production which are generally predictable.
   5. (5) New construction--All new improvements to real property including initial finish out work to the interior or exterior of the improvement. An example would be a multiple story building which has only had its first floor finished and occupied. The initial finishing out of each additional floor prior to initial occupancy will be considered new construction. New construction also includes the addition of new footage to an existing structure.
   6. (6) Nonprofit hospital--A public or private hospital licensed under the Health and Safety Code, Chapter 241 or Chapter 577, that is operated as a charitable or nonprofit establishment.
   7. (7) Real property--Land including structures and other improvements embedded in or permanently affixed to the land.
   8. (8) Remodeling or modification--To make over, rebuild, replace, or upgrade existing real property. However, the replacement of an item within an operating and functioning unit in accordance with paragraph (4) of this subsection is not taxable remodeling or modification. Finish out work performed after initial finish out has been done is remodeling even though the improvement has not been occupied. An example would be a shopping complex completely finished by the developer prior to renting to tenants. A prospective tenant wants a different color scheme before taking possession. The repainting by the developer is remodeling.
   9. (9) Repair--To mend or bring back as near as can be to its original working order real property which was broken, damaged, or defective. However, minor repair work performed on operational and functioning improvements to realty within the meaning of paragraph (4) of this subsection is not taxable repair.
   10. (10) Residential property--Property intended for use as a family dwelling or a multifamily apartment or housing complex, nursing homes, condominiums, or retirement homes. The term includes homeowners association-owned and apartment-owned swimming pools, apartment-owned laundry rooms for tenants, and other common areas for tenants' use. Managers' offices will only be residential if the space occupied by the office is 5.0% or less of the total space of the residence. The term does not include hotels or any other facilities which are subject to the hotel occupancy tax or any other area open to nonresidents.
   11. (11) Restoration--An activity performed to bring back as near as can be to its original condition real property which is still operating and functional but that has faded, declined, or deteriorated, that is not work performed within the meaning of paragraph (4) of this subsection.

   12. (12) Unrelated service--A service will be considered as unrelated if:

       1. (A) it is not a service involving the repair, remodeling, or restoration of real property, nor a service taxed under other provisions of the Tax Code, Chapter 151;
       2. (B) it is of a type which is commonly provided on a stand-alone basis; and
       3. (C) the performance of the unrelated service is distinct and identifiable. Examples of an unrelated service which may be excluded from the tax base include engineering plans or architectural designs.

2. (b) Tax responsibilities of persons who repair, remodel, or restore nonresidential real property.

   1. (1) All persons who repair, restore, or remodel nonresidential real property must obtain a Texas sales and use tax permit. Persons who maintain real property are not covered by this rule. Persons who are constructing new facilities or are repairing or remodeling residential property should refer to §3.291 of this title (relating to Contractors).
   2. (2) All persons who repair, restore, or remodel nonresidential real property must collect tax on the total sales price to their customers less separately stated charges for unrelated services or 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 real property.
   3. (3) A contract which involves both nonresidential remodeling and new construction will be taxed in total unless the charge for new construction labor is separately stated as outlined in paragraph (7) of this subsection. An example would be remodeling a restaurant's kitchen at the same time a new dining area outside the existing structure was added. Work on the kitchen would be taxable as remodeling, while the new dining area would be new construction. Minor repair, restoration, or remodeling done in connection with new construction will not be taxable if the charge attributed to repair, restoration, or remodeling is 5.0% or less of the overall charge.
   4. (4) Sales tax must be paid at the time of purchase by the repairman or remodeler on all materials and supplies used but not incorporated in the realty. The repairman or remodeler is not entitled to a credit for the tax paid on materials and supplies used but not incorporated into the realty.

   5. (5) Items used in performing repairs, remodeling, or restoration for exempt entities.

      1. (A) Persons who repair, remodel, or restore real property or make improvements to real property for school districts or nonprofit hospitals may claim an exemption for taxable items used in those activities. Taxable items used in performing repairs, remodeling, or restoration activities for school districts or nonprofit hospitals are exempt from tax to the extent of the value of the items so used or consumed.
      2. (B) Taxable items incorporated into realty being repaired, remodeled, or restored by persons performing work for entities covered by the Tax Code, §151.309 or §151.310, other than school districts or nonprofit hospitals, may be purchased tax free as sales for resale. The contract between the persons performing the work and the organization covered by the Tax Code, §151.309 or §151.310, may be either lump sum or separated.
      3. (C) Consumable items, machinery, or equipment used but not incorporated into the realty being repaired, remodeled, or restored for entities covered by the Tax Code, §151.309 or §151.310, other than school districts or nonprofit hospitals, are taxable to the persons performing the work.
   6. (6) Repairs, restoration, or remodeling performed upon a structure which is used both for residential and commercial purposes will be 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.
   7. (7) When both remodeling and new construction are being performed under the same contract, the parties to the contract should separately identify taxable from nontaxable labor in a construction contract and the charges applicable to each or the entire contract will be presumed to be for repair, restoration, and remodeling. Documentation which clearly defines the work being performed should be retained by both parties to show that had the new construction and remodeling been done independently of each other, the cost of each would be reasonably near the allocation of charges. Examples of acceptable documentation include written contracts which detail the scope of work, bid sheets, tally sheets, schedules of values and blueprints. If there is not a written contract signed by both parties clearly showing agreement as to the taxable and nontaxable work being performed, the customer and the service provider must prepare, at the time of the transaction, a written certification verifying the allocation of charges for remodeling and new construction. The comptroller may recalculate the charges if the allocation appears unreasonable and either party may be held responsible for the additional tax due.
   8. (8) Repainting is presumed to be a restoration or remodeling activity unless it meets the definition of maintenance found in subsection (a)(4) of this section. Persons performing repainting or other restoration activities should collect sales tax on their total charge unless their customer provides a properly completed exemption certificate as outlined in subsection (c)(2) or (4) of this section.
   9. (9) Where nontaxable unrelated services, new construction services, real property maintenance, or residential real property remodeling, and taxable services are sold or purchased for a single charge and the portion relating to taxable services represents more than 5.0% of the total charge, the total charge is presumed to be taxable. The presumption may be overcome by the service provider at the time the transaction occurs by separately stating to the customer a reasonable charge for the taxable services. However, if the charge for the taxable portion of the services is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through documentary evidence, the percentage of the total charge that relates to nontaxable unrelated services. Examples of acceptable documentation include written contracts detailing the scope of work, bid sheets, tally sheets, schedules of values and blueprints.

3. (c) Exemptions.

   1. (1) It is the responsibility of the repairman or remodeler to verify any exemption claimed by the customer, except for real property scheduled maintenance or the customer is a governmental agency or a nonprofit school.
   2. (2) A charge for labor to maintain real property is not taxable. Persons providing maintenance on real property are liable for tax on all materials used. A service provider's customer must be able to substantiate by way of maintenance schedules or work orders or other evidence that the services meet the definition in subsection (a)(4) of this section. If the person performing the service does not have a written contract, but is only hired as needed, the service provider must presume that the labor is for repair or restoration and collect tax. If the service provider's customer has documentation to prove that the labor qualifies as maintenance, the customer may issue an exemption certificate in lieu of paying tax to the service provider. The certificate must state that the labor is maintenance as defined in subsection (a)(4) of this section, rather than repair or restoration as defined in subsection (a)(9) and (11) of this section, and that the customer will be liable for any additional tax due in the event that it is determined that repairs rather than maintenance were performed. Repairs or restoration performed under a claimed maintenance contract will not change a nontaxable maintenance contract into a taxable repair or restoration contract as long as the charges attributable to repairs and restoration are 5.0% or less of the overall charge. Note: The 5.0% test applies to each contract and subcontract. For example, if five different companies provide lump-sum contracts for services, each contract stands alone in determining if taxable services are 5.0% or less of that contract. In the absence of a written contract, the 5.0% test will apply to each billing or invoice to the customer. Maintenance contracts or services billed with repair and restoration, as defined in subsection (a)(9) and (11) of this section, that exceed 5.0% will be taxable in total unless the charges for repairs and restoration are separately identified to the customer in the contract or billing. However, see subsection (b)(9) of this section.
   3. (3) Modifying parts of existing structures for the sole purpose of supporting the addition of new space will not change a new construction contract into a remodeling contract as long as the charges attributable to remodeling are 5.0% or less of the overall charge. Examples include changing a one-story building to a two-story building and adding a stairway to the existing structure to provide access to the new space, or removing a wall to add additional structural support in the process of adding on a new room outside the original structural space. Contracts with remodeling charges exceeding 5.0% will be taxable in total unless the charges for remodeling are separately identified to the customer. However, see subsection (b)(9) of this section.
   4. (4) An exemption certificate may be issued for the labor involved in remodeling, restoring, or repairing buildings listed in the National Register of Historic Places. An organization exempted under the Tax Code, §151.309 or §151.310, may issue an exemption certificate if the repair, restoration, or remodeling appears reasonably related to the exempt purpose of the organization. See §3.322 of this title (relating to Exempt Organizations).
   5. (5) The labor to repair real or tangible personal property damaged within a disaster area by the condition or occurrence that caused the area to be declared a disaster area is exempt from tax if the charge for labor is separately stated to the customer. The materials used to perform the repairs are taxable. A person having property repaired under this paragraph should issue the service provider an exemption certificate in lieu of tax. The service provider must presume that all work is taxable until the customer issues an exemption certificate covering the separately stated labor portion of the bill. If the charge for the repair is lump-sum, the total charge is taxable.
   6. (6) No sales tax is due on the wages or salary paid by an employer to an employee who provides the labor to repair, remodel, or restore real property belonging to and used by the employer. A person will be considered the employee of the employer if the employer pays the person's salary, withholds applicable federal taxes from the employee's salary, pays employment-related benefits, such as health insurance, etc., and exercises direct control over the work performed by the person.

4. (d) Resale certificates.

   1. (1) Persons who repair, restore, and remodel real property may issue a resale certificate in lieu of tax to suppliers of tangible personal property only if the tangible personal property will be incorporated into the customer's realty. For example, a repairman or remodeler purchases paint to repaint a repaired or remodeled area. The paint is transferred to the customer as a part of the finished job. The repairman or remodeler may purchase the paint tax free by issuing a resale certificate. Tax is due on the total amount charged the customer, including amounts for the paint and for the services. A resale certificate may not be issued for materials and supplies used or consumed by the repairman or remodeler which are not incorporated into the customer's realty.
   2. (2) A resale certificate may be issued for a service if the buyer intends to transfer the service as an integral part of taxable services. A service will be considered an integral part of a taxable service if the service purchased is essential to the performance of the taxable service and without which the taxable service could not be rendered. Examples of services for which a resale certificate may be issued in lieu of tax are landscaping and surveying services if the landscaping or surveying are performed upon the property being remodeled.

5. (e) Local taxes. Local taxes (city, county, transit authority, city transit department, and special purpose districts) apply to services in the same way as they apply to tangible personal property.

   1. (1) Generally, service providers must collect local sales taxes if their place of business is within a local taxing jurisdiction, even if the service is actually provided at a location outside that jurisdiction.
   2. (2) Transit sales taxes do not apply to services provided outside the boundaries of a transit area.
   3. (3) If the service provider's place of business is outside a local taxing jurisdiction but the service is provided to a customer within a local taxing jurisdiction, local use taxes apply and the service provider is required to collect them.
   4. (4) For information on the collection and reporting responsibilities of providers and purchasers of taxable services, see §3.374 of this title (relating to Collection and Allocation of the City Sales Tax), §3.375 of this title (relating to City Use Tax), §3.424 of this title (relating to Collection and Allocation of Transit Sales Tax), and §3.425 of this title (relating to Transit Use Tax).
6. (f) Use tax. If a seller of a service is not engaged in business in Texas or in a specific local taxing jurisdiction and is not required to collect Texas tax, it is the Texas customer's responsibility to report and pay the use tax directly to this office.
7. (g) Effective date. Written contracts or bids signed on or before July 21, 1987, but not completed prior to January 1, 1988, shall be governed by the provisions of §3.319 of this title (relating to Prior Contracts). Contracts signed after July 21, 1987, are subject to state tax to the extent the contracts were performed on or after January 1, 1988.

Source Note:The provisions of this §3.357 adopted to be effective April 4, 1988, 13 TexReg 1984; amended to be effective October 17, 1990, 15 TexReg 5853; amended to be effective December 7, 1992, 17 TexReg 8235; amended to be effective March 23, 1995, 20 TexReg 1762.