Sales Tax Overview for Contractors
Texas tax laws can be confusing and difficult to understand sometimes. This article series is designed to help you understand the information you need to determine your tax responsibilities as a contractor. In this video, we’ll cover basic terms used in our tax laws and rules.
Once you have watched this video you can select from one of the different contractor tax videos to better understand your tax responsibilities in each situation or scenario. In Texas, contractors may be required to collect Texas sales or use tax. If you perform new construction or residential repair, remodeling and/or restoration work, you are considered a contractor. Or, if you perform non-residential repair remodeling and restoration work, you are considered a taxable service provider. In this post the term “contractors” refers to both contractors and taxable service providers.
Contractors can include home builders, general contractors, subcontractors, developers or specialty trade contractors, such as plumbers, HVAC technicians, electricians, painters, interior designers and installers, such as installers of carports, solar panels, fire alarm systems and home theaters are all considered contractors. As a contractor, you can perform work on different types of real property, such as residential or non-residential. Residential property is a property that is either a single-family or multifamily building used as a residence and not as a business. Residential property also includes any property that is connected to those buildings, such as apartment common areas, laundry rooms for tenants and certain recreational areas, such as swimming pools and basketball courts.
Non-residential property or commonly referred to as “commercial property” is property without facilities for people to live in. It also includes buildings and other improvements built into or affixed to the land. Some examples of non-residential property include office buildings, shopping centers, industrial parks, bridges, hotels and motels. You can also perform or provide different types of work or services to each of these types of properties. That work includes new construction, repairing, remodeling, restoration and maintenance. You can use different types of contracts to bill or invoice your customer, either lump-sum or separately stated.
Your tax responsibilities are different for each one. Lump-sum contracts are known as “fixed price,” “flat price” and “turnkey” contracts. When you bill your customer you charge them a single amount for labor and incorporated materials, instead of separately itemizing them. Separated contracts are known as “time and materials” contracts. When you bill your customer you separately state the labor and incorporated materials charges. Finally, we’ll cover the different items you may use in completing your work. As a contractor, you can use incorporated materials, consumable items and equipment to complete your construction projects. Knowing how to classify these items will help you understand if you should pay sales tax when you purchase these items. “Incorporated materials” are items that you incorporate into and become a part of any permanent real property improvement. These are some examples of incorporated items you might use. “Consumables” are nonreusable single-use items used for construction projects.
Here are some examples of consumables you might use for your construction projects. “Equipment” is any item that you use that is not an incorporated material or a consumable item. Here are some examples of equipment you might use for your construction projects. Remember, determining who is responsible for the sales tax on these items is based on the type of contract, work and the type of property that you work on.
You should now understand the terms used in performing your contract work. When you are ready you can select from one of the different contractor tax videos to better understand your tax responsibilities in each situation.