IS NEW COMMERCIAL CONSTRUCTION TAXABLE IN TEXAS?
[BLOG] Published: 2021-04-12 - Updated: 2022-01-19
IS NEW COMMERCIAL CONSTRUCTION TAXABLE IN TEXAS
Contractors need to be keen about sales tax regulations during the purchase of construction materials. Different contractors utilize different contract types and construction materials which bring a difference in tax obligations. Yes, Texas sales tax on commercial remodels also has to do with the supplies a commercial construction company or contractor uses to remodel or construct a new commercial structure.
Commercial construction involves real property like medical facilities, office buildings, warehouses, shopping centers, manufacturing buildings, parking garages, restaurants, including other commercial buildings. As a commercial construction contractor, you need research on any information relating to taxes for the provision of services and purchase of supplies for commercial construction. (Katy, 2020)
Commercial remodeling activities that are taxable
As a commercial construction contractor, any amount you charge for renovation or remodeling commercial buildings is taxable in Texas. The activities that attract taxes include;
- Refurbishing the appearance of an existing commercial building
- Reconstructing an entire commercial building
- Replacing major components of an existing commercial building; replacement of minor components during maintenance is not taxable.
- Renovating components of a commercial building
- Repainting and reroofing during renovation or remodeling
Construction materials, supplies, and equipment that contractors use in any of the above activities are also taxable. However, labor associated with new construction, completing, remodeling, and renovation of any commercial construction is not taxable. (Viator, 2019)
ProTip Takeaway: Minor activities that occur during the maintenance of a commercial building do not attract any taxes.
Understanding your tax responsibility
Now that you know that commercial construction is taxable in Texas, it will help if you know different aspects of the activities that you do in commercial construction that attract taxes. Each aspect is associated with different tax obligations that you must follow as a contractor.
To understand your tax responsibility, the first step toward assessing the contract type you utilize. The two types of contracts contractors utilize are separated contracts and lump-sum contracts. Well, what tax responsibilities come along with these types of contracts? (Hegar, n.d.)
Just as the name entails, a lump-sum contract entails the entire payment at a specific time. In lump-sum contracts, a contractor calculates all the cost for the entire renovation or remodeling of a particular commercial building and bills it in one lump sum to the client. The client, in return, needs to make the payment at once during a specific time.
The lump-sum contract does not involve separate billing of materials or labor that come along in new construction, remodeling, or renovating a particular commercial building. The lump-sum contract states that a contractor is a consumer. That implies; the sum amount the contractor charges a client is not taxable. The taxable amount comes when the contractor purchases materials, equipment, or other commercial building construction supplies.
Any real property services that contractors conduct, do not attract any taxes. The lump-sum contract also states that a contractor does not, under any circumstance, have an obligation to get tax on labor and construction materials, equipment, and supplies from the client. As the taxable service provider or the consumer, you pay tax through the materials you purchase to construct that client's commercial building.
As a contractor using the lump-sum contract, you must use tax for ant equipment, construction tools, and supplies you use to remodel, renovate or build a new commercial building. Any incorporated material that a contractor purchases from a supplier is also taxable during the time of purchase. A contractor needs to accrue any tax-free material; material erases from an inventory or materials and supplies they purchase outside Texas.
A separated contract, the total price a contractor charges, is placed into not less than two amounts. One charge for the labor of remodeling or making a new commercial construction, and a second charge for materials the contractor used to do the commercial construction task. A separated contract involves progress billing to separate the two charges.
In this contract, the contractor is the retailer of any material he/she use in the construction. That implies; the contractor should get sales taxes from the clients on the total amount he/she charges for the construction.
The contractor still has to pay tax on purchasing materials, equipment and supplies, and tools utilized in the commercial construction activity in the separate contract. The contract entails that a home builder, the contractor in a separate charge contract, resells consumable materials to the clients. On the other hand, the client needs to pay the tax for the incorporated material that the contractor asks to collect.
ProTip Takeaway: Client-contractor contract is the priority; invoices and bids come after. Invoices and bids, both separated and lump-sum, do not alter the contract into a lump-sum or vice versa. Anything was written, whether bids, invoices, or contracts, when the others are unwritten, direct the contractor's tax responsibility.
Consumables, Equipment and Incorporated materials
Whether it's new construction, remodeling, or repair, contractors have to use consumables, equipment, and incorporated materials in any commercial construction project. Each of these elements has its tax obligation. Therefore, it would be best if a contractor understands each of the aspects to know the tax responsibility. (ZASALT, 2018)
Consumables are any single-use, non-reusable, or non-durable items that a contractor use in a particular commercial construction project. For consumables, the contractor and the team use them once and then disposes of them. Consumables are not durable items; you use them one single time, and they get damaged because of their nature.
Some of the consumable items that contractors use in commercial construction projects include; barricade tapes, drop cloths, natural gas, disposable gloves, chalks, electricity, and other non-reusable items. Any durable item used more than once is not consumables, even the contractor's rents or leases.
Material is not items that you use to do the commercial construction projects, but items used to become part of the commercial building. Incorporated materials that contractors use incorporates together to make the permanent building or real property. Contractors use incorporated materials in new construction, remodeling, and also renovation of commercial real property.
Incorporate materials that become part of the property include mortar, brick, lumber, drywall, lighting items, air conditioning components, paint, flooring tiles, wood, and carpets. Anything that's not consumable and becomes permanent in the construction is an incorporated material. They are usually durable items that can last for some time.
Any item that's not consumable or incorporated material is equipment. Equipment is items that a contractor uses to install the incorporated material to become part of the building. Equipment is durable items that can last long even after the commercial construction project and include; hammers, screwdrivers, saws, drills, or any other machinery type. Equipment that contractors utilize can either be rented, leased, or bought.
ProTip Takeaway: For consumables, equipment, and incorporated materials, a contractor must pay tax while purchasing. For a commercial property for resale, there is an exemption to buy the items tax-free, and the tax will apply during the resell of the property. A contractor may use the tax while purchasing the items or collect tax from the clients for the resold items depending on the contract type. The contractor can also place the items in a tax-free inventory.
Commercial construction activity
Contractors can perform different activities in commercial construction. The type of activity you do will determine your tax obligation. Therefore, it will help if you know about the activity you perform to direct you in knowing your tax responsibility. (ZASALT, 2018)
In the new commercial construction project, you are starting the construction from scratch. That involves measuring the square footage, making the foundation, building the structure to finish the property. New construction can also involve adding a particular component like a parking lot or playground to an existing real property.
Remodeling a commercial property involves modifying the structure's design, upgrading components, and repairing broken components of a commercial property. Renovation involves repairing through rebuilding or restoration of a broken or commercial property.
ProTip Takeaway: Remodeling, new construction, or renovating a commercial property means you are a taxable service provider. The tax is applicable for the total amount that a contractor charges, both for items used and the labor cost. That means that all these commercial construction activities are taxable, whether the contractor is under a lump-sum or a separate contract. The contractor will collect the clients' tax for any incorporated material they use in a particular commercial construction project.
$150 - $750 per square foot
Office building remodeling
$15,000 or $100 per square foot
Health facility remodeling
$250 - $300 per square foot
Industrial Building remodeling
$120 - $450 per square foot
Apartment complexes remodeling
$ 60 -$150 per square foot
Remodeling and Construction Project
In Texas, there are tax obligations associated with commercial construction. It is essential to confirm tax requirements. At Smart Remodeling LLC, we know our tax responsibility as a BEST RESIDENTIAL AND COMMERCIAL REMODELING in HOUSTON. Reach out to us to help with any commercial construction-related questions.