Electrician Services 1 of 2 (Sales Side)

Electricians have an interesting situation. They can provide services like repairing circuits to residential customers lump sum tax free, but the same services would be taxable to a business customer.

Additionally, if they are involved in construction, what the can charge tax on and when they need to pay tax on materials depends on the customer and contract. It gets tricky. If you get to the end and think 'we're not doing it this way' that's a great time to give us a call.

Statutory Basis

In general, most electricians, plumbers, and other services fall under 3 major tax statues. 151.0101, 151.0047, 151.0056

151.0101

Sec. 151.0101.  "TAXABLE SERVICES".

(a)  "Taxable services" means:
(...)
(13)  real property repair and remodeling;

This explicitly establishes the services that work with real property in this space to be taxable, however there is an important coinciding section:

151.047

Sec. 151.0047.  "REAL PROPERTY REPAIR AND REMODELING".  (a)  "Real property repair and remodeling" means the repair, restoration, remodeling, or modification of an improvement to real property other than:

(1)  a structure or separate part of a structure used as a residence;

(2)  an improvement immediately adjacent to a structure described by Subdivision (1) of this section and used in the residential occupancy of the structure or separate part of the structure by the person using the structure or part as a residence;  or

(3)  an improvement to a manufacturing or processing production unit in a petrochemical refinery or chemical plant that provides increased capacity in the production unit.

(b)  In this section:

(1)  "Increased capacity" means the capability to produce:

(A)  additional products or services as measured by units per hour or units per year;  or

(B)  a new product or service.

(2)  "Production unit" means a group of manufacturing and processing machines and ancillary equipment that together are necessary to create or produce a physical or chemical change beginning with the first processing of the raw material and ending with the finished product.

(3)  "New product" means a product that:

(A)  has different product properties and a different commercial application than the product previously manufactured or processed by the production unit that produced the previous product;  and

(B)  is not created by straining or purifying an existing product or by making cosmetic changes, such as adding or removing color or odor, to or from an existing product.

The "other than" is doing alot of heavy lifting there. Note that they are defining what isn't in the category; residential structures (and adjacent) as well as a petrochemical carve out, because it wouldn't be the Texas tax code if oil and gas didn't get special treatment.

Combining these, we see nonresidential repair and remodel is taxable and conversely residential repair and remodel isn't, but this isn't the whole picture, we need one more code section before we can start claiming what is and isn't taxable. So far this has been repair/remodel work and we need to broaden this to include construction.

151.056

 Sec. 151.056.  PROPERTY CONSUMED IN CONTRACTS TO IMPROVE REAL PROPERTY.  (a)  A contractor is the consumer of tangible personal property furnished by him and incorporated into the property of his customer if the contract between the contractor and his customer contains a lump-sum price covering both the performance of the service and the furnishing of the necessary incidental material.

(b)  A contractor is the seller of tangible personal property furnished by him and incorporated into the property of his customer, from whom he shall collect the tax, if the contract between the contractor and his customer contains separate amounts for the performance of the service and for the furnishing of the necessary incidental material.  The tax rate is applied to the price of the materials as agreed in the contract or the price of the materials to the contractor, whichever is the greater.

(c)  If a contractor has paid the sales tax to his supplier when the tangible personal property is purchased, the contractor may credit the amount of the tax paid to the supplier against the tax imposed as provided in Subsection (b) of this section with respect to a subsequent sale of the property.

(d)  In this section, "contractor" means a person who makes an improvement on real estate and who, as a necessary or incidental part of the service, incorporates tangible personal property into the property improved.

(e)  This section does not apply to the use or consumption of tangible personal property as a necessary or incidental part of a taxable service.

(f)  A contractor is not eligible for the exemption provided by Section 151.318 on items used in the performance of a contract to improve real property.

(g)  In this subsection, "ready mix concrete contractor" means a person who manufactures or produces ready mixed concrete for construction purposes and incorporates the ready mixed concrete in the property improved.  A ready mix concrete contractor performing a contract must separate and individually invoice the customer for each yard of ready mixed concrete produced and consumed for the improvement of real property and collect and remit the tax imposed under this chapter on the ready mixed concrete produced and consumed.  The tax rate is applied to the price of the materials determined by the greater of the invoice price or fair market value of ready mixed concrete incorporated into the project.  This subsection does not apply to an invoice submitted by a ready mix concrete contractor for a public works project.

Let's break this down by the most important subsections:

(a) - This is were the most confusion is and it's plainly written in the law, materials are consumed by the contractor in lump sum contracts, thus sales tax is generally due by the contractor, not only on the supplies and equipment used, but by the materials as well.

Example: We have contract to install wiring in a new office building for a lump sum of 50,000. We pay 25,000 dollars on materials, and tax is due to the vendor from us.

(b) - If a contract separates labor and materials, the materials charge is taxable.

Example: We have contract to install the piping in a new office building for a lump sum of 50,000 split 25,000 labor and 50,000 materials. We charge tax on the 25,000 dollars of materials.

(d) - Clarifies 'contractor' is a fairly broad term here, to cover 'builders' of all types.

(f) - 151.318 is the manufacturing exemption. Contractors don't get equipment tax free that manufacturers do. This creates an unequal playing field against smaller players, so if you want to manufacture as well, get a knowledgeable expert beforehand.

Bringing It Together

That's a lot of words, in practice we use flow charts to get it right 100% of the time, below are the 4 scenarios:

Separated Residential - Contractor charges tax on materials.

Separated Nonresidential - Contractor charges tax on the entire charge.

Lump Sum Residential - Contractor pays tax on materials, doesn't charge tax.

Lump Sum Nonresidential - Contractor charges tax on the entire charge (because a taxable and nontaxable charge are intermingled)

Administrative Code Guidance

There are 2 Rules we will be referencing. Rule 3.291, which governs contractors (construction) and Rule 3.357 which is nonresidential real property repair and remodel.

3.291- Contractors

Rule 3.291 is the administrative code rule regarding contractors and adds a lot of details to the statue. This is a quick guide not an exhaustive guide, so I'll go over two additional important points.

Document Guidance

(5) Contracts versus bids and change orders. For tax purposes, the terms of a contract control over the terms of a bid. For example, if the bid is lump-sum but the written contract is separated, then the contract determines the tax responsibilities of the parties, and the customer is liable for tax on incorporated materials. The terms of a contract also control change orders. If the contract is lump-sum, then change orders will be treated as lump-sum even if the change orders show charges for incorporated materials separate from other charges. If the contract is separated and change orders are for lump-sum amounts, then the lump-sum amounts will be treated as charges for incorporated materials unless the contractor can reasonably demonstrate the portion attributable to labor.

There is a hierarchy of documentation that must additionally be complied with. Do note a schedule of values that separates labor and materials may be considered sufficient to establish an otherwise lump sum contract as separated.

Local Tax Guidance -

(10) Local tax. A contractor's responsibility for local sales and use taxes depends on the type of contract entered into with the customer.

(A) A contractor who has entered into a separated contract with the customer must collect local taxes on the charge for materials based on the location of the job site.

(B) A contractor who has entered into a lump-sum contract with the customer is the consumer of all materials used to perform a lump-sum contract.

(i) The lump-sum contractor should pay tax to suppliers on all materials at the time of purchase, unless the contractor maintains a valid tax-free inventory or holds a direct pay permit.

(ii) When the local sales taxes collected by the supplier are less than the 2.0% local tax cap, additional local use taxes are due based on the location where the goods are first stored or used. Local use tax is not due if the supplier collected a local sales tax for the same type of taxing jurisdiction.

(iii) When a lump-sum contractor has items shipped to the jobsite from outside of Texas, the contractor is responsible for accruing local taxes based on the location of the jobsite.

(iv) The lump-sum contractor must accrue local use tax based on the purchase price of the taxable item. The local use tax is due in the reporting period in which the item was first stored, used, or otherwise consumed in a local taxing entity.

This area of the tax job site is determinant of what local taxes are due. One of the only sections where this applies and NOT how it applies for the other type of work done, as seen furher in 3.357.

3.357- Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance

3.357 focuses more to individual service jobs, like replacing old wiring or fixing a fault. The work is generally taxable, and for local taxes we follow the standard schema of tax due based on service provider place of business, with overflow if in a low tax rate area and service is performed in a location where taxes are higher, with exceptions.

Local Tax Guidance - Repair/Remodel

(f) 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) 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) Transit sales taxes do not apply to services that are provided outside the boundaries of a transit area.

(3) If the service provider's place of business is outside a local taxing jurisdiction but the service is provided to a customer who is located within a local taxing jurisdiction, then local use taxes apply and the service provider is required to collect the local taxes.

(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).

Again, this just

Exemptions/Exceptions

Governmental Entities


Sec. 151.309.  GOVERNMENTAL ENTITIES.  A taxable item sold, leased, or rented to, or stored, used, or consumed by, any of the following governmental entities is exempted from the taxes imposed by this chapter:

(1)  the United States;

(2)  an unincorporated instrumentality of the United States;

(3)  a corporation that is an agency or instrumentality of the United States and is wholly owned by the United States or by another corporation wholly owned by the United States;

(4)  this state;

(5)  a county, city, special district, or other political subdivision of this state;  or

(6)  a state, or a governmental unit of a state that borders this state, but only to the extent that the other state or governmental unit exempts or does not impose a tax on similar sales of items to this state or a political subdivision of this state.

Pretty simple here, materials for government construction are nontaxable, and while they don't need to provide a certificate to not pay tax, you will need to provide a certificate to your materials vendors.

Nonprofit Entities

Sec. 151.310.  RELIGIOUS, EDUCATIONAL, AND PUBLIC SERVICE ORGANIZATIONS.  (a)  A taxable item sold, leased, or rented to, or stored, used, or consumed by, any of the following organizations is exempted from the taxes imposed by this chapter:

(1)  an organization created for religious, educational, or charitable purposes if no part of the net earnings of the organization benefits a private shareholder or individual and the items purchased, leased, or rented are related to the purpose of the organization;

(2)  an organization qualifying for an exemption from federal income taxes under Section 501(c)(3), (4), (8), (10), or (19), Internal Revenue Code, if the item sold, leased, rented, stored, used, or consumed relates to the purpose of the exempted organization and the item is not used for the personal benefit of a private stockholder or individual;

(3)  a nonprofit organization engaged exclusively in providing athletic competition among persons under 19 years old if no financial benefit goes to an individual or shareholder;

(4)  a company, department, or association organized for the purpose of answering fire alarms and extinguishing fires or for the purpose of answering fire alarms, extinguishing fires, and providing emergency medical services, the members of which receive no compensation or only nominal compensation for their services rendered, if the taxable item is used exclusively by the company, department, or association; or

(5)  a chamber of commerce or a convention and tourist promotional agency representing at least one Texas city or county if the chamber of commerce or the agency is not organized for profit and no part of its net earnings inures to a private shareholder or other individual.

(...)

Works the same way as the governmental exemption, except an exemption certificate is needed for documentation.

Historic Sites

The statute has a clean, easy to read exemption, noted excerpted below:

Sec. 151.3501.  LABOR TO RESTORE, REPAIR, OR REMODEL HISTORIC SITES.  
(a)  Labor to restore, repair, or remodel an improvement to real property is exempted from the taxes imposed by this chapter if:
(1)  the amount of the charge for labor is separately itemized;  and
(2)  the restoration, repair, or remodeling is performed on an improvement to real property listed in the National Register of Historic Places.
(b)  The exemption provided by this section does not apply to tangible personal property transferred by the service provider to the purchaser as part of the service.

This allows nonresidential repairs to be treated as separated new construction, though practically, this complicates the record keeping requirements for a business so it tends not to be used. Additionally to the listed National Register, the Texas Historical Commission keeps it's own list, that while not noted in the statute, generally I've found the administration amenable to accepting Texas landmarks.

Final Thoughts

This area is complicated, has large, possibly taxable, transactions and is audited continuously. A little bit of thoughtfulness in setting up companies and contracts can go along way. GCs sometimes don't have any obligations for contractor sales tax and may write contracts that don't align with the tax code. Do consult an expert in this space if you have any questions.

If there are any questions not found in this guide that you would like to see answered, please reach out to [email protected].