During this hurricane season, we wanted to remind you all that the Comptroller’s Office has exemptions relating to repair and remodeling projects in designated disaster areas. There is an exemption for labor to repair commercial property in designated disaster areas.
- The area must be designated a disaster area by the Governor of Texas or President of the United States and the project must be related to the disaster. See the links for documentation of the disaster area declaration and a full list of designated counties.
- To obtain the exemption, the contract must be a separated contract. A separated contract separately states the price for incorporated materials from the price for labor. For example, Thomas Construction is remodeling a commercial building due to Hurricane Harvey. The contract price is $500,000 for labor and $350,000 for materials. This is a separated contract.
Sales tax would not be due on the labor charge ($500,000). You must charge your customer sales tax on the charge for materials ($350,000). If the contract price was $850,000, with no separately stated price for materials and labor, the entire project ($850,000) would be taxable.
Also, please note that cost plus contracts are not necessarily separated contracts. The contract must separate the price of labor from materials to be a separated contract.
The form that you will need your customer to sign is the Texas Sales and Use Tax exemption certificate. In the “purchaser claims this exemption for the following reason” field, reference the project being in a designated disaster area- Hurricane Harvey. You must have a properly completed Texas Sales and Use Tax exemption certificate in order to not charge sales tax on the entire commercial remodeling project. Remember, you will still charge your customer sales tax on the materials charge. See the link for an example of a properly completed exemption certificate.
In terms of your subcontractors, issue them a resale certificate to purchase their services tax free. Also, issue a resale certificate to purchase your incorporated materials tax free. You must pay sales tax on your equipment rentals. You can only issue the resale certificates if you have an active sales tax account with the Texas Comptroller of Public Accounts.
There has always been an exemption for labor on residential repair, remodeling projects. You do not need any special forms for that type of project. The contract type (separated or lump sum) determines your sales tax responsibilities.
FINAL NOTE: If you have executed lump sum contracts already, go back and restate them. You can change the nature of the contract until the work stops.
LINKS (KEEP THE FIRST TWO ITEMS FOR YOUR FILES in case of audit):
- FEMA list of counties in the designated disaster zone
- Disaster declaration proof
- Example of a properly completed exemption certificate
If you have any questions, please do not hesitate to contact us.