In this month’s issue, we continue our series that takes a close look at the sales tax treatment for specific contractors, repairmen and other service providers.
Part 2 – Breaking Down Demolition Services
Demolition involves tearing down buildings and other man-made structures by implosion or using non-explosive methods such as a wrecking ball.
The complete demolition of a real property improvement (such as a building or parking lot) is not taxable. Any partial demolition is considered real property remodeling and the taxability depends on whether the work performed is on residential or nonresidential property.
Complete demolition of a real property improvement means to destroy the improvement down to the slab or bare ground. Total demolition of a building means the entire structure is removed except for the slab. Note that parking lots are separate real property improvements from buildings.
For example, the complete demolition of a parking lot means to demolish the lot down to the dirt. Retaining any portion of the previous real property improvement such as a sidewall, steel columns or joists, or a section of the parking lot, etc., is partial demolition and considered remodeling.
If a company only performs complete demolition services, it is not required to have a sales tax permit or collect tax on this nontaxable service. If, however, the company performs partial demolition or other services (such as debris removal, new construction or remodeling services, etc.), then it may be required to have a sales tax permit and collect tax.
A provider of a demolition service owes tax on all materials and equipment bought, leased or rented to provide the service.
Waste Removal (Real Property Services)
Waste removal services are taxable real property services. Real property service providers must collect tax on their services and pay tax on all materials and equipment bought, leased or rented for use in providing the waste removal services.
If a company bills its customer separately stated charges for both complete demolition and waste removal services, it only collects tax on the taxable waste removal services.
For example, a company charges its customer $40,000 for its services: $27,000 for complete demolition and $13,000 for debris removal services. The assumed sales tax rate is 8.25 percent.
|Complete Demolition||$ 27,000|
|Waste Removal||$ 13,000|
|State and Local Sales Tax (8.25% x $13,000)||$ 1,072.50|
If the company bills its customer a lump-sum charge for both the complete demolition and waste removal services, and the waste removal charges are more than 5 percent of the entire bill, then it must collect tax on the entire charge to its customer.
Using the same charges from the previous example:
|Complete Demolition and Waste Removal||$ 40,000*|
|State and Local Sales Tax (8.25% x $40,000)||$ 3,300|
*A single charge for complete demolition and waste removal services, when the waste removal services are more than 5 percent of the single charge, is taxable. If the service provider separately states the charges, they only need to collect tax on the taxable waste removal services.
Real Property Improvements After Demolition Services
Complete DemolitionMaking new real property improvements following complete demolition services is new construction. A company performing new construction is considered a contractor.
For example, if a company destroys an entire parking lot down to the dirt, the new parking lot it builds is new construction. Likewise, for the construction of a building on an existing site to qualify as new construction, a company would need to demolish the existing building to its slab or foundation, with no remaining walls or ceilings above the ground floor slab or foundation.
For new construction, the construction labor and demolition services are not taxable, but the incorporated materials and waste removal services are taxable. The party responsible for paying the tax on the incorporated materials and the waste removal services depends on the type of contract used.
Contractors performing new construction contracts under a lump-sum contract (a lump-sum amount that does not separate the charges for incorporated materials or labor) are consumers of all materials, consumable items and equipment used or incorporated into a customer’s property.
As a consumer, a lump-sum contractor must pay tax to suppliers when buying the materials. If the materials are purchased from an out-of-state seller, a contractor must accrue and remit use tax on the materials, unless Texas use tax was collected by the out-of-state seller. A contractor must not collect tax from a customer on a lump-sum charge or on any portion of the charge.
Contractors performing separated contracts (the charges for incorporated materials and labor are separately stated) are the retailers of all materials physically incorporated into the real property improvement. As a retailer, a contractor may issue a resale certificate and must collect tax from the customer based on the agreed contract price of the incorporated materials and other taxable services provided.
Here are some examples of how the type of contract affects tax collection and payment responsibilities. In these examples, a company charges its customer $340,000 for its services: $27,000 for the complete demolition, $13,000 for waste removal and $300,000 for the new construction. The assumed sales tax rate is 8.25 percent.
|Complete Demolition, Waste Removal, and New Construction||$ 340,000**|
|State and Local Sales Tax (8.25% x $340,000)||$ 28,050|
**Again, because the waste removal service exceeds 5 percent of the single charge (i.e., is not separately stated), the entire service is presumed to be for taxable waste removal services. However, the service provider may separate the charges under Rule 3.356(i)(2) and charge tax only on the $13,000 charge for waste removal services.
|Complete Demolition||$ 27,000|
|New Construction (Incorporated Materials)||$ 110,000|
|New Construction (Labor)||$ 190,000|
|Waste Removal||$ 13,000|
|State and Local Sales Tax (8.25% x $123,000)***||$ 10,147.50|
***$110,000 for incorporated materials + $13,000 for waste removal
Partial DemolitionPartial demolition of existing realty and any real property improvements made following partial demolition services is remodeling. The taxability of remodeling depends on the type of property (residential or nonresidential).
If you perform residential remodeling, you are a contractor. For residential remodeling, the remodeling labor and demolition services are not taxable, but the incorporated materials and waste removal services are taxable. The party responsible for paying the tax on the incorporated materials and waste removal services depends on the type of contract used.
If you perform nonresidential remodeling, you are a taxable service provider. For nonresidential remodeling, the taxable service provider must collect tax on the total charge (including the demolition services). It makes no difference what type of contract is used.