Texas remodel tax works differently depending on what you’re remodeling. If it’s a home, apartment, condo, or similar residential property, the labor is exempt from sales tax and only the materials are taxed, at a combined state and local rate of up to 8.25 percent. If it’s commercial property, the entire bill is taxable, labor and materials alike. The contract your contractor writes also affects who pays the tax and when it shows up.
Residential Remodeling: Labor Exempt, Materials Taxed
For a single-family home, duplex, apartment, condominium, nursing home, or retirement home, the labor portion of a remodeling job is not subject to Texas sales tax.1Texas Comptroller of Public Accounts. Real Property Repair and Remodeling That covers the hours spent tearing out an old kitchen, the electrician’s time rewiring a bathroom, and every other hour of hands-on work. Hotels and short-term rental properties rented for fewer than 30 days do not count as residential for these purposes.
Materials are the exception. Drywall, tile, lumber, fixtures, paint, and every other physical component that gets incorporated into your home is tangible personal property, taxed at up to 8.25 percent (6.25 percent state plus up to 2 percent local).2Texas Comptroller of Public Accounts. Sales and Use Tax Whether that tax lands on your invoice as a line item or gets absorbed into the contractor’s price depends on how the contract is written, which is covered below. Either way, you’ll pay it on the physical stuff that goes into your walls, floors, and ceilings, and you won’t pay it on the labor.
Commercial Remodeling: Everything Is Taxable
For nonresidential property such as office buildings, retail stores, warehouses, restaurants, hospitals, and manufacturing facilities, the entire cost of remodeling is taxable.1Texas Comptroller of Public Accounts. Real Property Repair and Remodeling Both labor and materials. Repainting a retail space, upgrading an office suite’s electrical system, or replacing a warehouse roof all generate a sales tax obligation on the total bill. On a $100,000 commercial remodel, that can add up to $8,250 in tax.
Texas defines commercial remodeling broadly. It includes rebuilding, upgrading, replacing, or repairing any part of an existing nonresidential structure, and even partial demolition of an existing commercial building counts. Complete demolition of a commercial structure is neither remodeling nor repair, and is not taxable.3Legal Information Institute. 34 Texas Administrative Code 3.357 – Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance
One trap catches a lot of new tenants. If a finished-out commercial space has never been occupied and the incoming tenant wants changes before moving in, that work is still remodeling, not new construction. The initial finish-out was the construction phase; anything after that triggers the tax.
Remodeling vs. New Construction
The line between remodeling and new construction changes the tax picture significantly on commercial jobs. Labor for new construction is never taxable in Texas, on residential or commercial property.1Texas Comptroller of Public Accounts. Real Property Repair and Remodeling New construction includes building a new structure from scratch, completing an unfinished structure, and the initial finish-out of the interior or exterior of a building. Once that initial finish-out is complete, any further work shifts into the remodeling category.
Adding a new wing to an office building? The labor on the new square footage is tax-free. Renovating the existing offices at the same time? That labor is fully taxable. When a single contract covers both new construction and remodeling of nonresidential property for one price, and the remodeling portion exceeds 5 percent of the total charge, the Comptroller presumes the entire amount is taxable. The workaround is to have the contractor separately state a reasonable charge for the taxable remodeling work on the invoice.
How the Contract Type Changes Your Bill
Texas recognizes two contract structures for construction and remodeling work, and the choice affects who pays tax to whom.
Lump-Sum Contracts
A lump-sum contract quotes one total price without separating labor from materials. On residential remodeling and on new construction, the contractor is treated as the consumer of the materials. The contractor pays sales tax to suppliers when buying materials and does not charge the property owner any tax on top of the contract price.1Texas Comptroller of Public Accounts. Real Property Repair and Remodeling The tax is already baked into the number you were quoted.
For commercial remodeling under a lump-sum contract, the rule flips. Because both labor and materials are taxable on nonresidential work, the contractor must collect sales tax from the property owner on the total contract price.3Legal Information Institute. 34 Texas Administrative Code 3.357 – Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance
Separated Contracts
A separated contract lists materials and labor as distinct line items. That changes the contractor’s role: instead of consuming the materials, the contractor acts as a retailer reselling them to the property owner. The contractor buys materials tax-free using a resale certificate (Texas Form 01-339) and then collects sales tax from the property owner on the materials charge.4Legal Information Institute. 34 Texas Administrative Code 3.291 – Contractors
On a residential remodel with a separated contract, you pay tax only on the materials line. Labor stays tax-free. On a commercial remodel with a separated contract, you pay tax on both the materials and the labor line, because nonresidential remodeling labor is taxable regardless of how it’s billed.1Texas Comptroller of Public Accounts. Real Property Repair and Remodeling
For a homeowner, the two contract types usually produce a similar total cost. The tax gets paid either way; the only difference is whether you see it as a line item or it’s built into the price. For commercial owners, the total tax is the same under either structure, but the cash-flow timing and the paperwork are not.
Exemptions
Exempt Organizations
Nonprofits with federal 501(c)(3) status, government agencies, and public educational institutions can generally have remodeling work performed without paying Texas sales tax. The organization must give the contractor a completed Texas Sales and Use Tax Exemption Certification (Form 01-339) before or at the time of purchase. Without that form on file, the contractor has to charge tax, and cleaning it up afterward is a headache.
Disaster Repair
When the President or the Governor of Texas declares a disaster area, labor to repair damaged real property inside that area is exempt from sales tax on both residential and nonresidential property.5Texas Comptroller of Public Accounts. Disasters and Texas Taxes For residential work, the exemption applies as long as the labor is billed to the customer. For nonresidential work, the contractor must use a separated contract and accept an exemption certificate from the property owner for the labor portion. Materials used in disaster repairs stay taxable unless the property owner independently qualifies for another exemption.
Penalties for Getting the Tax Wrong
The Comptroller does not treat unpaid or late sales tax as a minor oversight. Penalties stack quickly.6Texas Comptroller of Public Accounts. Penalties for Past Due Taxes
- 1 to 30 days late: a 5 percent penalty on the tax due.
- More than 30 days late: a 10 percent penalty.
- After a Notice of Tax Due: an additional 10 percent, bringing the total to 20 percent of the unpaid tax.
- Late filing: $50 per late report, even if no tax is owed for that period.
Interest begins accruing on the 61st day after the report was due, at a variable rate the Comptroller sets each calendar year. The property owner has skin in this too. If the contractor fails to collect tax that was owed, the Comptroller can pursue the property owner for the unpaid amount. On a commercial project especially, a contractor who quotes a “great deal” by not charging sales tax is creating a liability that will eventually land on someone’s desk. Confirm your contractor holds a valid Texas Sales and Use Tax Permit before work begins, and keep every invoice and certificate for at least four years in case of an audit.
Mixed-Use Properties
Buildings used for both residential and commercial purposes, such as apartments above a ground-floor retail space, fall into what the Comptroller calls “multiple-use property.”1Texas Comptroller of Public Accounts. Real Property Repair and Remodeling There is no published formula for splitting the tax treatment between the residential and commercial portions. Contact the Comptroller’s office directly for guidance before the project starts. Getting the classification wrong on a large mixed-use project can produce a tax bill nobody budgeted for.