The difference between a residential and a nonresidential property is everything when it comes to your tax bill. In Texas, the labor to remodel a family’s kitchen is not taxable, but the labor for a similar job in a commercial office space is. This single distinction is the foundation of the Texas remodel tax, and misinterpreting it can have serious financial consequences. This guide will walk you through the most common property types you’ll encounter—from single-family homes and multi-family complexes to nonprofits and mixed-use buildings—so you know exactly how to handle the tax side of things for each one and create accurate, compliant bids every time.

Key Takeaways

• Classify Every Property First: Your labor on residential remodels in Texas is not taxable, but your total charge for nonresidential work is. This single distinction determines how you tax the entire project.
• Use Your Contract to Manage Material Tax: A separated contract lets you buy materials tax-free and bill the tax to your customer, while a lump-sum contract means you pay the tax upfront. This choice is key to managing your project's cash flow.
• Document Everything and Call the Comptroller: For complex jobs or work with tax-exempt groups, solid paperwork is your best defense. When you face a unique situation, don't guess—get a definitive answer from the Texas Comptroller to avoid future liability.

Texas Remodel Tax: What's Taxable and What's Not?

Navigating Texas sales tax for remodeling projects can feel like a maze, but it all boils down to one key question: what kind of property are you working on? The rules for a home renovation are completely different from those for a commercial build-out. Understanding this distinction is the first step to keeping your projects compliant and your books clean.

Getting a handle on the basics—like whether you’re dealing with a residential or nonresidential property, what key tax terms mean for your bottom line, and how to approach those tricky mixed-use projects—will save you major headaches down the road. Let’s break down exactly what’s taxable and what’s not, so you can focus on the work instead of the paperwork.

Residential vs. Nonresidential Properties

In Texas, the biggest factor determining if your labor is taxable is the type of property. The rule of thumb is pretty straightforward: labor to repair, remodel, or restore a residential property is not taxable. This includes single-family homes, apartments, condos, and nursing homes. So, if you’re renovating a kitchen in a family’s house, you don’t charge sales tax on your labor.

On the flip side, the total amount you charge for remodeling or repairing a nonresidential (or commercial) property is taxable. This covers everything from office buildings and retail stores to restaurants and factories. The Texas Comptroller is very clear on this distinction, so it’s crucial to correctly classify every job before you even write up a contract.

Key Tax Terms to Know

A few key terms can make or break your understanding of Texas remodel tax. First, "New Construction" is almost always a non-taxable service. Similarly, as we just covered, "Residential Repair or Remodeling" is also generally not taxable. The one you need to watch is "Nonresidential Repair or Remodeling," which is a taxable service.

It’s also important to know how your contract structure affects things. If you use a separated contract—where you list the charges for materials and labor separately—you can give your suppliers a resale certificate and avoid paying tax on materials that become part of the customer’s property. This is a huge advantage, but you have to follow the sales and use tax rules precisely.

How to Handle Mixed-Use Properties

What happens when a project involves a property that’s used for both living and business, like a home office or a storefront with an apartment upstairs? This is where things can get complicated. The tax treatment isn't always black and white and often depends on the primary use of the property or how the space is divided.

Because every mixed-use situation is unique, there isn’t a one-size-fits-all answer. The Texas Comptroller’s official advice is to call their office for specific rules when you encounter one of these projects. Don’t guess. Taking a few minutes to get clear guidance directly from the source will ensure you’re handling the taxes correctly and protect you from potential compliance issues later on.

When Is Your Remodeling Labor Taxable?

Figuring out when to charge sales tax on your labor is one of the trickiest parts of running a remodeling business in Texas. The rules can feel complicated, but they all come down to one key question: are you working on a residential or a nonresidential property? The answer completely changes how you handle taxes on your labor charges. Getting this right is essential for staying compliant and protecting your bottom line.

According to the Texas Comptroller, the type of property dictates whether your hard work is taxable. For contractors, this distinction is everything. It affects how you structure your bids, write your contracts, and bill your clients. Understanding these core rules helps you avoid costly mistakes and ensures you’re collecting and remitting the correct amount of tax for every single job. Let’s break down exactly what you need to know for different project types.

Rules for Residential Labor

When you’re working on a residential property, the rule is simple: your labor is not taxable. This applies to any work you do to repair, remodel, or restore a place where people live. The state considers properties like single-family homes, apartment complexes, condominiums, nursing homes, and retirement homes to be residential. So, whether you're renovating a kitchen in a suburban house or repairing the plumbing in a multi-family building, you do not need to add sales tax to your labor charges. You’ll still need to pay sales tax on the materials you purchase for the job, but the service itself is exempt.

Rules for Nonresidential Labor

The rules flip when you work on nonresidential, or commercial, properties. For these projects, the total amount you charge for remodeling, repairing, or restoring the property is taxable. This includes both your labor and any materials you incorporate into the job. Nonresidential properties are places of business, such as office buildings, retail stores, restaurants, warehouses, factories, and hospitals. If you’re hired to remodel a commercial space, you must collect sales tax on the entire charge from your client. This is a critical distinction that impacts your project bids and final invoices for all commercial work.

Exceptions for Natural Disasters

Texas has a specific exception for nonresidential properties that have been damaged in a natural disaster. If you are hired to repair a commercial building located in an area that has been officially declared a natural disaster by the governor or U.S. president, your labor to fix the damage is not taxable. This exemption is designed to help businesses recover more quickly. However, it’s important to remember that this rule only applies to the labor charges. The materials you use for the repair are still subject to sales tax, and you’ll need to handle that accordingly.

Maintenance vs. Repair: Why the Difference Matters

The state draws a clear line between maintenance and repair, and it affects your tax obligations. Real property maintenance is scheduled, routine work you perform to keep a property in good working order—it’s about preventing problems, not fixing them. Labor for maintenance is not taxable, whether the property is residential or commercial. Examples include regularly scheduled HVAC servicing or repainting a building to prevent deterioration. In contrast, a repair involves fixing something that is broken, damaged, or worn out. Repair labor is taxable on nonresidential properties. Keeping these definitions straight is key to billing correctly.

How Your Contract Type Changes Your Tax Bill

The way you structure your contract has a direct impact on how you handle sales tax, who pays it, and when. In Texas, the two primary contract types for construction are lump-sum and separated. Choosing the right one for your project isn’t just about billing—it’s a strategic decision that affects your cash flow and your bottom line. Understanding the difference is the first step to making sure you’re pricing your jobs correctly and staying compliant with state tax laws.

Whether you’re working on new construction or a residential remodel, the contract you sign dictates your tax responsibilities for materials, supplies, and even some services. One structure requires you to pay tax upfront on materials, while the other allows you to pass that tax directly to your customer. Let’s break down how each one works so you can decide which approach makes the most sense for your business and your clients.

Lump-Sum Contracts

With a lump-sum contract, you charge your client one total price for the entire job, without itemizing the costs for labor and materials. When you operate under this type of agreement for new construction or residential projects, you are considered the end consumer of the materials. This means you are responsible for paying sales tax to your suppliers when you purchase all materials, equipment, and supplies. You then build that tax cost into the total lump-sum price you quote your customer. Importantly, you do not collect any sales tax from your client on the final bill.

Separated Contracts

A separated contract works differently. Here, you bill your customer by listing the charges for materials and labor separately. This structure allows you to act as a retailer for the materials you incorporate into the job. You can provide your suppliers with a resale certificate to purchase materials tax-free. Then, you charge your customer sales tax on the total amount billed for materials. Your labor charges, however, remain non-taxable. This method can be beneficial for managing cash flow, as you aren’t paying the sales tax on materials out of pocket upfront.

Purchasing Materials and Supplies

How you buy materials is determined entirely by your contract type. For a separated contract, the process is straightforward: you give your supplier a resale certificate instead of paying sales tax. This applies to all materials that will become a permanent part of the customer’s property. This tax-free purchasing can also extend to certain taxable services you buy and then separately bill to your client, like landscaping or surveying. This approach requires clear communication with your suppliers and meticulous tracking to ensure you’re correctly applying the resale certificate only to qualifying purchases for that specific job.

Essential Documentation

No matter which contract type you use, keeping detailed records is non-negotiable. Your documentation is your proof of compliance if the Texas Comptroller ever has questions. Be sure to keep copies of all contracts, bids, invoices, and blueprints for every project. For separated contracts, you’ll also need to keep all resale certificates on file. This paperwork is especially critical for complex jobs that might involve both new construction and remodeling, as it substantiates how you calculated and applied taxes. Think of it as your business’s financial defense—it’s better to have it and not need it than the other way around.

Which Properties Qualify for Tax Exemptions?

Figuring out which properties get a tax break can feel tricky, but it usually comes down to one main question: is the property residential or nonresidential? In Texas, the rules are pretty clear about this distinction, which is great news for contractors. Understanding these categories helps you create accurate bids, bill your clients correctly, and keep your projects compliant from the start.

Generally, labor on residential repair and remodeling projects is not taxable, while labor on nonresidential (or commercial) projects is. This simple rule covers a lot of ground, but there are always specific situations that need a closer look. For example, what happens when you’re working for a nonprofit or on a building that’s used for both business and living? We’ll walk through the most common property types—single-family homes, multi-family complexes, nonprofits, and mixed-use buildings—so you know exactly what to expect and how to handle the tax side of things for each one.

Single-Family Homes

When you’re working on a single-family home in Texas, the labor for any repair, remodel, or restoration is generally not taxed. This is a huge plus for both you and the homeowner. According to the Texas Comptroller’s guidelines, this exemption applies to a wide range of residential structures, including houses, duplexes, and other individual living spaces. This rule is designed to make it easier for homeowners to maintain and improve their properties without an extra tax burden on the labor. For you, it means you won’t need to collect or remit sales tax on your services for these jobs, simplifying your invoicing process. Just remember, this exemption applies specifically to the labor, not necessarily the materials.

Multi-Family Properties

Just like with single-family homes, the labor to repair, remodel, or restore multi-family properties is also not taxed in Texas. This rule covers buildings like apartment complexes, condominiums, and retirement homes. The state treats these properties as residential, so the same tax exemptions on labor apply. This consistency helps contractors who work on a variety of residential projects, from small home renovations to large-scale apartment updates. By not taxing the labor, the state encourages the upkeep and improvement of these essential living spaces. As a contractor, you can confidently bid on these projects knowing that your labor charges won't include sales tax, which can be a significant factor in your project's overall cost.

Working with Nonprofit Organizations

Things get a little different when you’re working with nonprofit or government clients. As a rule, you do not charge tax for jobs performed for government agencies, whether they are federal, state, or local. Some nonprofit organizations also qualify for tax-exempt status, but it’s not automatic. Before you assume a project is tax-exempt, the nonprofit must provide you with a valid exemption certificate. It’s your responsibility to get this document before you start the work. Keep a copy for your records, as it’s your proof for why you didn’t collect sales tax. Without that certificate, you could be held liable for the uncollected tax down the road.

Mixed-Use Property Rules

Mixed-use properties—buildings that serve both residential and commercial purposes, like a storefront with an apartment upstairs—can be the most complicated when it comes to taxes. There isn’t a single, simple rule for these situations. The taxability of your labor often depends on the property's primary use or how the project is divided between the residential and commercial sections. Because these projects fall into a gray area, the best approach is to get clarification before you finalize your contract. Your safest bet is to contact the Texas Comptroller’s office directly for specific guidance. They can help you determine how to properly apply the tax rules to your project, ensuring you stay compliant.

Who Pays Sales Tax on Materials?

Figuring out who is responsible for the sales tax on materials can feel complicated, but it really boils down to your contract and the type of property you’re working on. For nonresidential remodeling projects, the rules are pretty clear: you, the contractor, are considered the service provider. This means you’re responsible for collecting sales tax from your customer on the total price of the job, which includes both labor and materials. Think of it as a single taxable transaction.

However, the situation changes if you use a separated contract. With this type of agreement, you itemize the charges for materials and labor separately. This structure effectively turns you into a retailer for the materials. You can then purchase the necessary materials tax-free from your suppliers by providing them with a resale certificate. Your customer then pays sales tax on the materials you bill them for, while the labor charges remain non-taxable. This distinction is crucial for keeping your books clean and your projects profitable. Getting this right from the start saves you major headaches down the line.

Your Responsibilities as a Contractor

When you're working on a nonresidential remodeling project, your role is to collect the appropriate sales tax from your client. According to the Texas Comptroller, you should "collect state sales tax plus any local tax on your total charge for the job." This applies when you use a lump-sum contract where the customer pays one price for the entire project. In this scenario, you are the end consumer of the materials, meaning you'll pay sales tax to your supplier when you buy them. You then pass that cost along to your customer as part of the total project price, on which you also collect sales tax.

Your Customer's Obligations

Your customer’s tax obligations are directly tied to the contract you use. If you have a separated contract, the responsibility for the sales tax on materials shifts more directly to them. The Texas Comptroller explains that under a separated contract, you can give your suppliers resale certificates instead of paying tax on materials you incorporate into the customer's property. You then charge your customer sales tax on the agreed-upon price for the materials. The separately stated labor charges are not taxed. This method provides transparency for your client, as they can see exactly what they are paying for materials versus labor.

Records You Need to Keep

Clear and accurate records are your best friend when it comes to tax compliance. For separated contracts, it's a requirement that you "must show labor and materials separately on the bill." This isn't just a suggestion; it's essential for the contract to be treated as separated for tax purposes. Your invoices should clearly itemize the charges for all materials from lumber and drywall to fixtures and paint. You also need to keep copies of the resale certificates you provide to suppliers. Maintaining organized documentation for every project protects you in case of an audit and ensures you’re handling your tax obligations correctly.

Factoring in Local Taxes

Don't forget that the sales tax you collect isn't just the state rate. You also need to account for local taxes from cities, counties, and special districts. The total tax rate can vary significantly depending on the project's location. As a contractor, it's your job to charge the correct, combined rate for the job site address. The total charge to the customer is what’s taxable, so getting the rate right is critical. Thankfully, the Texas Comptroller provides resources to help you find the right tax rate for any location in the state, ensuring you collect and remit the correct amount every time.

Tax Rules for Special Projects

Not all remodeling jobs are created equal, especially when it comes to taxes. Different types of projects follow specific rules that can change how you handle sales tax on labor and materials. Understanding these distinctions is key to creating accurate bids, staying compliant, and guiding your clients effectively. Whether you're adding a new room, remodeling an interior, or working on a historic landmark, knowing the specific tax implications can save you from costly surprises down the road.

From residential remodels to energy-efficient upgrades, each project type has its own set of guidelines. For example, the labor for a simple kitchen update in a family home is treated differently than the labor for a similar update in a commercial office space. Similarly, projects that add new square footage are classified differently than those that simply restore an existing area. Let's break down the tax rules for some of the most common special projects you'll encounter in Texas.

Interior Remodeling

When you’re working on an interior remodel, the first question to ask is whether the property is residential or nonresidential. This distinction is everything. In Texas, the labor to repair, remodel, or restore residential real property is not taxable. This includes single-family homes, apartments, condos, and nursing homes. So, for that kitchen gut-job or bathroom overhaul in a client's house, you won't charge sales tax on your labor. The rules for real property repair and remodeling are clear on this, which simplifies things for residential contractors. However, remember that this exemption only applies to labor; you'll still need to handle taxes on materials correctly based on your contract type.

Room Additions

If your project involves adding new, usable space to an existing building—like a new bedroom, an expanded living area, or a second-story addition—it falls under the category of "new construction." This is great news from a tax perspective because the labor for all new construction in Texas is not taxable. It doesn't matter if the property is residential or commercial. The key is that you are building something entirely new, not just repairing or remodeling what's already there. Properly applying Texas sales and use tax means clearly defining the scope of work as new construction in your contracts to avoid any confusion with the tax authorities.

Energy-Efficiency Projects

While most tax discussions focus on state sales tax, energy-efficiency projects bring federal tax credits into the picture. These credits are a major selling point for property owners and something you should be aware of. When a client installs certain energy-generating systems, like solar panels or geothermal heat pumps, they may qualify for a significant federal tax credit. For instance, some upgrades can earn the homeowner a credit for up to 30% of the cost. While you don't manage their tax filing, knowing about these federal tax deductions for home renovation can help you provide more value and close more deals.

Historic Properties

Working on historic properties often involves a unique set of tax rules, especially when the owner is a tax-exempt organization. If you are hired to repair or remodel a property for an entity exempt under the Texas Tax Code, such as a historical preservation society or a government agency, your services may also be exempt. According to the Texas Administrative Code, the services you purchase for the job can be claimed as exempt as long as they are essential to completing the contract. Before you assume an exemption, always get a valid exemption certificate from your client and keep it on file.

Stay Compliant and Find Resources

Keeping up with tax regulations can feel like a full-time job, but getting it right is non-negotiable. The good news is that Texas provides clear guidelines and resources to help you stay on the right side of the law. Knowing where to look for answers and what to keep on hand can save you from major headaches down the road. Here’s a breakdown of the essential compliance steps and where to turn for help when you need it. By staying organized and informed, you can handle your tax obligations confidently and focus on what you do best: building and remodeling.

Following Texas Comptroller Guidelines

One of the most important rules to remember is that in Texas, labor for repairing, remodeling, or restoring residential properties isn't taxable. This is a huge piece of the puzzle. This exemption covers a wide range of properties, including single-family homes, apartments, condominiums, and even nursing homes. Understanding this core principle is your first step toward accurate billing and compliance. The Texas Comptroller’s office offers detailed official guidance on Real Property Repair and Remodeling that you can reference for any project.

What Documents to Keep on File

Good paperwork is your best defense. For any project, but especially those involving both residential and commercial work, maintaining organized records is critical. Be sure to keep copies of all contracts, bids, and blueprints on file. These documents create a clear paper trail that defines the scope of your work. If you ever need to clarify the tax status of a project—particularly one that mixes new construction with repairs—having these records readily available will make the process much smoother and support your compliance efforts.

How to File Correctly

How you structure your contract directly impacts how you handle taxes. For new construction and residential remodels, the services are generally not taxable. If your contract separates the cost of materials from labor, you can purchase those materials tax-free using a resale certificate. You then charge your customer sales tax on the materials you bill them for. This method ensures you’re not paying tax on items you’re reselling to the client. For a closer look at the specifics, legal experts have broken down how to correctly apply Texas sales and use tax in these situations.

Where to Get Support

You’re not expected to have all the answers, especially when unique situations arise. If you have questions about a customer's tax-exempt status or need clarification on a specific remodeling scenario, the best place to go is the source. The Texas Comptroller's office is an invaluable resource for contractors. Their Tax Assistance team is available to provide guidance and support for your specific questions. You can reach them directly on their toll-free line at (800) 252-5555 for reliable advice.

Solve Common Tax Problems

Texas sales tax rules for remodeling can feel complicated, but a few common issues trip up contractors more than others. Getting ahead of these problems saves you from headaches, audits, and unexpected tax bills down the road. By understanding how to classify properties, structure your contracts correctly, handle material taxes, and keep solid records, you can manage your projects with confidence. Let's break down these key areas so you can stay compliant and protect your bottom line.

Classifying the Property Correctly

The first step in any remodeling project is figuring out if the property is residential or nonresidential, because the tax rules are completely different. According to the Texas Comptroller, labor for repairing or remodeling residential property is not taxable. This includes single-family homes, apartments, condos, and nursing homes. In contrast, the total amount you charge for work on nonresidential (commercial) property is taxable. Misclassifying a commercial office as residential could lead to significant unpaid taxes. Always confirm the property type before you even draft a contract to ensure you’re applying the Texas tax rules correctly from the start.

Structuring Your Contract

How you write your contract directly impacts your tax obligations. For residential remodels, using a separated contract—where you list charges for materials and labor separately—is often the best approach. This structure allows you to buy materials tax-free using a resale certificate. You then charge your customer sales tax only on the materials you bill them for. As legal experts explain, this method provides clarity and helps you manage taxes properly. With a lump-sum contract, you’re considered the consumer of the materials and must pay tax on them when you buy them, which can complicate your job costing.

Paying Tax on Materials

Knowing who pays sales tax on materials—and when—is essential. For nonresidential jobs, the rule is simple: you must collect state and local sales tax from your customer on the total charge for the job. This includes all costs you pass on to them, from materials to other services. The only exception is for building permit fees, which are not taxable if you list them separately on the invoice. For most jobs, you will pay sales tax when you purchase the materials from your supplier, unless you are using a resale certificate under a separated contract as mentioned earlier. Always factor these taxes into your project bids to avoid shrinking your profit margin.

Keeping Accurate Records

Meticulous record-keeping is your best defense against tax issues. The Texas Comptroller advises contractors to keep clear records like contracts, bids, invoices, and blueprints. This documentation is especially critical for complex jobs that might mix new construction with repairs or include ongoing maintenance work. These records prove how you calculated taxes and justify your decisions if you’re ever audited. Think of it as building a financial foundation for every project. Strong records provide a clear story of the job, protect your business, and ensure you can always demonstrate compliance with state tax law.

Frequently Asked Questions

What's the most common mistake contractors make with Texas remodel tax? The single biggest error is misclassifying the property type. The tax rules for a residential home are completely different from those for a commercial building. Accidentally charging tax on a residential remodel or, worse, failing to collect it on a nonresidential job can lead to significant compliance issues. Always confirm if a property is residential or nonresidential before you even begin drafting a contract.

Can I avoid paying sales tax on materials when I buy them? Yes, you can, but it depends entirely on your contract. If you use a separated contract that lists the charges for labor and materials independently, you can provide your suppliers with a resale certificate. This allows you to purchase the materials tax-free. You then act as a retailer and collect the sales tax on the materials directly from your customer on their final bill.

What if my project is a mix of remodeling an existing space and adding a new room? This is a common scenario that requires careful documentation. The labor for the new room addition is considered new construction, which is not taxable in Texas. The labor for remodeling the existing part of the building follows the standard rules: it's not taxable if the property is residential but is taxable if it's nonresidential. Your contract and invoices should clearly separate the scope and costs for each part of the job to justify how you applied the tax.

Do I have to charge sales tax when working for a nonprofit like a church or a school? Not usually, but you can't just assume they are exempt. The nonprofit organization must provide you with a valid exemption certificate before you begin the project. It is your responsibility to obtain this document and keep a copy for your records. Without that certificate, you could be held liable for the uncollected sales tax if you are ever audited.

Is there a difference between "maintenance" and "remodeling" for tax purposes? Yes, and the distinction is important. Maintenance is scheduled, routine work meant to keep property in good working order, like repainting to prevent deterioration or performing a scheduled HVAC check-up. Labor for maintenance is not taxable. Remodeling or repair, on the other hand, involves fixing something that is broken or making a capital improvement. Repair labor is taxable on nonresidential properties, so keeping these definitions straight is key to billing correctly.