With the fourth largest city in the country underwater and Tropical Storm Harvey slowly carrying its destruction east, it doesn’t feel quite right to write of upcoming Labor Day picnics or outings. However, Labor Day was created in 1882 to be “a general holiday for the workingmen,” and it’s working men and women who’ll rebuild Houston and other affected areas in the aftermath of Harvey. So perhaps now is the time to highlight some of the tax policies the construction industry could encounter as it builds, repairs, and rebuilds homes and businesses.
Tax relief in times of trouble
One obvious way to help taxpayers reeling from a natural disaster is to offer an extension to file taxes, and the Texas Comptroller is doing just that. Businesses adversely affected by Harvey may be granted up to 90 days to file their tax returns. Such an extension must be requested from the Comptroller directly, at 800-252-5555.
Other available tax assistance may complicate business, but such is the nature of tax.
For example, while labor to repair, remodel, or restore residential real property is exempt from Texas sales and use tax, charges to repair, remodel, or restore nonresidential real property are generally taxable. Due to Harvey, however, businesses don’t have to apply sales tax to normally taxable labor charges when the purchaser provides the seller with an exemption certificate that explains the reason for the exemption (e.g., “launder clothing damaged during Harvey”).
An exemption certificate may be accepted for the following services:
- Repair of nonresidential real property (labor charges must be separately stated or separated after receipt of an exemption certificate)
- Repair or restoration of tangible personal property damaged by a natural disaster (includes cleaning services)
- Removal of trees damaged during the disaster
As always, tax exemption certificates must be properly managed and readily available should tax authorities need to verify them.
To the rescue
Unfortunately, it can be difficult for local businesses to work during and directly following a natural disaster such as Harvey. Employees may be temporarily homeless or preoccupied with their very survival; tools and trucks may be underwater or swept away. Fortunately, out-of-state businesses are encouraged to offer their assistance. Texas is waiving the requirement to register with the state and collect and remit sales and use tax for:
- An out-of-state business entity that enters Texas at the request of an in-state business entity under a mutual assistance agreement
- An out-of-state business entity that is an affiliate of an in-state business entity
Tax authorities don’t consider such remote entities to be doing business in the state if they’re only in Texas to perform emergency-related work during a disaster period. They won’t owe Texas use tax on any equipment brought into the state to aid in this work, provided such equipment is removed from Texas upon its completion. However, these businesses must pay tax on any taxable items purchased for their own use.
Furthermore, tax applies to any taxable item sold by such an out-of-state business, even though they aren’t required to collect it. According to the Comptroller, “Purchasers are still responsible for use tax on any taxable items purchased from such an out-of-state business entity.”
The state and local sales and use tax divide
Several states, including Missouri, are sending emergency responders and volunteers to help with relief efforts in Texas. Businesses from numerous states will follow as they can, and should be aware that special sales and use tax policies tend to recede with the flood waters. Once recovery is well underway, normal tax policies return. These differ from state to state and can be quirky.
In Missouri, for example, it’s possible for local sales tax to apply to a transaction that’s exempt from state sales tax as well as state and local use tax.
This unusual tax policy was explained in Missouri Department of Revenue Letter Ruling 7863, which pertains to a taxpayer who manufactures and installs countertops in the state. The taxpayer wished to know if its purchases of granite, quartz, and other countertop slab materials are subject to Missouri sales and use tax.
Missouri sales tax applies to sales of tangible personal property and certain services (Section 144.020.1, RSMo). Its sister use tax applies to “the privilege of storing, using, or consuming” tangible personal property in the state (Section 144.610.1, RSMo). Given these statutes, one could understandably assume that state and local sales or use tax is owed on this particular taxpayer’s purchases.
However, Section 144.054.2, RSMo exempts from state sales tax and state and local use tax “machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product.” It does not exempt these items from local sales tax — and so, a confusing tax policy is born.
That is not the case in Texas. According to the Comptroller, “Texas sales and use tax exempts tangible personal property that becomes an ingredient or component of an item manufactured for sale, as well as taxable services performed on a manufactured product to make it more marketable.” Contractors don’t have to pay local sales tax as they do in Missouri — something for Missouri contractors doing business in Texas to keep in mind.
Tax policies aren’t generally created to make tax compliance more challenging. Instead, they’re often developed to encourage or discourage certain economic activity, or perhaps even to assist taxpayers in times of great need. Unfortunately, the results are sometimes confounding. “Workingmen” (and women) have to deal with these policies every day, which is one reason they deserve a break and some recognition on Labor Day.
Additional information about tax relief in Texas is available from the Texas Comptroller. As we learn more about how Harvey affects sales and use tax or other transaction taxes, we’ll share it here.