Taxing the Middleman in Texas
- Nov 19, 2015 | Gail Cole
Certain groups, such as governmental agencies and religious and educational organizations, are exempt from paying sales tax in Texas and in many other states. This policy sometimes muddles sales tax compliance for the businesses doing business with the exempt organizations. This is particularly true when regarding real property improvements.
For example, when a contractor hired by a city rents equipment (like barricades) to use on the job, sales tax applies to the rental charges even though the equipment is being used on a job for an exempt entity. As explained by the Texas Comptroller, “The exempt status of the city does not flow through to the contractor.”
But… (there’s always a “But”).
A contractor may claim an exemption (with an exemption certificate) on certain purchases required to complete a contract for real property improvement for an exempt entity. Tangible personal property that is “incorporated into realty in the performance of the contract” is exempt. Certain purchases used to complete the job may also be eligible for an exemption. Sec. 151.311 of Texas Tax Code provides further details and examples.
Equipment rental is excluded from this exemption. However, when seeking reimbursement for equipment rental charges, a contractor may seek reimbursement for the sales tax paid on the equipment rental. The reimbursement of the sales tax must be separately stated on the invoice. An example is provided in Tax Policy News, “Caught in the Middle.”
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