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Taxing the Middleman in Texas

  • Nov 19, 2015 | Gail Cole

 What to do when the business you do business with is exempt.

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.”

Simplify management of sales tax and sales tax exemptions with sales tax software. Learn more.

photo credit: BRITISH COLUMBIA 1971 MUNICIPAL EXEMPT plate via photopin (license)

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.