The Texas Comptroller of Public Accounts recently upheld an assessment of additional sales tax on construction services performed between 2014 and 2017. [(Tex. Comptroller of Pub. Accts., Decision No. 118,954, June 10, 2025)] The case involved a mix of new construction, repairs, and remodeling.
The Comptroller found that when the taxpayer used a lump sum contract which provided a single charge that combined taxable and non-taxable services, the taxpayer could not later claim an exclusion for the non-taxable services. On appeal, the Administrative Law Judge (ALJ) confirmed the assessment, emphasizing:
- Repairs and remodeling remain taxable. Work such as repair, maintenance, and remodeling of both tangible personal property and real property is subject to sales tax.
- New construction is excluded—but must be proven. Initial finish-out and other qualifying new construction are exempt, but taxpayers must substantiate the claim with contemporaneous records.
- Burden of proof is on the taxpayer. Absent clear documentation, if taxable and non-taxable services are included together in a single charge, the Comptroller will generally presume services are taxable. Taxpayers must keep “contemporaneous” books and records to substantiate exemptions, exclusions, or deductions. Under Tex. Tax Code §111.0041 and Rule 3.281, records must be kept “in the regular course of business” and be available during audit.
Why It Matters
The case highlights the importance of careful recordkeeping. Contractors and developers who fail to distinguish taxable work from exempt new construction risk significant additional tax liability in an audit. Lump sum contracts often face this kind of scrutiny from tax authorities.
The ALJ confirms that “if a combination of taxable services (e.g., repair of nonresidential property), nontaxable services (e.g., new construction, residential repair, or maintenance), and nontaxable unrelated services are sold or purchased for a single charge and the portion that relates to taxable services represents more than 5.0% of the total charge, the total charge is presumed to be taxable. The service provider may overcome this presumption by submission of documentary evidence that establishes the percentages of the total charge that relate to taxable services and to nontaxable services.”
What You Should Do Now
- Review contracts and invoices to ensure they clearly separate new construction from repair/remodel work. Whenever possible, break out line items and do not charge lump sums.
- Maintain supporting project records (scope of work, bid sheets, tally sheets, schedules of values, and blueprints) that substantiate claims of new construction.
- Train project managers and accounting staff to recognize taxable versus exempt work.
- Consider a proactive review or self-audit to identify exposure before the Comptroller does.
Notes for Practitioners
- All sales of tangible personal property are presumed taxable unless an exemption applies (Tex. Tax Code §§151.051, 151.052).
- Taxable services include repair, remodeling, maintenance, and restoration of real property (Tex. Tax Code §§151.0101(a)(3), 151.0047).
- New construction is excluded from tax, including initial finish-out of real property improvements (Tex. Tax Code §151.0048; 34 Tex. Admin. Code §3.291).
- While the Comptroller has the initial burden to show taxability, the taxpayer must establish entitlement to any exclusion or exemption (Tex. Tax Code §111.025(a)(3)).
