I just got my kitchen partially remodelled...scope was basically repositioning/replacing windows and adding some cabinets and granite adjacent to existing. The general contractor did good work for the most part, but is wanted to charge 8.25% sales tax at end of the job on the full lump sum contract amount. Anyone who has gotten their home remodelled run into this? This doesn't seem legal for residential remodels after looking up Texas tax statues. Seems like a play for more money. He did some other seemingly shady stuff like expect me to supply materials like mortar and granite when no material was drawn up as customer-supplied in the contract. The other three bids I got included all materials and his was 2nd highest. Bit of a headache but got it straightened out. Any experience from home owners or remodeling contractors is appreciated.

This is very shady. If the scope did not include those costs, then they do not exist. Reference your contract to see if he has any language saying that there are costs outside of the agreed costs. Guys like this make us all look bad when they pull this crap.
-Brandon Henderson
Envision Renovations
www.EnvisionYourHome.com

Thanks Brandon. I already told him I wasn't paying for the materials and he aquiessed. My question now is around sales tax and if it is legal for him to charge me in Texas since this is a residential job. The state comptroller website has some verbiage that seems pretty clear that it is not but the guy has been in business for ten years and was adamant this is standard practice.

I work for a general contractor and we don't pay tax on labor from subs. Materials only, whether they provide it or we buy it.

Typically if they supply and install, they give us a lump sum and no tax is added. They already should add it to their material portion, and just give us the bottom line.

The contract is a lump sum contract that shows the agreed price "plus tax". I read that contractors can charge tax for marerials on residential cost-plus contracts, but not lump sum. Said he can't provide me documentation with material costs because he sometime buys them for several jobs at the same time. Anyone else think I am wrong in not paying sales tax here?

Thanks strat.

Sales tax should be a pass through on materials only. It should never be applied to labor as it is a tax on consumption. Typically, a lump sum contract is just that and shouldn't have a "plus tax" adder to it. The fact that it does complicates thing a bit as you have agreed to pay some kind of tax even if it is not clear on what and how much. However, the onus should be on him to provide you with a breakout of what is labor vs. material and the excuse that he didn't track it for your project is nonsense.

Can't say 100% on residential, but you can definitely have a lump sum contract with a tax adder. Although that is very uncommon. If I bid a LS job, I don't want you to know my true material cost. That is my risk/reward.

That said, it all depends on how your contract was written and if he wants you to pay, I'd force him to provide documentation on material costs and then only pay tax on that number. The multiple job deal is an excuse.

He doesn't have to show you his direct costs. You owe sales tax on the portion of the lump sum that he states is for materials, which can have an overhead and profit multiplier added, the same as if you were buying from HD or Lowe's, because that is YOUR cost of materials.

He needs to provide a breakout, but I agree with the above, he's under no obligation to show you his actual receipts. He definitely knows what your job cost him in materials roughly... for him to say otherwise is bull***** That probably means whatever # he can come up with will be bull**** as well.

You can call the Texas State Comptroller and they will give you answers.

On any job where you get a product, I'm required to tax everything

In commercial (I don't work in residential), a 'use tax' is sales tax on materials up front. Typically, most jurisdictions will say to pay the use tax rate on 50% of total valuation (materials/labor/profit. The assumption is, on a typical job, half is material and half is labor. The use tax is only a portion of the sales tax. So then, we add the remaining portion of sales tax on all the materials. it ends up being more in taxes than just tax on materials itself, but that's what the city wants, that's what we do.

So this is the workaround for you. Just like the city is not going to deal with thousands of receipts from a dozen subs to figure out material cost, you shouldn't either even on a smaller scale. So the 50% rule of thumb can be used. Don't ask him for receipts, but tell him that you are only required to pay sales tax on materials, and you estimate it to be half of total job cost, which is materials, labor, and profit.

I guarantee you he isn't collecting sales tax and providing it to the state if he is an individual contractor. If this is a large company doing business, I can see them adding sales tax for material purchases.

Which is the case here?

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He needs to provide a breakout, but I agree with the above, he's under no obligation to show you his actual receipts. He definitely knows what your job cost him in materials roughly... for him to say otherwise is bull***** That probably means whatever # he can come up with will be bull**** as well.

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I wouldn't pay sales tax on a "number" he gives me. He wants sales tax then he better have itemized receipts. If he doesn't want to provide that because he doesn't want me seeing what materials really cost, then I am going to assume he made enough to cover any sales tax associated with their purchase.

http://comptroller.texas.gov/taxinfo/taxpubs/tx94_116.html

This will take you to the comptroller's web site. The Residential Repair and Remodeling paragraph seems to fit your situation. If it applies, then the cost is not taxable to you. However, your contract may be stating that you must reimburse for tax in addition to the lump sum cost. If he is stating that he is charging you sales tax and not remitting it, he could be in trouble. Collecting sales tax and not remitting it is frowned on by the comptrollers office.

Use tax is the sales tax a buyer remits to the state on purchases made from a vendor that is not required to register and collect the sales tax (i.e. think out of state sellers with no nexus to the state)

I've seen lots of lump sum contracts and none had the additional tax add on. The tax was paid by the contractor at the time the materials were purchased and included in the basic lump sum cost.

The Comptroller has come down hard on building contractors and this guy may have been one of them, and is therefore trying to cover his butt. I do not know all the rules on sales taxes and remodeling vs. new construction, but I have a carpenter client who got dinged hard because he constructed cabinet doors and sold them to his main builder without showing the sales tax as a line item. It cost him over $40K over a three year period.

As a general contractor, if we are delivering a job to the end user, we are allowed to pay sales tax on materials at time of purchase and, as long as we do not separate time and materials (i.e. Lump sum) then we do not have to collect/remit sales tax on the sale.

Wow. Thanks everyone for all the helpful responses. It looks like Tax Rule 3.291 (Contractors) is what applies to my situation. It says what pretty much everyone has said...he can't charge me sales tax on labor or materials on a lump sum residential contract.

Sam - In hindsight, my general contractor mentioned that he purchased his materials at HD, Lowes, etc, so he already paid sales tax. I think he is trying to pocket some extra money or at best, has a terrible understanding of the tax rules and thinks he is passing taxes on to me, which is still just as illegal.

Depending on his response, I might consider paying tax on some materials if he can show me resale certs for the bigger ticket items, but I'd be shocked if he'd know what I was talking about judging by our last discussion.

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Sam - In hindsight, my general contractor mentioned that he purchased his materials at HD, Lowes, etc, so he already paid sales tax. I think he is trying to pocket some extra money or at best, has a terrible understanding of the tax rules and thinks he is passing taxes on to me, which is still just as illegal.

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It's one of two scenarios:
He hasn't done this a lot and when he added up materials, labor, and profit and gave you that number, he forgot to add sales tax on materials, and so he's trying to get it now. (his mistake, his loss)
Or he's trying to take advantage of you by adding sales tax on a lump sum which already includes his materials with sales tax.

An experienced sub will come to a lump number that has materials WITH sales tax. Rookie mistake.

I went through the exact same thing back in 2010. I hired a guy to remodel a bathroom and he then tried to charge me sales tax on the entire job. I presented to him the info from the state comptroller's website and told him to forget about the sales tax or I would report him to the BBB. He immediately said don't worry about it and did not make a fuss about it. I sort of think that maybe he didn't even know the law himself or it was just another example of trying to get more money. There was nothing on the estimate about sales tax.

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Wow. Thanks everyone for all the helpful responses. It looks like Tax Rule 3.291 (Contractors) is what applies to my situation. It says what pretty much everyone has said...he can't charge me sales tax on labor or materials on a lump sum residential contract.

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Which would mean you signed a contract that is not valid since it is "Lump Sum + Sales Tax" per your previous posts.

Had a small flooring company measure all my dimensions then I went to their store and they started writing up my work order. He added all the labor and materials up then multiplied it all by 1.0825 and started to write down the total on a ticket (without breaking out sales tax). I said "uhhhh, no. Sales tax on materials only". Lot of fumbling with his words after that so I walked out. Not sure if I was right or not but I always thought sales tax was on the material only and he seemed really shady after I called him on it.

After reading this, I'm thankful I live in a state with no sales tax

Dont you live in MT where they have a State income tax? I can control my spending and thus how much I am taxed as opposed to an income tax where the only way to mitigate the tax is to be less of a badass at work and that isnt going to happen.

Yes. And 6.9% of my income goes to a state that is run by complete idiots. But there is no sales tax on my home or vehicles (though registration is roughly $400/year)

But at least I'm not in a state that has both income tax and sales tax. I think we can all agree that sucks

Nope. Contract is still valid. No tax owed. Lump sum contract section of rule 3.291:
The contractor shall not collect from a customer any amount represented to be tax on a lump-sum charge or on any portion of the charge except as provided under subparagraph (E) of this paragraph. A lump-sum contractor must refund to the customer any tax that is collected in error or the contractor must remit the tax to the state. The contractor may not retain such tax.

Don't want to rain on your parade and not a lawyer but pretty sure that it's not that cut and dry. You mentioned that your contract was a lump sum contract that shows the agreed price "plus tax". Per my understanding, signed agreements that conflict with tax rules typically supersedes it unless you signed it without full consent.

The tax rules are in place in case the "plus tax" language wasn't there and the contractor tried to charge you tax after the fact. In that case, it would be a no brainer. However, you signed a contract in which you agreed to play a price plus a tax. Therefore, the question should be what is the taxable portion?

This is similar to how wills work. The state has a set of rules in place but the presence of a will can and does override it in most instances. Just my two cents.