Do Contractors Charge Sales Tax on Labor in Texas?

Whether contractors charge sales tax on labor in Texas depends on what kind of work they’re doing. Labor on new construction is not taxable. Labor on repair or remodeling of nonresidential property is taxable at the state rate of 6.25% plus local taxes, up to a combined 8.25%. Labor on repair or remodeling of residential property is generally not taxable. Materials follow their own rules and can be taxable even when the labor isn’t.

New Construction Labor Is Not Taxed

If the job creates something that wasn’t there before, the labor charge stays outside sales tax, whether the project is residential or commercial.¹ That covers:

Building a home, office, warehouse, or any other structure from the ground up
Finishing a shell or partially completed building
The first-time interior or exterior finish-out of a space, such as building out a raw commercial suite for its first tenant
Adding new usable square footage, like a second story or a new wing

The word doing the work here is “new.” Create something and the labor is clean; fix or update something and different rules kick in.

Nonresidential Repair and Remodeling: Labor Is Taxable

Work on existing commercial property is the one place where Texas contractors must charge sales tax on labor. When you repair, remodel, or restore offices, retail stores, warehouses, restaurants, or hotels, tax applies to your total charge, including both labor and materials, and you collect it from the customer.¹

The Comptroller treats the following as taxable when performed on nonresidential real property:

Rebuilding damaged portions of a structure
Upgrading existing components, such as new flooring over old or an upgraded electrical panel
Replacing parts of an existing structure
Repairing broken or defective building systems
Repainting, re-roofing, or refinishing

The taxable amount is every cost you pass on to the customer, with one narrow exception: separately stated building permit fees you paid on the customer’s behalf.²

This is where tenant-improvement work catches contractors out. A first-time build-out of a raw space is new construction and the labor is not taxable. Ripping out the previous tenant’s layout and rebuilding the same space for the next tenant is remodeling, and the whole charge is taxable. Same address, same contractor, different tax treatment.

Residential Repair and Remodeling: Labor Is Not Taxed

Labor to repair, remodel, or restore residential property is not subject to Texas sales tax. Residential property here means houses, duplexes, apartments, nursing homes, and retirement homes. Hotels are not residential for this purpose.¹

Replacing a roof on a house, gutting a kitchen, upgrading plumbing across an apartment complex — the labor charge to the customer carries no sales tax. Materials are a separate question. You either pay tax on them at the supply house or collect tax on them from the customer, depending on how the contract is written, but the labor itself stays clean.

Homebuilders get a further break. Real property services purchased as part of building a new home — surveying, landscaping, security system installation — are not taxable when they’re part of the contract to build the home and its adjacent improvements, such as pools, garages, fences, and driveways.³

Maintenance Is Not the Same as Repair

Scheduled, periodic maintenance on nonresidential property is not taxable, even though repair work on the same building would be. The line: maintenance prevents a breakdown; repair fixes one. Swapping HVAC filters on a quarterly schedule is maintenance. Fixing a failed compressor is a repair.¹

To claim the maintenance treatment, you need a contract or other paperwork showing the work is scheduled and periodic. Without it, the Comptroller can reclassify the job as a taxable repair on audit. Any parts or materials you install during maintenance are still taxable, and you pay tax on those when you buy them. The exemption covers your service charge only.

How Your Contract Type Changes the Invoice

The way you write the contract decides who pays tax on the materials and, on some jobs, whether tax appears on the customer’s invoice at all. Texas recognizes two contract types.

Lump-Sum Contracts

A lump-sum contract quotes one price with no split between labor and materials. Under this structure, you’re the final consumer of the materials. You pay sales tax to your suppliers at purchase and charge the customer no separate sales tax.⁴ For new construction and residential repair, this is often the cleaner path. The material cost, tax included, goes into your bid.

A contract that shows a zero charge for either materials or labor is treated as lump-sum, and so is any contract that doesn’t clearly break out all labor, including fabrication labor.⁴

Separated Contracts

A separated contract lists materials and labor as distinct line items. You buy the materials tax-free using a resale certificate and then collect sales tax from the customer on the materials line. The materials charge to the customer must be at least what you paid for them.¹

On new construction and residential repair, the labor line still carries no tax under a separated contract; only the materials line is taxed. On nonresidential repair and remodeling, both lines are taxable regardless of how you invoice. Cost-plus contracts count as separated contracts as long as they separately state labor from materials.

Disaster-Area Repairs

When the Governor of Texas or the President declares a disaster area, labor to repair damaged property inside that area is exempt from sales tax. The condition: you must separately state the labor charge from any materials on the invoice. Bill it as a lump sum and the exemption is gone.⁵ Materials and parts installed during the repair remain taxable. Only the labor gets the break.

Government and Nonprofit Customers

Some customers don’t owe sales tax on your services or the materials you use for them:

Government entities, including the state, counties, cities, school districts, and special districts
Nonprofits with federal exemptions under IRC Sections 501(c)(3), (4), (8), (10), or (19)⁶

Before you skip tax on a job for one of these customers, get a completed exemption certificate (Form 01-339) from them and keep it. The exempt organization issues the certificate; you don’t create it. If the Comptroller audits and there’s no certificate in the file, the uncollected tax comes out of your pocket.⁷

1
Texas Comptroller of Public Accounts. Real Property Repair and Remodeling
2
Texas Comptroller of Public Accounts. Taxable Services
3
Texas Comptroller. Homebuilders and Real Property Services
4
Cornell Law School Legal Information Institute. 34 Tex. Admin. Code 3.291 – Contractors
5
Legal Information Institute (LII) at Cornell Law School. 34 Tex. Admin. Code 3.292 – Repair, Remodeling, Maintenance
6
Texas Comptroller. 501(c)(3), (4), (8), (10) or (19)
7
Comptroller of Public Accounts. Nonprofit and Exempt Organizations – Purchases and Sales