If you have ever put tax on one invoice, left it off the next, and then had a customer ask you why, you already know this is one of the murkier corners of running a contracting business in Texas. Most contractors we work with have been handling it the same way for years, based on how a previous bookkeeper did it or what another builder said over coffee, carrying a quiet worry that nobody has ever really checked.
That worry is reasonable, and the confusion is not a reflection on you. Two separate things decide whether labor is taxable on a Texas job, and most people only ever track one of them. The first is whether the work is new construction or remodeling. The second is whether the property is residential or nonresidential. Labor to repair, remodel, or restore residential real property is not taxable in Texas at all. Labor on nonresidential remodeling is taxable, and the taxable amount is the total charged for the job, including costs you pass through to the customer. New construction sits outside taxable repair and remodeling on both kinds of property.
The other half of why this feels slippery is that the line between new construction and remodeling is narrower than it sounds. Adding a new wing to a building is new construction. Moving interior walls to make a room bigger is remodeling, even though it feels like building. Finishing out office space that was previously used for storage is remodeling, even though nobody has ever worked in it. Same crew, same materials, different tax treatment.
This guide sets out the main matrix, the classification traps that catch working contractors, what happens when one contract contains both kinds of work, and what your books need to hold so that the classification you made at the time is still provable later. It describes what the rules say and shows how they could apply. It is not a determination about any particular job: whether a specific piece of work is taxable is a question for the Comptroller’s rules and your CPA, and this guide says clearly where that line falls. AliCat Solutions does the bookkeeping side of it for Central Texas contractors.
Estimated reading time: 19 min read
Overview
Texas taxes labor on repair, remodeling, and restoration of nonresidential real property, and does not tax that labor on residential property. New construction is excluded from taxable repair and remodeling on both. The rule itself is short. The difficulty is the classification underneath it: reallocating existing square footage is remodeling, while adding new usable square footage is new construction, and the two can happen on the same site in the same month. Where a single nonresidential lump-sum charge mixes both, remodeling of 5.0 percent or less rides along untaxed, and anything above that must be separately identified or the whole contract is presumed taxable.
What this guide covers
- What Texas actually counts as new construction
- Where the line falls, and the three traps
- The residential line, which changes the answer entirely
- When one contract contains both kinds of work
- What your books have to show, either way
| New construction | Repair, remodeling, or restoration | |
|---|---|---|
| Residential real property Family dwellings, apartment complexes, nursing homes, condominiums, retirement homes |
Not taxable repair or remodeling. You are a contractor, and tax follows your contract type on materials. | Labor is not taxable. Tax follows your contract type on the materials that go into the job. |
| Nonresidential real property Hospitals, office buildings, warehouses, parking garages, retail shops, restaurants, manufacturing facilities |
Not taxable repair or remodeling. Excluded from the remodeling rule. | The total amount charged is taxable, including labor and costs passed on to the customer, except separately stated building permit fees paid on the customer’s behalf. |
Hotels, and residential properties rented for periods of less than 30 days, are not residential real property for this purpose. Where a single structure is used both residentially and commercially, the work is taxable in total unless the labor on the residence is separately identified, and charges for common areas are taxed on the ratio of residential to nonresidential use.
What Texas actually counts as new construction
New construction means all new improvements to real property, including initial finish-out work to the interior or exterior of the improvement. The Comptroller’s own example is a multiple-story building where only the first floor has been finished and occupied. The initial finish-out of each additional floor, before that floor is first occupied or used, is new construction.
New construction also covers adding new usable square footage to an existing building. Putting a new wing onto an existing building is the example given in the rule, and it is the clearest case there is: there is more building at the end than there was at the start.
Those are two independent routes into new construction, and it is worth not collapsing them. A job qualifies if it adds new usable square footage, and it also qualifies as the initial finish-out of a new improvement even where no footprint was added. Neither test is the whole definition on its own, and reaching for only one of them is how contractors misclassify in both directions.
- A new building on a bare site is new construction
- A new wing on an existing building is new construction, because the footprint grew
- The first finish-out of a shell floor, before anyone occupies or uses it, is new construction
- An exterior addition that encloses space that was previously open is new construction
Two of these catch people out in opposite directions. Contractors who assume finish-out is always remodeling overcharge tax on genuinely new floors. Contractors who assume any large job is new construction undercharge on jobs that only rearranged what was already there, which is the more expensive mistake because the liability lands on them rather than on the customer.
Where the line falls, and the three traps
Reallocation of existing square footage inside a building is remodeling, and it does not count as adding new square footage. The rule spells this out with two examples that describe an enormous amount of real commercial work.
The first is removing or relocating interior walls to expand the size of a room. The room gets bigger, the client is delighted, and no new square footage entered the building, so it is remodeling. On nonresidential property, that makes the total charge taxable.
The second is the finish-out of an office space that was previously used for storage. This is the one that surprises people most, because the space has never been an office and finishing it feels like building something new. But the square footage already existed and was already in use, so the initial-finish-out exclusion does not reach it. It is remodeling.
Three places the classification commonly turns, and what each one raises
- A bigger room in the same building. Moving interior walls to enlarge a space is described in the rule as remodeling however structural the work felt. Worth asking: did the footprint change at all?
- Storage becoming something useful. Finishing out space that was previously used, in any capacity, is not the initial finish-out of a new improvement. Worth asking: had this space ever been occupied or used before?
- The property type itself. An apartment complex is residential; a hotel, and a property rented for stays under 30 days, is not. Worth asking: what is this building actually used for, and can I evidence that?
There is a third category worth knowing, because it sits outside taxable remodeling as well. The repair, restoration, or remodeling of nonresidential real property does not include the addition of new usable square footage, and it does not include scheduled and periodic maintenance. Genuine maintenance performed on a schedule is not the same thing as a repair, and treating every recurring visit as taxable remodeling overcharges your customer. The distinction has to be supported by the contract or other documentation showing the work really is scheduled and periodic, which makes it another classification that lives or dies on paperwork.
None of these are calls to make alone on a large job, and none of them are calls a bookkeeper makes for you. What they are is decisions worth recording at the time, because the difference between them is invisible in a bank feed six months later. A job coded only as “Smith Building, framing” cannot tell anyone which side of the line it sat on.
If you want the underlying mechanics of when and how a Texas contractor collects at all, our guide to whether you need to collect sales tax as a Texas contractor covers the collection duty itself.
The residential line, which changes the answer entirely
Residential real property means family dwellings, and the definition is broader than most people assume. It includes apartment complexes, nursing homes, condominiums, and retirement homes. The property does not have to be the residence of the owner, so a landlord’s rental house is still residential.
It does not include hotels, or residential properties rented for periods of less than 30 days. That short-stay carve-out matters more every year, because a house operated as a short-term rental can fall outside the residential definition while looking identical to the one next door.
When you repair or remodel residential property you are a contractor, and the tax question moves from your labor to your materials. Under a lump-sum contract you pay tax on your own supplies, materials, equipment, and taxable services. Under a separated contract the treatment differs. Which one you are operating under is decided by how your contract is written, not by how you think of the job.
Nonresidential is the other world. The total amount charged for remodeling, repairing, or restoring nonresidential real property is taxable, and that total includes all costs passed on to the customer. The exception named in publication 94-116 is separately stated building permit fees that you pay on the customer’s behalf. Other separately stated charges can raise their own questions, so treat that as the exception this guidance names rather than as proof that no other can exist. Separately stated is doing real work in that sentence: a permit fee buried inside a lump-sum price is not separately stated and does not come out.
When one contract contains both kinds of work
Most real commercial projects are not purely one thing. A tenant improvement can add square footage at one end of the building and rearrange it at the other, under one contract, for one price.
Texas draws the line at five percent, and it runs in both directions. Minor repair, restoration, or remodeling performed in connection with new construction is not taxable where the portion of the charge attributed to that work is 5.0 percent or less of the overall lump-sum charge. Incidental remodeling on a genuinely new build does not drag the job into taxability.
Above that threshold, the obligation flips. Where the remodeling portion exceeds five percent of a single lump-sum charge, the parties must separately identify the taxable and nontaxable labor along with the charges that apply to each. If they do not, the entire contract is presumed to be for repair, restoration, and remodeling, and is taxable.
Read that consequence carefully, because it is the most expensive sentence in this article. The default is not a reasonable apportionment. It is the whole contract, treated as taxable remodeling. It is a presumption rather than a permanent verdict, and documentation can still be produced to displace it, but you are then arguing from behind with records assembled after the fact instead of simply showing what the contract already said.
One detail cuts the other way and catches people who think the five percent rule protects them. All separately stated charges for repair, restoration, remodeling, or other taxable services are taxable even where they come to 5.0 percent or less of the total contract price. The relief applies to minor work folded into a lump sum, not to work you itemised. Change orders deserve their own attention for the same reason: a job that begins comfortably under five percent can be pushed over the line by later variations, and the allocation has to be re-tested and the paperwork updated when that happens rather than at the end of the job.
What the rule accepts as documentation
- Both parties must retain documentation that clearly defines the work performed, showing that if the new construction and the remodeling had been done independently, the charge for each would reasonably approximate the amount allocated
- Named as acceptable: written contracts detailing the scope of work, bid sheets, tally sheets, schedules of values, and blueprints
- Where no written contract clearly shows agreement on the taxable and nontaxable work, the customer and the service provider must prepare a written certification verifying the allocation
- The retention duty sits on both parties, not on whichever one still has the file
That list is worth treating as a checklist rather than as examples, because it tells you exactly what a reviewer will accept. Every item on it is a document that exists naturally during a job and disappears naturally after it, unless somebody files it deliberately.
What your books have to show, either way
Every classification in this article is a decision made once and defended later. Texas requires sales and use tax records to be retained for at least four years, and those records have to show gross receipts, taxable labor and services, taxable purchases, and support for any deduction or exclusion you claimed.
That last clause is the one that turns a tax question into a bookkeeping question. Claiming a job was new construction is claiming an exclusion. The claim is only as good as the documentation sitting behind it, and that documentation is built while the job is live, not assembled under time pressure years afterwards.
In practice, a file that survives review has the same handful of things in it for every job: the contract showing the scope and the split, the invoices matching that split, the permits, and enough of a description that somebody who was never on site can tell what physically changed about the building. Our record retention guide sets out how long each of these has to be kept.
This is the part AliCat Solutions actually does. The classification belongs to the Comptroller’s rules and to your CPA. Setting your books up so that each job carries its own evidence, and so that a quarter’s taxable labor can be produced as a report rather than reconstructed invoice by invoice, is bookkeeping, and it is the difference between a review that is a document request and a review that is an investigation.
If any of this is already behind you and the jobs are closed without the paperwork, that is a cleanup rather than a loss. Our bookkeeping cleanup and catch-up service exists for exactly this: going back through closed work, reconstructing what the records should have carried, and getting the file into a state where the next four years are defensible.
One honest limit on everything above. This covers the ordinary residential, nonresidential, new construction and maintenance positions that most Central Texas contractors meet. Texas also runs specific regimes that can change the answer entirely, including work for exempt entities, repair labor after a declared natural disaster, property on a historic register, and increased-capacity work in petrochemical refineries and chemical plants. If your job touches any of those, treat this guide as background and take the specific question to the Comptroller or your CPA.
Questions Texas contractors ask about this
Q: Is labor taxable on a residential remodel in Texas?
A: No. Labor to repair, remodel, or restore residential real property is not taxable in Texas. Residential real property means family dwellings, and the definition includes apartment complexes, nursing homes, condominiums, and retirement homes. The property does not have to be the owner’s own residence, so rental houses are covered. It does not include hotels or residential properties rented for periods of less than 30 days. On residential work you are treated as a contractor, and the tax question moves to how your materials are handled, which depends on whether you are working under a lump-sum or a separated contract.
Q: Is finishing out an office suite new construction or remodeling?
A: It turns on whether it is the INITIAL finish-out of that space. The initial finish-out of a floor in a building where only the lower floors have been finished and occupied is new construction, because it is the first finish-out of that space. Finishing out an area that was previously used as storage is remodeling, because the square footage already existed and was already in use. And a later finish-out of space that has already been finished once is remodeling too, even if nobody ever moved in. The test is not how new the result looks; it is whether the work added usable square footage or was the first finish-out of a new improvement.
Q: What happens if one contract covers both new construction and remodeling?
A: On nonresidential property, where a combined contract contains more than five percent repair, restoration, or remodeling, the taxable and nontaxable labor and their charges must be separately identified. If they are not separately identified, the entire contract is presumed taxable, which is a far worse outcome than an apportionment. Both parties are required to retain records of the allocation. The practical move is to write the split into the contract at the start, carry it through to the invoice so both documents agree, and keep the working that justifies it.
Q: How long do I need to keep the records that prove a job’s classification?
A: Texas sales and use tax records must be kept for at least four years. They need to show gross receipts, taxable labor and services, taxable purchases, and support for any deduction or exclusion claimed. Treating a new-construction classification as an exclusion you will one day have to evidence is the right mental model: the contract, the invoices, the permits, and a description of what physically changed about the building all belong in the job file while the job is live.
Q: Who decides whether a specific job is taxable?
A: The Comptroller’s rules decide it, and your CPA advises on how they apply to a specific contract. A bookkeeper does not make that call and should not offer to. What a bookkeeper does is make sure the decision is recorded at the time, that the job file holds the evidence behind it, and that your accounting file can report taxable and nontaxable labor without anyone going invoice by invoice. If a job is genuinely borderline, the Comptroller’s guidance points you to calling them directly, particularly on multiple-use property.
Where the bookkeeping side of this sits
AliCat Solutions handles the bookkeeping side of Texas sales tax for contractors and service businesses across Cedar Park, Round Rock, Leander, Georgetown, and the wider Austin metro. That means job-level records that hold their classification, filings that go in on time, and books your CPA can work from. Our sales tax and compliance service covers calculation, filing and remittance, multi-jurisdiction tracking, and documentation support if a review ever lands.
Citations
- Real Property Repair and Remodeling (Texas Comptroller of Public Accounts, publication 94-116). The Comptroller’s own statement of the rule: labor to repair, remodel, or restore residential real property is not taxable, while the total amount charged for the same work on nonresidential real property is taxable, including costs passed on to the customer except separately stated building permit fees. https://comptroller.texas.gov/taxes/publications/94-116.php
- 34 Tex. Admin. Code section 3.291, Contractors. The rule that defines new construction, including initial finish-out and the addition of new usable square footage, and states that reallocating existing square footage inside a building is remodeling. It also defines lump-sum and separated contracts. https://www.law.cornell.edu/regulations/texas/34-Tex-Admin-Code-SS-3-291
- 34 Tex. Admin. Code section 3.357, Nonresidential Real Property Repair, Remodeling, and Restoration. The rule governing mixed contracts: minor repair or remodeling done in connection with new construction is not taxable at 5.0 percent or less of a lump-sum charge; above that the parties must separately identify taxable and nontaxable labor or the entire contract is presumed taxable; separately stated taxable charges are taxable regardless. It also names the acceptable documentation, requires both parties to retain it, and sets the mixed residential and commercial rule. https://www.law.cornell.edu/regulations/texas/34-Tex-Admin-Code-SS-3-357
- Texas Sales and Use Tax Frequently Asked Questions, Keeping Records (Texas Comptroller of Public Accounts). The record retention requirement: sales and use tax records must be kept for at least four years and must show gross receipts, taxable labor and services, taxable purchases, and support for claimed deductions or exclusions. https://comptroller.texas.gov/taxes/sales/faq/records.php
- Taxable Services (Texas Comptroller of Public Accounts, publication 96-259). Confirms that the repair, restoration, or remodeling of nonresidential real property does not include the addition of new usable square footage or scheduled and periodic maintenance. https://comptroller.texas.gov/taxes/publications/96-259.php
Related reading
- Do I need to collect sales tax as a Texas contractor?
- How do I track job costs in a construction business?
- Why does my construction business show profit on paper but run short on cash?
- How long do I need to keep business records?
- Texas sales tax and compliance services
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About the author: Alicia Hoffman, CPA is the founder of AliCat Solutions. A CPA since 1996 with two decades in corporate finance, mostly at Dell, and a BBA from Texas A&M, she built AliCat to bring corporate-grade bookkeeping discipline to small service businesses across Central Texas, backed by a written 3-Point Guarantee.
