Sales tax on construction: one job, three states, three answers

Two identical bathrooms. One in an apartment, one in a hotel. In Texas one of them is taxable and the other is not — and the difference is not in the work, the materials or the price. It is in what the building is used for.

Sales tax on construction is not a rate problem. Rates are the easy part; a lookup solves them, and where the tax lands changes what belongs in the estimate before you bid: contractor estimate, from takeoff to a price that holds. The hard part is a set of legal characterizations that decide, before any rate is applied at all, whether the transaction is taxable, who is the taxable party, and whether the contractor is a seller of taxable services or a consumer of taxable materials. Those characterizations differ from state to state and often within a state.

This article takes two large construction markets with well-documented and genuinely different systems — Texas and New York — and shows what each one actually asks. It is not a national guide, because there is no national answer — and the choice between them quietly resets your material cost on the job: job costing for contractors, five buckets and the burden.

Texas: the property decides, then the contract decides

The Texas Comptroller draws the first line by property type:

• Residential real property: "Labor to repair, remodel, or restore residential real property is not taxable." The Comptroller includes family dwellings, apartments, nursing homes, condominiums and retirement homes, and excludes hotels and short-term rentals under thirty days.
• Nonresidential real property: work on hospitals, offices, refineries, warehouses and commercial establishments is subject to tax on the full amount charged.

The second line is new construction versus remodeling. Construction labor on a new structure is not taxable. But when one contract mixes new construction with nonresidential remodeling, the Comptroller applies a threshold: where the remodeling exceeds 5 percent of the total charge, the entire charge is presumed taxable unless the contractor is "separately stat[ing] to the customer a reasonable charge for the taxable services" at the time of the transaction.

Read that last clause as a document requirement, because that is what it is. The escape from a presumption of full taxability is a line on the invoice, written at the time — not a spreadsheet assembled during an audit two years later.

The third line is the contract form:

Neither is "better". They are different cash-flow and documentation profiles, and choosing one implicitly by how you happen to write invoices is the failure mode.

The governing rules are Rule 3.291 (Contractors) and Rule 3.357 (Real Property Repair, Remodeling, and Restoration), covered in full in Texas sales tax: home repair labor untaxed, office repair taxed.

New York: three tests, one form, and materials that stay taxable

New York frames the question as capital improvement versus repair and maintenance. A capital improvement must meet all three of the following:

1. "It substantially adds to the value of the real property, or appreciably prolongs the useful life"
2. "It becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage"
3. "It is intended to become a permanent installation"

If the work qualifies, the contractor does not collect sales tax on the charge for the project. If it does not — "fixing a broken step or repainting" is the department's own example — the work is taxable and the contractor collects.

Two things follow that surprise contractors coming from other states.

The certificate is not optional in practice. The contractor should obtain Form ST-124, the Certificate of Capital Improvement, from the customer. It is the document that protects the contractor from liability for uncollected tax. Doing genuinely qualifying work without holding the certificate leaves you exposed on audit with nothing to show.

Materials remain taxable to you. Building materials purchased for capital improvement work are taxable to the contractor, "whether the contractor or property owner makes the purchase", and a resale certificate cannot be used for them. The sales tax you paid on materials for an exempt job is a business cost — which means it has to be inside the price you quoted, or you have eaten it.

That last point is where the money is. A contractor who bids a capital improvement in New York at material cost plus markup, without the sales tax that will be paid on those materials, has bid the job short by the tax rate on the material portion. On a $60,000 job with $34,000 of materials that is not a rounding error.

The two states next to each other

The two states do not merely have different rates. They ask different first questions, and a business that carries a mental model from one state into the other will get the characterization wrong before it ever reaches a rate.

What this means for how you write an invoice

Three practical consequences, all of them about documents rather than tax law.

Separate labor from materials, always. In Texas a separated contract requires it; in New York it determines what tax you absorbed; everywhere it is what makes an audit survivable. A single line reading "bathroom remodel — $18,400" contains no information at all about a tax position.

State taxable services separately at the time of the transaction. The Texas 5 percent rule is explicit that the separately stated reasonable charge must be made to the customer at the time, not reconstructed. An invoice that cannot show it, cannot use it.

Keep the customer's certificate with the job, not with the accountant. An ST-124 that exists but cannot be produced during an audit has the same value as one that was never collected.

Rates: the part that is not the hard part

Every state that levies sales tax sets its own rate, and in most of them local jurisdictions add their own on top — state, county, city and special districts, stacking additively on the same transaction. There are several thousand of these combinations across the country, and they change.

That is why a serious answer to "what rate do I charge" is never a table in an article. It is either a rate service, or your own determination for the jurisdictions you actually work in — recorded, with its components visible, so that an invoice shows why the rate is what it is.

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Current as of August 29, 2026. This article describes sales tax treatment of construction work in Texas and New York only, and is not tax advice. It does not cover the other states, local rate determination, use tax, exemption certificates for exempt organizations, or the treatment of equipment rental, fabrication and installation of tangible personal property. Sales tax rules and rates change; the material above is taken from the state publications linked in the sources, with the date they were checked. Confirm your position with a tax adviser or the state revenue department before relying on it.

What Zirko does: it puts individual positions with quantities and prices on a document, so labor and material stay separately visible instead of collapsing into one figure. In the United States the business enters its own tax rates — Zirko maintains no US rate table and suggests nothing, because a suggested rate would be tax advice we are not qualified to give. A rate can be recorded with its components (state, county, city) so the invoice shows how the total was reached, and an invoice can be issued with no tax line at all — a separate state, not a zero-percent rate. Issued documents are immutable; a correction is a separate document.