Texas Sales And Use Tax Rules For Construction-Related Services

The Texas sales and use tax rules surrounding contractors and other construction-related work are incredibly complex. Additionally, the rules are structured to have broad application and thus impact many industries, including general construction, oil and gas related services, demolition, and more. The application of these rules is a fact-intensive undertaking and should be performed on a case-by-case basis, but I have outlined a basic overview of these rules below.

What is a “Contractor”?

The Texas Comptroller defines a “contractor” as a person who performs one or more of the following real property improvements and who, in making the improvement, incorporates tangible personal property into the real property being improved: [1]

“New Construction”

Building new improvements to residential or nonresidential real property; or
Completing any part of an uncompleted new structure that is an improvement to residential or nonresidential real property
“Scheduled and Periodic Maintenance”
Making improvements to real property as part of periodic and scheduled maintenance of nonresidential real property [2]
“Residential Repair & Remodel”
Repair, restoration, maintenance, or remodeling of residential real property
Work performed by a “contractor” also specifically includes the initial finish-out work to the interior or exterior of an improvement to real property [3], and the addition of new usable square footage to an existing building. [4]

Is Work Performed By a “Contractor” Subject to Sales Tax?
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Employee Exits: Texas Non-Compete Agreements In Post-Employment Disputes

In a recent post, I addressed the applicable framework under Texas law when employees not subject to non-compete agreements leave a job to compete with a former employer. This article addresses Texas law on non-compete covenants and its impact on potential disputes when covered employees exit and work in competitive roles.

Employers and employees alike have legitimate interests in these circumstances. Employers have an interest in protecting their investment in competitive information and knowledge held by the employee. On the flipside, exiting employees have a legitimate interest in earning a livelihood—and sometimes their only viable alternative might require a competitive role.

Recent Regulatory Scrutiny of Non-Compete Agreements

Because non-compete agreements can be used abusively, negatively impacting employees and burdening the free market, legislators and regulators have widely acted to restrain freedom of contract in connection with their use. A prospective federal regulatory proposal may soon eliminate their use in employment relationships nationwide.[i] But for the time being, Texas employers and employees would do well to familiarize themselves with the framework described below.

How Can Non-Compete Agreements Restrain Competition from Employees?

The “teeth” that compel compliance with covenants not to compete are (1) damage awards and (2) injunctive relief. Additionally, requests for injunctive relief to enforce non-compete covenants benefit from a special rule: the proponent need only show a substantial breach of a covenant for entitlement to a permanent injunction. See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 795 (Tex. App.–Houston [1st Dist.] 2001, no pet.) (holding that a showing of irreparable harm was not necessary to support the lower court’s issuance of a permanent injunction); but see Argo Grp. US, Inc. v. Levinson, 468 S.W.3d 698, 702 (Tex. App.—San Antonio 2015, no pet.) (holding that a plaintiff seeking a temporary injunction under Tex. Bus. Com. Code § 15.51 must show a probable, imminent, and irreparable injury in the interim before trial); Primary Health Physicians, P.A. v. Sarver, 390 S.W.3d 662, 664–65 (Tex. App.–Dallas 2012, no pet.) (same). This significantly relaxes the proof required to support a permanent injunction.[ii]

These enforcement mechanisms drastically alter the legal framework governing relationships between employees and their former employers. Unless they are restrained voluntarily by agreement, former employees have a common law right to compete. Consequently, unless a non-compete agreement applies, in typical cases courts will not issue an injunction to restrain competitive conduct by a former employee post-exit. For the same reason, damage awards are not available in these circumstances unless the competing former employee’s pre-exit conduct breached a fiduciary duty or misappropriated a trade secret.
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Texas Sales And Use Tax Treatment of Software And Computer Programs

The function and utility of computers has changed and evolved at an exponential rate over the last several years, and will likely continue to do so, particularly as advancements like artificial intelligence become integrated in more industries. Unsurprisingly, current Texas sales and use tax authority surrounding the use of computers is complex and can create problems for taxpayers who provide computer programs and software, and perform related services. The following types of transactions involving software and computer programs are discussed briefly below:

Sale of a computer program to a customer;
Providing “contract programming” services; and
Providing repair, maintenance, and restoration services for a computer program
Sales of Computer Programs or Software

Comptroller Rule 3.308(c)(1) provides that “[t]he sale, lease, or license of a computer program is a sale of tangible personal property. Tax is due when the computer program, or a license to use the computer program, is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media.” [1] This stems from the Comptroller’s treatment of software as “tangible personal property”, the sale of which is generally taxable in Texas. [2]
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Texas Sales And Use Tax Implications Of Oil And Gas Well Servicing

In certain circumstances, services performed on oil and gas wells or related equipment may be subject to Texas sales or use tax. The taxability of these services is fraught with complexity, but is discussed briefly below.

General Taxability

At a high level, services performed on oil and gas wells are generally subject to tax as either (i) commercial repair and remodeling services (i.e., services performed on real property) or (ii) repair, remodeling, or maintenance of tangible personal property (i.e., services performed on portions of the well or related equipment). [1]

Nontaxable Services

Comptroller Rule § 3.324 carves out certain services as specifically nontaxable. This Rule lays out two general categories of nontaxable services.

First, no Texas sales or use tax is due on “[t]he labor to perform those services subject to the 2.42% oil well service tax imposed under Tax Code, Chapter 191”. [2] In this context, Chapter 191 applies “oil well services” which are defined to include:
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Rentals Versus Services Under Texas Sales And Use Tax

One of the thorniest issues in Texas sales and use tax is the distinction between the rental of tangible personal property (which is subject to tax) and the provision of a service (which is only taxable if the service is taxable). This distinction not only affects the taxability of charges for the rental or service but also that of equipment that is purchased to provide the rental or service.

What’s a Rental?

The rental of tangible personal property in Texas is subject to sales or use tax.[1] A rental occurs when possession but not title to tangible personal property is transferred for consideration.[2] A person acquires possession of tangible personal property when that person acquires operational control over that property.[3] Operational control, in turn, means that the customer can use, control, or operate the tangible personal property.[4]

What are Taxable Services?

Only the following services are subject to Texas sales or use tax:
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Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Howdy folks, and welcome back to another edition of the Texas Tax Roundup, where we gab about all things Texas tax and perhaps even some things Texas tax adjacent. As ole T.S. once put it, “April is the cruelest month” [1]—although maybe not for the same reasons he had. Because instead of “breeding lilacs out of the dead land”[2] or some such, which implies at least a glimmer of hope (although that might be why he thought it was so cruel, him being a bit of a downer, you know), April 2023 showered us with a string of taxpayer defeats, the one bright spot being a smackdown on a plea to the jurisdiction by the Texas Comptroller.

Court Opinions
Franchise Tax
Plea to the Jurisdiction/Total Revenue

Hibernia Energy, LLC v. Hegar, No. 03-21-00527-CV (Tex. App.—Austin Apr. 21, 2023, no pet. h.)—The Texas Third Court of Appeals affirmed the trial court’s judgment denying the Comptroller’s plea to the jurisdiction but also denying a taxpayer’s/consultant’s claim for refund for franchise taxes attributable to the inclusion in total revenue of gains from the sale of oil-and-gas leasehold interests.

The taxpayer, a limited liability company, acquired oil-and-gas leasehold interests in 2010, and then sold these interests in 2012 and 2014 at a gain of $95,866,370 and $296,691,853 for each year respectively. The taxpayer included these gains in its total revenue for purposes of determining its franchise tax liability for the respective franchise tax report years and paid the taxes.

In 2015, the taxpayer hired a consultant that filed a refund claim on the taxpayer’s behalf for the franchise taxes paid that were attributable to these gains.[3] The reason given for why the taxpayer was entitled to a refund was that it had overstated total revenue by including gains whose inclusion was not required under applicable law.

A limited liability company by default is treated as a partnership for federal income tax purposes.[4] A partnership is required to file a Form 1065, U.S. Return of Partnership Income to “report the income, gains, losses, deductions, credits, and other information about the operation of the partnership.”[5]

Under the Texas franchise tax, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is calculated by first adding up the amounts reportable as income on various lines on the entity’s Form 1065:
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Texas Mixed Beverage Taxes

The state of Texas imposes two taxes on alcoholic beverages that impact holders of certain permits under the Texas Alcoholic Beverage Code. These taxes are the mixed beverage gross receipts tax and the mixed beverage sales tax. Both are set forth in Texas Tax Code, Chapter 183 (“Chapter 183”) and Texas Comptroller Rule 3.1001 (“Rule 3.1001”).[1]

Who’s Subject to Mixed Beverage Taxes?

The folks who get hit with mixed beverage taxes (other than consumers) are what are called “permittees.” [2] Chapter 183 defines a “permittee” is defined as someone who holds one of the following permits under the Texas Alcoholic Beverage Code:

-a mixed beverage permit;
-a private club registration permit;
-a private club exemption certificate;
-a private club registration permit with a retailer late hours certificate;
-a nonprofit entity temporary event permit;
-a private club registration permittee holding a food and beverage certificate;
-a mixed beverage permit with a retailer late hours certificate;
-a mixed beverage permit with a food and beverage certificate; or
-a distiller’s and rectifier’s permit.[3]

What’s a Mixed Beverage?

Chapter 183 defines a “mixed beverage” as “a beverage composed in whole or part of an alcoholic beverage in a sealed or unsealed container of any legal size for consumption on the premises when served or sold by the holder of a mixed beverage permit, the holder of certain nonprofit entity temporary event permits, the holder of a private club registration permit, or the holder of certain retailer late hours certificates.”[4]

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Treasury Issues Proposed Regulations On IRS Appeals Procedures

Taxpayers routinely resolve their tax controversy matters without resort to litigation.  Indeed, good tax professionals will often seek to avoid costly and time-consuming litigation, if possible, by utilizing various administrative avenues within the IRS including the IRS Independent Office of Appeals (“IRS Appeals”).  Formed originally in 1927, IRS Appeals serves as a quasi-independent government agency staffed with the purpose of, among other things, resolving certain tax controversy matters in a manner fair to both the United States and the taxpayer.

However, IRS Appeals does not hear all tax controversy matters.  Rather, it has excepted from its jurisdiction certain tax matters which it feels are not within its scope of review.  Generally, this has been accomplished through a hodgepodge of administrative guidance, including publication in revenue procedures and the Internal Revenue Manual (“IRM”).

On July 1, 2019, Congress codified the objectives and purposes of IRS Appeals in the Taxpayer First Act of 2019, Pub. L. No. 116-25 (“2019 TFA”).  Thus, by statute, Congress provided that the IRS Appeals process “should be generally available to all taxpayers.”  See I.R.C. § 7803(e)(4).  Because the term “generally” denotes at least some type of exclusion, many taxpayers and tax professionals were left wondering how far the new statutory right extended.

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Texas: Administrative Judges Rulings On Tax Matters

Proposed Rules


34 Tex. Admin. Code § 3.9 (Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) (proposed at 47 Tex. Reg. 3106 (May 27, 2022))—The Texas Comptroller proposed amendments to this rule to address reporting requirements for distributors of certain off-highway vehicles that were added as a result of SB 586, 87th Leg., R.S. (2021).  Prior to SB 586, Tex. Tax Code § 151.482 (Reports by Manufacturers and Distributors) only required manufacturers of such vehicles to file reports with the Comptroller.  See HB 1543, 86th Leg., R.S. (2019).

Notable Additions to the State Automated Research System


Fraudulent Transfers

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A Win For Taxpayers—Section 6330(d)(1) Is A Nonjurisdictional Deadline

Collection Due Process Hearings And Jurisdiction

Collection Due Process (“CDP”) hearings are crucial to taxpayers. Taxpayers have a right to a Collection Due Process hearing with the IRS Independent Office of Appeals before levy action is taken. According to the IRS, a “CDP hearing is an opportunity to discuss alternatives to enforced collection and permits you to dispute the amount you owe if you have not had a prior opportunity to do so.”[1] When a taxpayer receives a notice of determination from IRS Appeals, the taxpayer has 30 days to petition the U.S. Tax Court. The U.S. Supreme Court in Boechler, P.C. v. Commissioner recently held that a Tax Court petition may still be considered by the Tax Court even if it is late. 

I.R.C. § 6330(d)(1) – Collection Due Process Hearings

The statute at issue in Boechler is Section 6330(d)(1). For reference, the statutory language is reproduced below:

(d) Proceeding after hearing.

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The Section 962 Election

For years, section 962 was a relatively obscure tax-planning mechanism.  The Tax Cuts & Jobs Act, however, changed that, pushing the so-called section 962 election into vogue. Section 962 allows an individual shareholder of a controlled foreign corporation to elect to be taxed as a domestic C corporation.  As a result, a taxpayer making a section 962 election would be taxed at a 21% rate on a controlled foreign corporation’s undistributed subpart F income and at favorable GILTI rates on GILTI inclusions from a CFC (inclusions related to global intangible low-taxed income).  The election may also entitle the individual to take advantage of a deemed-paid foreign tax credit under section 960.

In effect, section 962 creates an alternative tax regime applicable to individual U.S. shareholders investing abroad through CFCs.  The election is intended to put individuals who directly own foreign investments on even footing with individuals whose foreign investments are held through a domestic corporation.

What is a Section 962 Election?

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What Is A Grantor Trust?

Grantor Trusts

Under the Internal Revenue Code’s “grantor trust”[1] rules, the grantor of a trust may be treated as the “owner” of all or part of the trust.  As such, the grantor is taxed on the trust’s income and reports its deductions.  That is, trust income and deductions are attributed to the grantor as if he or she owned the trust or a portion of the trust.

If the grantor trust rules apply, the trust is not treated as a separate taxable entity for Federal income tax purposes—at least to the extent of the grantor’s interest.  Said another way, the provisions “look through” the trust form and treat the grantor and the trust as one and the same.

Generally, the grantor trust rules apply where the grantor has transferred property to a trust but has not given up sufficient dominion and control over the property or the income that it produces.

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