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When a private equity firm, strategic acquirer, or SBA buyer signs a Letter of Intent to buy a $3M–$25M Texas contracting business (see our Verified Fact Sheet), their transaction tax CPA firm immediately pulls a 48-month sample of your closed commercial invoices, job descriptions, and sales-tax filings. Alongside requesting a Texas Comptroller Form 86-114 Certificate of No Tax Due, they test whether your bookkeeper accidentally applied new-construction tax rules to commercial remodeling and repair jobs.

1. The 4-Quadrant Texas Contractor Sales Tax Matrix (34 TAC § 3.291 vs. § 3.357)

Why do so many good Texas bookkeepers and CPAs get this wrong? Because in Texas, the tax rule changes across four variables: (1) Residential vs. Non-Residential (Commercial), (2) New Construction vs. Repair/Remodeling vs. Scheduled Maintenance, (3) Lump-Sum vs. Separated Contract, and (4) Direct Owner vs. Subcontract under a GC:

Texas Comptroller Sales Tax Rules for Contractors (34 TAC § 3.291 & § 3.357)
Texas Job Type & Admin Code Rule Lump-Sum Contract (One Combined Price) Separated Contract (Labor & Materials Broken Out) The Common Diligence Audit Trap
1. New Construction (Commercial or Residential) OR Any Residential Repair/Remodel
(34 TAC § 3.291)		 Contractor is the consumer: Pay 8.25% tax on materials at the supply house; charge $0 tax to the customer on the invoice. Contractor is a retailer of materials: Buy materials tax-free on a Resale Certificate; charge 8.25% tax on the separated material price only (labor is non-taxable). Writing a lump-sum contract with a tax-exempt school/church/hospital (under a lump-sum contract, you still owe tax on materials unless the contract is separated!).
2. Commercial (Non-Residential) Real Property Repair, Remodeling & Restoration
(34 TAC § 3.357(b)(2))		 100% TAXABLE (Labor + Materials): Buy incorporated materials tax-free on Resale; collect 8.25% sales tax from the customer on the entire lump-sum invoice. 100% TAXABLE (Labor + Materials): Collect 8.25% sales tax on both the separated labor charge AND the material charge. The #1 Deal Killer: Treating a commercial RTU change-out, tenant finish-out, roof replacement, or parking-lot overlay as a “lump-sum non-taxable” job and failing to collect 8.25% on labor.
3. Commercial Scheduled & Periodic Maintenance
(34 TAC § 3.357(d)(2))		 Labor is NON-TAXABLE: If performed on a pre-scheduled, periodic calendar to prevent failure (PM agreements), pay tax on consumable supplies and charge $0 tax on lump-sum PM fee. Buy incorporated parts on Resale; charge 8.25% on separated replacement parts; scheduled periodic maintenance labor remains non-taxable. Failing to separate non-taxable scheduled preventive maintenance from taxable emergency breakdown repair on the same commercial invoice.
4. Commercial Remodel Subcontract Under a General Contractor
(Form 01-339 Resale)		 Taxable in full UNLESS the GC gives you a signed, completed Texas Sales & Use Tax Resale Certificate (Form 01-339) stating the GC is collecting tax from the building owner. Same rule: without a signed Form 01-339 from the GC in your file, the Comptroller holds the subcontractor liable for 8.25% of the entire subcontract. Doing $3M/year of commercial TI remodel work for GCs with missing, unsigned, or incomplete Form 01-339 certificates in QuickBooks.

2. How a $2.5M Uncollected Commercial Remodel Exposure Freezes $350,000+ at Closing

Imagine a $9.0M Texas commercial HVAC, roofing, or electrical contractor where $1.5M/year of direct-to-building-owner commercial equipment retrofits or tenant-improvement remodels were billed on a lump-sum basis where the contractor paid tax on materials at the supply house ($45,000/yr) but did not collect 8.25% tax on the $950,000/yr of gross margin and labor.

Over Texas’s 4-year (48-month) statutory audit lookback period, that single bookkeeping error creates $313,500 in uncollected sales tax plus 10% penalty and statutory interest (~$385,000 total liability). When the buyer’s CPA firm spots this during our 60-item due diligence review, the buyer refuses to close unless $400,000 to $600,000 of your sale proceeds are locked inside a Special Tax Indemnification Escrow (separate from your standard Reps & Warranties escrow) for 2 to 4 years.

3. The 12-Month Pre-Sale Texas Sales Tax Cleanup Protocol

  1. Step 1: Run a 100% Audit of Your Commercial GC & Exempt-Entity Certificate Folder (Form 01-339).

    In a Texas Comptroller audit, you are only allowed 60 days after written notice to produce missing Resale or Exemption Certificates (`Form 01-339`), after which the Comptroller rejects any late certificates. Have your controller audit every commercial GC, municipality, school district, hospital, and industrial manufacturing client in your system 12 months before going to market so 100% of active `Form 01-339` PDFs are signed, dated, and attached to the customer master record.

  2. Step 2: Separate Invoice Item Codes for (A) New Construction, (B) Scheduled Maintenance, and (C) Commercial Repair/Remodeling.

    Never let a dispatcher or estimator use a generic “Commercial Labor & Materials” item code in `ServiceTitan`, `BuildOps`, or `QuickBooks`. Create distinct, locked tax-code templates for (1) Commercial New Construction / Addition of New Cubic Footage (`34 TAC § 3.291`), (2) Commercial Scheduled Periodic PM (`34 TAC § 3.357(d)` — citing the contract schedule), and (3) Commercial Non-Residential Repair & Remodeling (`8.25%` tax on total charge).

  3. Step 3: Use a Texas Comptroller Voluntary Disclosure Agreement (`VDA`) Before Going to Market If You Find a Historical Gap.

    If your pre-sale review uncovers uncollected commercial remodel tax, do not wait for a buyer’s QoE team to find it. Having your Texas salt/tax CPA initiate an anonymous Voluntary Disclosure Agreement (`VDA`) with the Texas Comptroller before you launch a sale process typically waives 100% of penalties, waives statutory interest, and lets you obtain a clean Form 86-114 Certificate of No Tax Due with zero buyer re-trading.

Frequently Asked Questions: Texas Contractor Remodeling vs. New Construction Sales Tax

Is labor taxable on a commercial remodeling or repair job in Texas?

Yes. Under 34 Texas Administrative Code § 3.357, the entire amount charged (both labor and materials) for repairing, remodeling, or restoring non-residential (commercial) real property in Texas is subject to state and local sales tax (typically 8.25%), regardless of whether the contract is lump-sum or separated—unless the work qualifies as new construction, scheduled periodic maintenance, or is performed for a tax-exempt entity with a valid Form 01-339.

What is the difference between non-taxable “Scheduled Maintenance” and taxable “Repair” on commercial property in Texas?

Under 34 TAC § 3.357(d)(2), scheduled, periodic maintenance on operational commercial equipment or real property (such as quarterly commercial HVAC filter/coil PMs or scheduled parking-lot sweeping/sealcoating on a fixed calendar before breakdown occurs) is not taxable on labor. By contrast, an on-call service dispatch to fix a broken compressor, leaking pipe, or damaged roof is a non-residential repair where 100% of labor and materials is taxable.

If we already paid sales tax on materials at the supply house on a commercial remodel job, can we take a credit when audited?

Yes. Under Texas Comptroller audit rules, if you erroneously treated a taxable commercial repair/remodel job as a lump-sum new-construction job and paid 8.25% tax on the materials at the supply house, your tax advisor can offset the tax paid on those incorporated materials against the assessment—leaving you liable only for the uncollected tax on the labor and gross-profit markup.

Why does a buyer care about our past Texas sales tax compliance if the deal is structured as an Asset Sale?

Because under Texas Tax Code § 111.020 (Successor Liability), purchasing the assets or business of a Texas company makes the buyer legally liable for up to 100% of the seller’s unpaid Texas sales and franchise taxes up to the purchase price unless the buyer withholds funds or receives an official Form 86-114 Certificate of No Tax Due from the Texas Comptroller.