You have heard the cliché that nothing in life is guaranteed except death and taxes. At least death does not get worse when the legislature meets! More than most businesses, our industry pays a substantial amount of property taxes! If your portfolio is like our company’s—insurance, payroll, mortgage, and taxes dominate our expenses. We know the property tax appraisal and appeal process, but what about sales taxes? When do we charge sales taxes? Are rents subject to sales taxes? This month’s article focuses on Texas rules and regulations regarding sales taxes.
Per usual, this article will provide you with resources and industry best practices to help you navigate the operational issues regarding Texas sales tax charges and collections. As always, this REDBOOK Blues article does not provide legal advice. If you need legal advice, contact one of AATC’s member attorneys (https://www.aatcnet.org/legal-services-program). AATC members are also encouraged to consult with a qualified tax attorney or accounting firm for all tax-related issues.
Like most residential rental property ownership and operational challenges, the TAA REDBOOK contains guidance on Texas sales taxes. Click on the following link to learn about the legal and operational issues concerning sales taxes https://www.taaredbookonline.org/business-practices/assumed-business-names/when-should-a-rental-housing-owner-or-property-management-company-collect-sales-tax
The following is a summary of the below article.
A. Rent – NO SALES TAX
In Texas, there is no sales tax on real estate rent! Also, there is no sales tax on charging extra rent for a ceiling fan, marble countertops, a better view, a unit closer to the pool, built-in appliances, etc. These amenities and extras are considered part of the rental of the real estate; therefore, they are not subject to sales tax.
Services that are sales taxable in Texas:
- Amusement services
- Cable television services
- Personal services, such as
- Dry cleaning, laundry, garment services
- Carpet and upholstery cleaning
- Motor vehicle parking and storage services
- Repair, remolding, maintenance, and restoration of tangible personal property
- telecommunications services;
- credit reporting services;
- debt collection services;
- insurance services;
- information services (20% exempt);
- real property services, which include:
- landscaping
- yard or lawn maintenance, including landscape maintenance.
- building and grounds cleaning, janitorial or custodian services
- structural pest control, and
- surveying of real property
- data processing services (20% exempt);
- real property repair and remodeling;
- security services;
- telephone answering services, and
- Internet access service (monthly $25 exemption)
B. Management Services
While “management services” in general are not expressly subject to sales tax, some aspects of management services are:
- data processing services (use of computers for record-keeping, reports, processing of statements);
- debt collection services (billing and collecting delinquent rents and other overdue sums owed to the owner);
- reproduction services (making copies of anything for the owner); and
- real property services.
The operational dilemma for AATC members is that when the above services are considered “alone,” they are subject to sales taxes.
The TAA REDBOOK states:
The Texas Comptroller’s Office presumes a single charge that is for both taxable and nontaxable services to be taxable and would require a management company to collect sales tax on the entire charge if the management company is selling any of the services listed above (data processing, debt collection, reproduction or real property services). Failure to collect and remit these sales taxes can result in a large sales tax deficiency and substantial penalties. (Remember that a rental housing owner and its management company are jointly and severally liable to pay unpaid sales taxes and penalties. (The Comptroller may collect taxes, penalties, and interest from the owner or the management company for prior years.)
A complete copy of the Comptroller’s rules regarding sales tax can be found at [https://comptroller.texas.gov/taxes/sales].
C. The 5% Rule
TAA played a major role in establishing what is commonly known as the “5% rule.” The TAA REDBOOK says, “If the portion of all taxable services provided by a management company to an owner does not exceed 5 percent of the total charge by the management company to that owner, no sales taxes are due on any taxable portions of the management fees to that owner. (This rule is applied on a per-invoice or per-bill basis and not on the basis of the total billings of the management company to all clients.)
D. Potential Sales Tax Eligible Items
AATC members need to pay close attention to potential sales tax liability for:
- Renting furniture to residents
- Renting washers/dryers to residents and
- Rental of parking spaces (covered, uncovered, reserved, assigned, etc.)
No one wants to pay more taxes than is absolutely necessary. Tax avoidance is an acceptable business practice. Tax evasion is the failure to pay taxes owed. AATC members operate in a complex sales tax environment. The TAA REDBOOK, along with competent tax attorneys and accountants, helps AATC members adhere to their sales tax obligations.
Nicole Zaitoon, Allied Property Management, is AATC’s 2023 Government Affairs Committee Chair and a member of AATC’s Board of Directors.
