Some states tax your labor, some do not, and several tax it on one job and not on the next one down the street. There is no national rule. Sales tax is set by each state, so the labor on the same home repair can be taxed in Seattle and untaxed in Houston.
What you can learn is the set of questions every state asks. Once you know them, your state’s guidance stops reading like a riddle, and you can tell which of your jobs need a closer look.
Question one: what did you work on
States sort work into two very different kinds of property.
Real property is land and anything built on it or attached to it so it becomes part of the building. The house, the ductwork inside the walls, a water heater piped in, a deck, a roof.
Tangible personal property is a movable thing. A garage door opener sitting on your bench, a pressure washer, a freestanding refrigerator.
The same trade can land on either side. A plumber replacing a faucet in a kitchen is working on real property. A handyman fixing a customer’s lawn mower in the shop is working on personal property. Many states tax these two very differently, so this is always the first thing to settle.
Where the line gets blurry
Some items sit in or on a building without becoming part of it. New York treats installing freestanding appliances, above ground pools, canvas awnings and weather stripping as taxable installation, because those items do not become part of the real property. California splits attached items into materials, which lose their identity in the building (lumber, plaster, paint, windows), and fixtures, which keep it (air conditioning units, furnaces, prefabricated cabinets). The contractor pays tax on materials as the consumer, but is treated as the retailer of fixtures and owes tax on their selling price.
Question two: what kind of work was it
For real property, many states draw at least one more line.
- New construction or improvement versus repair. Building something new, or adding something permanent, is often treated better than fixing what is already there. New York calls the first kind a capital improvement and does not tax it. Repairing a broken step or replacing a thermostat on a water heater is taxable repair work there.
- Residential versus commercial. Texas does not tax labor to repair or remodel a home, but taxes the total charge to repair or remodel an office, a restaurant or a warehouse.
- Repair versus maintenance. Texas treats scheduled, periodic work on property that is not broken as maintenance, and the labor for it is not taxable.
Question three: how did you bill it
This is the part most owners never hear about. How the invoice is written can change the tax.
States often care whether you gave one price for the whole job or stated materials and labor separately. In Texas, on residential work under a lump sum contract, you pay tax on your materials when you buy them and you do not charge the customer tax. Under a separated contract, you buy materials with a resale certificate, then collect tax from the customer on the materials charge, and the labor stays untaxed. Texas also says your materials charge must be at least what you paid for them.
California has a similar rule for repairs of personal property. Itemized repair labor is generally not taxable. But if the parts are worth more than 10 percent of the total charge, or you charge for them separately, you are the retailer of those parts and must show them separately on the invoice and collect tax on them.
Example: one Texas home repair billed two ways
Say a repair in a Texas house has $400 of materials, marked up, and $600 of labor. Use an example combined rate of 8 percent. Your real rate depends on the local taxes where the work is done.
| Lump sum, one price | Separated contract | |
|---|---|---|
| Invoice shows | $1,000 for the job | $400 materials, $600 labor |
| Tax on your materials purchase | You pay it at the supplier | None, resale certificate |
| Tax charged to the customer | $0 | $400 × 8% = $32 |
| Customer pays | $1,000 | $1,032 |
Both ways are allowed for residential work in Texas. The mistake to avoid is mixing them: buying materials tax free on a resale certificate and then billing a lump sum with no tax, so nobody pays tax on the materials. Pick one method per contract and make the invoice match it. The sales tax calculator will do the arithmetic for a single line if you want to check a total.
Four states, four different answers
These four show how wide the range is. They are examples, not a list of every state.
| Job | Washington | Texas | New York | California |
|---|---|---|---|---|
| Repair on a house | Taxable, labor included | Labor not taxable | Taxable, labor included | Labor not taxable |
| Same repair at a restaurant | Taxable, labor included | Taxable, total charge | Taxable, labor included | Labor not taxable |
| New permanent addition to a house, like a deck | Taxable, labor included | Labor not taxable | Not taxable as a capital improvement | Labor not taxable |
| Repairing an appliance brought to your shop | Taxable | Taxable | Taxable | Itemized labor generally not taxable, parts taxable |
In every “labor not taxable” cell, tax is still paid on the materials by someone, either you at the supplier or the customer on a separated bill.
Washington: taxes most of it
Washington treats construction for a property owner, residential or commercial, as a retail sale. The Department of Revenue says the taxable amount includes permits and other fees, labor, profit, materials and subcontractor charges, and the rate is the one where you do the work. Repairing personal property for others is on its list of taxable services too.
Texas: residential or not
Texas publication 94-116 is short and plain. Labor on residential real property, including apartments and nursing homes, is not taxable. The total charge on nonresidential repair and remodeling is taxable, except separately stated building permit fees. New construction labor is not taxable. Repairing personal property, appliance repair included, is a taxable service.
New York: improvement or repair
New York does not ask whether the building is a home or a store. It asks whether the work is a capital improvement, which means it meets all three tests: it adds real value or prolongs the property’s life, it is permanently affixed, and it is meant to stay. Building a deck or installing kitchen cabinets qualifies. Repairs and maintenance of real property and repairs of personal property are taxable services. The owner can give you Form ST-124 for improvement work, and accepting it relieves you of liability for the tax.
California: labor mostly untaxed, watch fixtures and parts
California considers construction contractors consumers of materials and retailers of fixtures. On a cost plus a fee contract, the separately stated fee is treated as nontaxable installation labor. For personal property, itemized repair labor is generally not taxable, with the 10 percent parts rule deciding who owes tax on the parts.
How to get a definite answer for your state
- Find your state’s contractor guide. Search your state’s department of revenue site for “contractors” or “construction”. A contractor guide is written for exactly this question, and it is the state’s own reading of its law.
- Sort your last month of jobs. For each one, write down real or personal property, new work or repair, and home or commercial. You will probably find two or three patterns that cover almost everything.
- Ask the department about the patterns you are unsure of. Put the question in writing, describe the job in plain words, and keep the reply with your records.
- Set up your invoices to match. Separate materials and labor on every invoice if your state rewards it, and keep tax on the lines that need it. Because the answer so often depends on the address, Foldrule keeps the tax setting on each property rather than on the client.
If you work in more than one state, or you do a lot of commercial remodeling, have an accountant who knows sales tax in your state look at your setup once. A wrong assumption about labor repeats on every invoice until someone catches it.
