Sales Tax State Activity Update - October 2004

Interior Design Services Taxable in Texas

In an administrative hearing the Texas Comptroller of Public Accounts ruled that design services were taxable.

The taxpayer was in the business of interior decorating and design. It located various household items and accessories for its customers, and sold them together with its design services. Upon audit the taxpayer was issued a deficiency notice, which included tax, penalty, and interest. The taxpayer and its clientele entered into a Letter Agreement. The relevant parts of the agreement are as follows:

• Hourly consulting charges will not be incurred if at least $35,000 of items are ordered for the home within six months from signing the agreement.
• If the agreement is terminated an hourly rate plus expenses will be charged.
• A 40% commission is payable to the taxpayer on the total cost of the items ordered including any labor charges incurred in obtaining the ordered items.
• The customer is responsible for all shipping charges, insurance charges, and taxes. The 40% commission is not calculated on the latter three items.

The tax deficiency was calculated on 40% of the sales price of the items sold by the taxpayer, and this was not disputed. Services performed by the taxpayer included planning, consultation, and design with the client, architects, and contractors. The taxpayer also supervised and scheduled construction activities. It arranged for the installation and deliveries of the items purchased by its clients. The design services related to both real and tangible property. The position taken by the taxpayer in this matter was that the design services were separately stated on the invoices, and these services were not enumerated as taxable under Section 151.0101, and therefore exempt.

The Administrative Law Judge (ALJ) hearing this case disagreed. The ALJ referred to multiple prior Comptroller Decisions all holding fees based on a percentage of tangible personal property were taxable. In addition, prior responses by the Comptroller’s Tax Policy Division on this subject held the taxability of interior design fees based on a percentage of the price. Also, the ALJ concluded that the fees were simply a markup since there was no evidence to the contrary, and clearly taxable under Section 151.007(a). In addition, it was also held that the 40% commission is taxable under Section 151.007(b) because they are rendered as part of the sale of tangible personal property.

(Texas Comptroller of Public Accounts Hearing No. 42165, Doc. 2004-14809 Release Date September 13, 2004)

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