A homeowners' association contracted for three subdivision entrance signs; the contractor's proposals and invoices bundled labor and materials into one lump-sum price and charged sales tax on top. Are the sign sale/installation charges lump-sum contracts, and is sales tax properly due on the invoices as billed?

Plain-English summary

A homeowners' association contracted for the construction and installation of three subdivision entrance signs, submitting the contractor's two proposals, three city building permits, and three invoices — all of which showed a sales tax charge. The taxpayer asked (1) whether the proposals were "lump-sum contracts," and (2) whether sales tax was actually due on any of the invoiced charges.

The Comptroller held that the sale and installation of the sign posts qualify as improvements to realty, and that the contractor's proposals and invoices here were lump-sum (one combined amount for both labor and materials). Under a lump-sum contract to improve realty, the contractor — not the customer — is treated as the consumer of the materials incorporated into the improvement, and the contractor may not collect sales tax from the customer on a lump-sum improvement-to-realty charge. Since these invoices charged sales tax anyway, that tax was collected in error, and the taxpayer can recover it by: (1) requesting a refund directly from the vendor, (2) taking a credit on a current sales tax return, or (3) requesting a refund directly from the state (with documentation including the vendor's name and permit number, the reason and amount for the refund, the local taxing jurisdiction(s), and a copy of the invoice or contract, mailed to the Comptroller's Credit Verifications/Revenue Accounting office).

The letter also notes the contrast: under a separated contract instead, the contractor is treated as a retailer and MUST collect tax from the customer on the agreed price for materials. Either way, a separately stated, dollar-for-dollar reimbursement for a city building permit fee is not taxable.

What this means for you

Homeowners' associations and property owners contracting for sign installation or similar realty improvements

If your contract is lump-sum (one price for labor and materials combined), the contractor shouldn't be charging you sales tax at all on that improvement — the contractor is the one who owes tax on the materials it buys, not you. If your invoices show tax anyway, you likely have a refund claim through the vendor, a credit on a return, or a direct state refund request.

Contractors installing signs or other improvements to realty

Structure your billing carefully: a lump-sum contract makes YOU the taxable consumer of materials (you don't collect from the customer), while a separated contract makes you a retailer who MUST collect tax from the customer on the materials price. Charging tax to the customer under a lump-sum contract is a billing error that can trigger a refund claim.

Accountants and tax professionals

This is a clean illustration of the standard lump-sum-vs-separated improvement-to-realty framework, with a concrete three-track refund procedure (vendor refund, return credit, or direct state refund with specific documentation) for tax collected in error on a lump-sum contract.

Common questions

Q: Can a contractor collect sales tax from the customer on a lump-sum contract to improve realty?
A: No — under a lump-sum contract, the contractor is the consumer of the materials and may not collect tax from the customer on that charge.

Q: What if the contractor charged tax anyway on a lump-sum improvement-to-realty invoice?
A: The customer can seek a refund three ways: directly from the vendor, as a credit on a current sales tax return, or directly from the state (with supporting documentation).

Q: How is a separated contract different?
A: Under a separated contract, the contractor is treated as a retailer and must collect tax from the customer based on the agreed price for the materials.

Q: Is a separately stated reimbursement for a city building permit fee taxable?
A: No, as long as it's a dollar-for-dollar reimbursement, separately stated on the invoice.

Q: Can I rely on this letter for my own sign-installation or realty-improvement contract?
A: No. This opinion is based on the facts presented, and other facts, though similar, may provide a different result; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific statutes or rule numbers were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200001968L

Original ruling text

January 12, 2000

Dear **:

This is in response to your letter request concerning the construction of (3)
subdivision signs for the entrances into your subdivision, **
(HOMES). You provide copies of the contractor's two proposals, the three city
building permits, and three invoices from the contractor. You asked the
following questions:

1) Are the proposals "lump-sum contracts"?

2) All three invoices show a charge for sales tax. Is sales tax applicable on
any of the services shown on the invoices?

Response: The sale and installation of the sign posts qualify as improvements
to realty. The proposals submitted by the contractor and accepted by HOMES are
lump-sum (one amount for both labor and materials) as are the invoices that you
provided. Under a lump-sum contract to improve realty, the contractor is
considered the consumer of all materials incorporated into the realty being
improved. The contractor may not collect tax from his customer on a lump-sum
improvement to realty. If you paid sales tax in error to a vendor you may
recover the tax in the following manner:

1. Request a refund directly from the vendor.

2. Take a credit on a current return.

3. Request a refund directly from the state. Documentation should include the
   name of the vendor and the vendor's sales tax permit number, reason and amount
   on which a refund is sought, local taxing jurisdiction(s) where local taxes
   were reported to and a copy of the invoice or contract. Refund requests should
   be mailed to the following address:

Comptroller of Public Accounts
Credit Verifications/Revenue Accounting
P. O. Box 13528
Austin, TX 78711-3528

Under a separated contract the contractor is considered a retailer and must
collect tax from the customer based on the agreed on price for the materials. A
separately stated reimbursement (dollar for dollar) by the contractor for a
city building permit fee is not taxable.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division