Can a designated Enterprise Project get a state sales/use tax refund on building materials where the tax was paid by its contractor under a cost-plus construction contract, if the invoices separately itemize the material cost and tax passed through to the client?

Plain-English summary

A tax professional wrote in on behalf of a client that qualifies for a refund under Texas's Enterprise Project program, which refunds the net state sales and use tax paid on purchases by a designated project. Rule 3.329(c)(3)(B) allows building materials used in construction to qualify for that refund, but Rule 3.329(c)(4) excludes tax paid by a contractor under a lump-sum contract. The client's contract was a cost-plus new-construction contract, and the contractor was paying tax on material purchases and then passing the material cost — plus the tax paid — through to the client at cost, with purchase invoices showing the tax attached to each billing. The requester argued that under Rule 3.291(a)(6) ("cost-plus contracts are generally regarded as separated contracts"), a separated contract makes the contractor a retailer of the materials it incorporates into the building, meaning the contractor isn't the end consumer — so the tax passed through should qualify for the Enterprise Project refund (and, separately, for a similar refund under the Property Tax Abatement Program).

The Comptroller pushed back on the framing: the word "generally" in Rule 3.291(a)(6) is there specifically because some cost-plus contracts are, in fact, lump-sum contracts — the cost-plus billing structure doesn't automatically make a contract "separated" for tax purposes. Without reviewing the actual contract and billings, the Comptroller couldn't say definitively which type this was. But the answer turned entirely on that classification: if the contract is lump-sum, the contractor is responsible for the tax and the Enterprise Project refund is unavailable — even though the contractor's invoices to the client identified the taxes paid line by line. Rule 3.329(c)(4) bars a refund for tax paid by a contractor under a lump-sum contract unless the contractor itself has been separately designated as an enterprise project.

What this means for you

Enterprise Project participants working with construction contractors

Don't assume a cost-plus contract automatically qualifies its contractor's tax payments for an Enterprise Project refund. The label "cost-plus" isn't determinative — what matters is whether the contract is genuinely lump-sum or separated under the Comptroller's rules, and only a separated contract's passed-through material tax is eligible.

Contractors on Enterprise Project jobs

Itemizing the sales tax you paid on material invoices, by itself, doesn't convert a lump-sum contract into a separated one for refund purposes. If your client is counting on an Enterprise Project refund for tax you pay on materials, confirm with them (and possibly the Comptroller) whether your specific contract terms qualify as separated.

Accountants and tax professionals

The Comptroller explicitly declined to rule in the abstract and required the actual contract and billing documents — a reminder that "cost-plus" and "separated" are related but not synonymous categories, and the Enterprise Project refund eligibility hinges on the real substance of the contract, not its billing method alone.

Common questions

Q: Does a cost-plus construction contract automatically count as a "separated" contract for Texas sales tax purposes?
A: Not automatically. Rule 3.291(a)(6) says cost-plus contracts are "generally" regarded as separated, but the Comptroller notes some cost-plus contracts are actually lump-sum contracts — the actual terms control.

Q: If our contractor's invoices show sales tax separately, does that guarantee our Enterprise Project refund eligibility?
A: No. Even with itemized tax shown on invoices, a genuinely lump-sum contract makes the refund unavailable under Rule 3.329(c)(4), regardless of how the billing displays the tax.

Q: Is there any way a lump-sum contractor's tax payments can qualify for an Enterprise Project refund?
A: Yes, if the contractor itself has been designated as an enterprise project — Rule 3.329(c)(4)'s exclusion has that specific carve-out.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.329(c)(3)(B) (Enterprise Projects — building materials used in construction qualify)
• 34 Tex. Admin. Code Rule 3.329(c)(4) (Enterprise Projects — no refund for tax paid by a lump-sum contractor, absent its own designation)
• 34 Tex. Admin. Code Rule 3.291(a)(6) (Contractors — cost-plus contracts generally, but not always, separated)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006399L

Original ruling text

June 12, 2000

via fax **

Dear **:

Thank you for your recent letter concerning enterprise projects. You state the
following:

We have a client that qualifies for a refund as an Enterprise Project. This
program allows refunds based on the net State sales and use tax paid on
purchases by the client. Rule 3.329 on Enterprise Projects states in Sec. (c)
(3) (B) that building materials used in construction qualifies. Sec. (c) (4)
states that tax paid by a contractor under a lump-sum contract does not
qualify.

The Contractors Rule 3.291 (a) (6) states that "cost-plus contracts are
generally regarded as separated contracts." Under a separated contract the
contractor is considered a retailer of all material physically incorporated
into the realty. The contractor is not the end consumer of materials under a
cost-plus separated contract, but is selling the incorporated materials to the
client.

In our case we have a cost-plus new construction contract where the contractor
is paying tax on the purchases and then passing through the material purchases
at cost together with the tax when billing the client. Copies of purchase
invoices with tax are included with all billings to the client to identify the
cost of material plus the tax paid by the client under the contract.

Since the sales tax is identified separately to the client and a retail sale
has been made by the contractor, it is our contention that this is a sale of
building materials used in construction on which the tax would qualify to be
included in the refund request.

The Property Tax Abatement Program under Tax Code - Chapter 111, also allows
refunds based on the net State sales and use tax paid on purchases by the
client. It is our contention that the above described tax payment under a
cost-plus contract would also qualify to be included in a refund request.

Response: You referred to Rule 3.291 (a)(6) stating "cost-plus contracts are
generally regarded as separated contracts." The word "generally" is there
because there have been cost plus contracts that are lump-sum contracts. Rule
3.329 (c) (3) (B) allows an exemption on building materials subject to the
limitations of paragraphs (c)(1),(2),(4),(5) and (6). Section (c)(4) states
that an enterprise project is not entitled to a refund for "any taxes paid by a
contractor under a lump-sum contract unless the contractor has received
designation as an enterprise project. I cannot answer your request without
reviewing the actual contract and billings. If the contract is lump sum, the
contractor is responsible for the tax and an enterprise project refund cannot
be made even if the contractor provides their invoices to the customer which
identify taxes paid.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division