When a contractor buys cabinets from a Texas manufacturer for drop-shipment to a construction site in a different Texas city, is the local sales tax rate based on the manufacturer's location or the job site's location?

Plain-English summary

A general contractor in a Texas metroplex ordered cabinets from a manufacturer in City A for a new construction project in City B, which had a different (higher, 7.25% vs. the manufacturer's 8.25%) local sales tax rate. The cabinets were drop-shipped directly to the City B job site. The Comptroller's phone line told the contractor the rate should be based on the point of delivery (City B); the manufacturer insisted the rate should be based on her own business location (City A, "point of shipment"). The contractor asked the Tax Policy Division to resolve the conflict.

The written answer: both were half-right, because the correct rate depends on the type of contract between the contractor and its own customer (not the type of transaction between the contractor and the cabinet manufacturer):

• Lump-sum contract (contractor's charge to its customer doesn't separately state labor vs. materials): the contractor is the consumer of the cabinets. As consumer, the contractor pays tax to its supplier (the manufacturer) based on the supplier's location — City A. This supports the manufacturer's position.
• Separated contract (labor separately stated from materials in the contractor's charge to its customer): the contractor is the retailer of the cabinets. As retailer, the contractor collects tax from its own customer based on the job site's local taxing jurisdiction — City B. This supports the point-of-delivery answer the contractor got on the phone. The contractor may issue a resale certificate to the manufacturer to buy the cabinets tax-free in this scenario, and the separately stated new-construction labor charge stays untaxed.

In both scenarios, the contractor still owes sales/use tax on consumable supplies and any equipment bought, leased, or rented for the job.

What this means for you

General contractors buying materials for out-of-city job sites

The applicable local tax rate on materials isn't a fixed "point of shipment" or "point of delivery" rule — it flips depending on whether your contract with your own customer is lump-sum or separated. Know your own contract structure before assuming which local rate applies.

Manufacturers and suppliers drop-shipping to contractor job sites

Whether you charge tax based on your own location depends on whether your contractor customer is buying as a consumer (lump-sum contract downstream) or as a reseller with a resale certificate (separated contract downstream) — ask which applies rather than assuming your own location always controls.

Accountants and tax professionals

This letter is a clean illustration that "point of shipment vs. point of delivery" is a false dichotomy for contractor materials purchases — the real driver is the lump-sum/separated contract classification between the contractor and its customer, which in turn determines the contractor's role (consumer vs. retailer) and therefore the sourcing rule.

Common questions

Q: Is the local sales tax rate on drop-shipped construction materials based on the supplier's location or the job site's location?
A: It depends on the contract type between the contractor and its own customer — supplier's location under a lump-sum contract, job site location under a separated contract.

Q: Can a contractor buy materials tax-free from an out-of-city supplier using a resale certificate?
A: Yes, under a separated contract, where the contractor is the retailer of the incorporated materials and collects tax from its own customer based on the job site's jurisdiction instead.

Q: Does the contract type change whether labor is taxable?
A: No — new construction labor is not taxable under either contract type; only the sourcing and collection mechanics for materials tax change.

Q: Can any contractor or manufacturer rely on this exact rate determination?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own contract type with a tax professional.

Citations and references

Publications referenced in the original letter:

• Comptroller Publication 94-116, "Real Property Repair and Remodeling" (new construction section)
• Comptroller Publication 94-105, "Guidelines for Collecting Local Sales and Use Tax"

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200010804L

Original ruling text

October 16, 2000

From: Emilio Lerma

To:

Subject: Sales Tax Help

Dear **:

I am responding to your e-mail inquiry regarding sales tax on cabinets.

You state that you are a general contractor ordering cabinets from a
manufacturer located in CITY A, Texas for a new construction project located in
CITY B, Texas. The cabinets will be dropped shipped to the construction site
in CITY B.

You contacted our office by phone and were informed that the applicable tax
rate is based on the point of delivery. The manufacturer states that tax rate
is based on his business location. You asked for the correct sales tax rate and
the applicable rule that deals with new construction projects.

You are considered a contractor if you affix a cabinet that becomes an
improvement to realty as part of the construction of new real property (i.e.,
new construction) or as part of the repair or remodeling of residential real
property. The type of contract between you and your customer determines who
pays tax on the materials and the applicable local tax rate.

Under a lump-sum contract, you are considered the consumer of all materials
incorporated into a customer's property. As a consumer, you (the contractor)
must pay tax to suppliers at the time the incorporated materials are purchased
based upon your supplier's location (CITY A, Texas). You will also pay sales
and use tax on consumable supplies and all equipment bought, leased, and rented
for use on the job. The lump sum charge to the customer is not taxable.

Under a separated contract, you are considered the retailer of all materials
physically incorporated into the realty. As a retailer, you must collect sales
tax from your customer based upon the agreed contract price of the incorporated
materials. The sales tax rate is based on the local taxing jurisdiction of the
job site (CITY B, Texas). The separately stated charge for new construction
labor is not taxable. You may issue a properly completed resale certificate to
your supplier to purchase the materials. Sales tax is due on consumable
supplies and all equipment bought, leased, or rented for use on the job.
Please refer to the section on new construction in our bulletin entitled Real
Property Repair and Remodeling publication number 94-116.

Please refer to our bulletin "Guidelines for Collecting Local Sales and Use
Tax" (94-105), for information on collecting local tax on taxable services. The
two bulletins referenced are available to view or down load at our web site
address .

This opinion is rendered based on the facts presented. Other facts, though
similar, may yield different results.

If you have any questions or require additional information, you may submit
inquiries to our tax help Internet address at , call
1-800-531-5441, extension 6-5809 or write to Tax Policy Division, Post Office
Box 13528, Austin, Texas 78711-3528.

Sincerely

Emilio S. Lerma
Tax Policy Division

Subject: Sales Tax Help!
Sender: **
To: "'[email protected]'"

To whom it may concern:

I need help getting a sales tax problem solved. Following is the chain of
events that has occurred:

I am a general contractor in the ** Metroplex. I am ordering
cabinets from a manufacturer in CITY A, Texas. My project (new construction)
is located in CITY B, Texas, which has a sales tax rate of 7.25%. I am
claiming that since the cabinets will be drop shipped to CITY B, Texas, the
applicable sales tax of 7.25% should be charged. I have contacted someone at
the Comptroller's Office before on the phone, and they told me that in a new
construction project, the applicable sales tax is based on the point of
delivery.

The cabinet manufacturer emphatically states that she must charge me 8.25%sales
tax. She claims that the Comptroller's Office has told her that because she is
located in CITY A, Texas, she must charge her local sales tax. If that is the
case, then the point of shipment would be the basis for sales tax. Which is
correct, point of delivery or point of shipment?

Obviously, we are at opposite ends of the spectrum on this decision. Could you
please respond via either e-mail or snail mail or facsimile. Also, could you
please show me where I can find the rules that deal with new construction
projects. I thank you in advance for your help.

Phone: **
Fax: **