Was a lump-sum architectural-model project a taxable sale of a model or a real-property construction service in Texas?

Plain-English summary

The Texas Comptroller said a lump-sum bid to construct an architectural model was a taxable sale of a fabricated product, not a nontaxable professional-service transaction or a real-property construction contract.

Sales tax applied to the model's sales price, including both materials and labor. Materials that became part of the model could and should be bought tax-free with a resale certificate.

The fact that the model maker used a lump-sum bid did not make it a “contractor” under the real-property rules. The letter said a contractor under Section 151.056(d) improves real estate and incorporates taxable items into that realty; the model maker instead manufactured a product for sale.

What this means for you

Architectural model makers

The historical taxable base included fabrication labor as part of the model's sales price.

Designers and prototype businesses

The body decided an architectural model only. It found no professional service for which the materials were merely incidental.

Accountants and tax professionals

Do not treat a lump-sum quote as a construction contract without a real-property improvement. Retain resale certificates for incorporated materials.

Common questions

Q: Was the model a taxable item?
A: Yes.

Q: Was fabrication labor included in the taxable sales price?
A: Yes.

Q: Could incorporated materials be bought tax-free?
A: Yes, with a resale certificate.

Q: Did a lump-sum bid make the model maker a real-property contractor?
A: No.

Citations and references

• Tex. Tax Code Ann. § 151.056(a) (as cited in the letter)
• Tex. Tax Code Ann. § 151.056(d) (the source renders the zero as the letter “O”)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8409L0594C01

Original ruling text

September 27, 1984

Dear **:

Thank you for your recent letter in regard to our recent September
4, 1984 telephone conversation concerning the taxability of the,
construction of an architectural model.

Your letter states:

I am contracted by an architect or developer to bid on the
construction of an architectural model. If I am the low bidder
then I purchase the materials for the project and pay sales tax
on those materials. (Those were my instructions from the
** Office.) All costs during the job are absorbed by
the lump sum bid and no individual invoices are billed.

The transaction between you and the architect or developer is for
the production of an architectural model (a taxable item). The
sales tax law imposes sales tax on the sales price of a taxable
item. The sales price of the taxable item includes the cost of
materials and labor; however, you are allowed to (and should)
purchase the materials which become a part of the model tax free
by issuing a resale certificate.

The transaction does not appear to require you to provide any
professional services whereby the materials would be transferred
as an incidental part of providing the services.

The sales tax law does allow a contractor to operate under a
lump-sum contract or billing. A Contractor operating under a
lump-sum contract or billing is the consumer of all materials
used in performing the contract. As the consumer, the lump-sum
contractor is required to pay sales tax on the materials when
purchased. The lump-sum contractor's payment of the sales tax
on the materials satisfies the sales tax liability. Tex. Tax
Code Ann. 151.056(a).

A contractor, as defined in the sales tax law, is a person who
makes an improvement on real estate and who, as a necessary or
incidental part of the service, incorporates taxable items into
the realty being improved. Tex. Tax Code Ann. SEC. 151.O56(d).

The sales tax law, as it applies to a contractor as defined in
the tales tax law does not apply to you. You are simply fabricating
or manufacturing a product for sale to your customer. The fact that
you make a lump-sum bid does not make you a contractor.

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

Please feel free to contact me if you have additional questions.
You may write me, call toll free 1-800-252-5555 from anywhere in
Texas or phone 512/475-1931.

Sincerely,

Eddie C. Washington
Tax Administration Division