How did Texas sales tax apply when a contractor bought mixed-use inventory tax-free, used some materials in lump-sum real-property repairs, and later lost or had materials stolen?

Plain-English summary

The requester made both over-the-counter sales and lump-sum repairs and improvements to real property. Because it did not know at purchase whether an inventory item would be resold or used on a lump-sum job, it bought inventory with resale certificates and accrued tax when materials were used. The Comptroller said that method was acceptable if accurate inventory records were maintained.

Materials removed from inventory for a job did not escape tax merely because they were later lost or stolen. The contractor remained liable for tax on their purchase price.

The earlier letter in the same STAR record addressed service invoices for central air-conditioning and heating units. Where the customer received only a lump-sum bill and the labor/material split appeared only on the contractor's internal copy, the Comptroller treated the requester as a lump-sum contractor repairing real property. It had to pay tax when buying the materials and could not charge the customer tax on any part of the lump-sum bill.

Common questions

Could the contractor buy mixed-use inventory with a resale certificate? Yes, when it did not know whether an item would be resold or used in a lump-sum job, provided it kept accurate inventory records and accrued tax as items were used.

What if materials removed for a job were lost or stolen? The contractor still owed tax on their purchase price.

Could the contractor charge sales tax on a customer's lump-sum repair bill? No. On the stated invoice arrangement, it paid tax on the materials and did not charge the customer tax on any portion of the bill.

Citations and references

• 34 Tex. Admin. Code Rules 3.291 and 3.292 were enclosed with the August 12 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/8608L0750C04

Original ruling text

August 22, 1986

Dear ***:

Thank you for your follow-up letter stating that you do over-the-counter
sales as well as lump-sum repair and improvements to realty.

When I called you in response to this follow-up letter you said that when
you buy inventory, you do not know if it will be sold over-the-counter or
used in a lump-sum contract. You said that you issue a resale certificate in
lieu of tax to your suppliers and accrue tax as the inventory is used. This is
acceptable.

However, as we discussed, you must maintain accurate inventory records.
If inventory is lost or stolen after it has been removed for use on a job,
you will still be held liable for tax on its purchase price.

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 us if you have additional questions. You may
write us, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,

Tax Policy Section
Tax Administration Division

August 12, 1986

Dear ***:

Thank you for your recent letter which is restated with response below.

I am writing to get my new invoices checked for use on service work.

I was audited for sales tax in February of this year and at that time
I was billing all service material, tax and labor. I was told at that
time that if the customer did not get a break down of material and labor
that we only had to pay tax on the amount of material purchased for the
job. When our invoices came in I ask for a approval and our auditor said
that we must send it off for approval from CITY. Would you please do so
and return for our records. As you will see customer copy will only have
total cost.

Response: In our phone conversation you stated that you service only
central air conditioning and heating units and that for service work
the customer sees only the yellow second copy of the invoice. You also
stated that on your service work, you do not have contracts. The invoice
is a the controlling document. You stated that you separate the material
and labor charges on the "white original" copy for your internal record
keeping only but that the customer gets a lump sum billing.

Based on the above information you are acting as a lump sum contractor
repairing real property. You should pay tax on your materials at the
time of purchase. You will not charge tax to your customer on any
portion of the bill.

I am enclosing Rules 3.291 and 3.292 for your reference.

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

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write us at the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division