Were liquidated-damage fees paid to a delayed granite fabricator included in the Texas sales-tax price of the granite?

Plain-English summary

A contractor subcontracted to furnish and install granite for a high-rise office building. Its third-party fabricator and supplier received liquidated-damage fees after delays involving delivery of materials.

The Comptroller treated the damage fees as part of the granite's sales price. Because the contractor bought the granite for resale, it incurred no tax at that purchase point.

If the materials price agreed with the customer was less than the contractor's supplier cost including the damage fees, however, the contractor owed tax on the difference. Section 151.056(b) used the greater of the customer contract price or the materials price to the contractor.

What this means for you

Calling the added payment “liquidated damages” did not keep it outside material cost. The contractor's ultimate tax exposure depended on comparing the two prices specified by the statute.

Common questions

Were the damage fees part of the granite's sales price? Yes.

Was tax due when the contractor bought for resale? No.

When did the contractor owe additional tax? When supplier cost including damage fees exceeded the materials price agreed with the customer.

What amount did the statute use? The greater of the two material prices.

Citations and references

• Tex. Tax Code § 151.056(b) — tax applies to the greater of the customer contract price for materials or the materials price to the contractor.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8706L0823A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller June 22, 1987

Dear **:

Thank you for your letter concerning the taxability of liquidated damage
fees
paid to a third party fabricator.

Situation:

** has awarded a subcontract to a local vendor to furnish and
install granite for a high rise office building. The subcontractor has
entered in a contract with a third party to fabricate and ship the
granite. Due to delays related to taking delivery of materials, the sup-
plier (third party fabricator) will be awarded liquidated damage fees.

(a) Based on the information mentioned above and the attachments, is
liquidated damage fees subject to sales/use tax.

Answer:

The liquidated damage fees are considered part of the sales price of the
granite. Since * is purchasing for resale, no tax liability is
incurred at
that time. However, if the agreed contract price for materials to your
customer is less than the price, including the damage fees, paid to the
supplier, **** will owe tax on the difference. Section 151.056(b)
states in
part, "...the tax rate is applied to the price of materials as agreed in
the
contract or the price of the materials to the contractor..., whichever is
the
greater.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
522/463-4600. You may write me at the Tax Administration Division.

Sincerely,
F. Wayne McDonald
Tax Assistance Section
Tax Administration Division