How did Texas apply sales tax to an electrical subcontract containing both taxable remodeling and new construction?

Plain-English summary

An electrical subcontractor worked on a project containing both nonresidential remodeling and new construction. The Comptroller said the subcontractor's total charge for the remodeling portion was taxable, but it could accept a valid resale certificate if the general contractor rebilled that work as taxable remodeling services.

For new construction, the result depended on the contract form. Under a separated contract, the subcontractor was the retailer of incorporated materials and could accept a resale certificate when the general contractor also had a separated contract with its customer. Under a lump-sum contract, the subcontractor was the consumer and had to pay tax on materials and other taxable inputs.

The existing prior-contract exemption certificate did not create a general exemption for materials or services. It only provided specified, time-limited relief from the July 1990 state rate increase and certain new or increased local taxes.

What this means for you

Mixed real-property work needed separate documentation for remodeling and new construction. Resale certificates, refunds, and responsibility for tax turned on what work was performed, how it was rebilled, and whether each relevant contract was lump-sum or separated.

Common questions

Was the remodeling portion taxable? Yes. The total remodeling charge was taxable, although a valid resale certificate could be accepted when the general contractor resold it as taxable remodeling.

Could the subcontractor buy incorporated materials for resale? Yes for the circumstances described, including remodeling inputs and materials sold under qualifying separated-contract treatment.

What if the new-construction subcontract was lump-sum? The subcontractor was the consumer and owed tax on the materials, taxable services, and other taxable items it used.

Did the prior-contract certificate exempt all project purchases? No. The letter limited it to certain state and local tax-rate changes.

Citations and references

• Comptroller Rule 3.357, concerning real-property repair and remodeling.
• Comptroller Rule 3.291, concerning contractors and lump-sum or separated contracts.
• Comptroller Rules 3.285 and 3.325, concerning resale certificates and refunds.
• Comptroller Rule 3.319, concerning prior contracts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9008L1045B01

Original ruling text

August 31, 1990

Dear *****:

In your letter, you requested information regarding the taxability of materials
used in one of your company's contracts.

You state that your company is an electrical subcontractor for work on the
***** project. You enclosed a copy of a prior contract exemption
certificate issued to your company by the general contractor, ABC Company.

ABC Company also provided you with a copy of a memo (which you enclosed) which
outlines "the sales tax requirements for this project". The memo indicates that
** of ABC Company discussed the tax consequences of the project with
Al Van Allen of our Taxability Section who advised ** as follows:

1. The portions of the contract which qualify as "new construction" and the
   portions which qualify as "remodeling" as defined in the enclosed Comptroller's
   Rule 3.357 (Real Property Repair and Remodeling). The classifications presented
   in the memo are accurate.

2. The documentation requirements when new construction and remodeling are
   performed under the same contract. Each subcontract with a subcontractor
   involved in remodeling should state the dollar value of remodeling work and
   dollar value of material, equipment, skill, and labor for the new work. In
   general, these are similar to the documentation requirements for identification
   of new construction and remodeling outlined in Rule 3.357(b)(7).

3. ABC Company may issue a resale certificate to each subcontractor in lieu of
   tax on remodeling. ABC Company would then collect tax from ***** project
   on the total remodeling charges.

4. The increase in the state sales/use tax rate wouldn't apply if the general
   construction contract contained a provision dated no later than June 7, 1990,
   stating that the tax charged by ABC Company could not be increased as a result
   of the rate change. You should note that the increase in the state sales/use
   tax rate won't apply if the provision is dated no later than June 30, 1990
   (instead of June 7). You also state that, prior to the receipt of the
   "exemption certificate", your company paid tax on materials. Your company
   subsequently billed and received payment for the cost of the materials plus tax
   from ABC Company.

Your letterhead indicates that your company is a division of XYZ Company. Our
records indicate that XYZ Company. holds a sales tax permit under taxpayer
number *****.

First, your company's total charge to repair or remodel nonresidential real
property is taxable as indicated in Rule 3.357. Therefore, the total charge to
perform remodeling work on the real estate is taxable.

However, your company may accept a resale certificate from ABC Company in lieu
of tax on your remodeling charges if ABC Company rebills your services to
***** project as a part of taxable remodeling services [Rule
3.357(d)(2)]. In addition, your company may refund sales or use tax charged to
ABC Company on remodeling services purchased for resale. In this case, ABC
Company should issue a resale certificate to your company to obtain a refund of
the tax collected. Your company may then obtain a refund of the tax reported to
the state by following the procedures outlined in the enclosed Comptroller's
Rule 3.325 (Refunds, Interest and Payments Under Protest) and "Refund Procedure
for Tax Paid in Error to a Retailer".

In addition, your company may issue a resale certificate to your suppliers in
lieu of tax on materials incorporated into the customer's realty [Rule
3.357(d)(1)]. If your company paid tax on these materials, your company may
obtain a refund of the tax from your suppliers by issuing a resale certificate
to the suppliers as indicated in Rule 3.325 and "Refund Procedure for Tax Paid
in Error to a Retailer".

In either case, the resale certificate must be valid, properly completed, and
otherwise comply with the requirements of the enclosed Comptroller's Rule 3.285
(Resale Certificate; Sales for Resale). I have also enclosed a Texas Sales Tax
Resale Certificate which you may reproduce as needed. Your company should issue
the resale certificate under XYZ Company's tax permit number. You should note
that the prior contract exemption certificate issued to your company by ABC
Company doesn't exempt your company from charging or paying tax on materials
used in performing the work under the contract.

Second, your company is treated as a contractor for sales tax purposes when
your company improves real property that qualifies as "new construction" (see
Rule 3.357) or repairs or remodels residential real property. In particular,
your company is a contractor for sales and use tax purposes when improving real
property that qualifies as new construction on ***** project. As a
contractor, your company's tax responsibilities depend on whether the contract
between your company and ABC Company is a "lump-sum contract" or "separated
contract" as defined in the enclosed Comptroller's Rule 3.291 (Contractors).

If the contract between your company and the general contractor is a separated
contract, you are considered the retailer of all materials physically
incorporated into the realty. However, you may accept a valid, properly
completed resale certificate in lieu of sales or use tax on the materials
charged to ABC Company if the contractor has a separated contract with their
customer (I. e., ***** project).

If ABC Company doesn't issue a resale certificate, your company must collect
tax on all taxable charges (such as materials charges). Under these
circumstances, your company may accept the prior contract exemption certificate
in lieu of (1) the 1/4% increase in the state sales and use tax rate which was
effective July 1, 1990, and (2) any increase or imposition of city, county,
transit, and special purpose district taxes effective on or after May 10, 1990.
Any prior contract exemption from local sales and use tax imposition or rate
increases has a limited duration.

In either case, your company should issue a resale certificate to suppliers in
lieu of sales or use tax on materials incorporated into the customer's
(***** project) realty. Your company may also obtain a refund of any
taxes paid in error as previously indicated.

If the contract between your company and ABC Company is a lump-sum contract,
your company is considered the consumer of the materials incorporated into the
realty and other taxable items. In this case, your company must pay tax on the
materials, taxable services, and other taxable items. However, since you have a
prior contract exemption certificate from ABC Company, your company may issue a
prior contract exemption certificate in lieu of (1) the 1/4% increase in the
state sales and use tax rate which was effective July 1, 1990, and (2) any
increase or imposition of city, county, transit, and special purpose district
taxes effective on or after May 10, 1990. Again, the exemption from the
increase in local taxes has a limited duration as indicated above.

In any case, you should consult Rule 3.291 regarding the taxability of
supplies, equipment, and other tangible personal property used in performing
your contracts. Although equipment, supplies, etc. that your company uses on
the ***** project are taxable, these items are exempt from the state
sales and use tax rate increase effective July 1, 1990, on equipment, etc. used
in performing work under the contract (since the contract was in effect prior
to July 1, 1990).

Third, I have also enclosed Comptroller's Rule 3.319 (Prior Contracts) which
explains the requirements for the prior contract exemption. As I previously
indicated, the prior contract exemption certificate issued to your company by
ABC Company doesn't exempt your company from sales/use tax on materials, etc.
used on the ****** project. Instead, the certificate allows
your company certain limited exemptions from tax rate increases and local tax
imposition.

Finally, you should note that:

1. If a taxpayer is operating as a contractor for sales and use tax purposes
   under a separated contract, the contractor may issue a resale certificate to
   suppliersin lieu of tax on taxable services such as landscaping, surveying, and
   final clean-up if the services are billed separately to their customer and are
   billed for at least the cost to the contractor. However, the contractor must
   pay tax on items such as daily clean-up services, guard services, and
   telecommunications services.

2. A taxpayer performing taxable repair or remodeling services may issue a
   resale certificate in lieu of tax on taxable services which are an integral
   part of the taxable services rendered by the taxpayer [Rule 3.357(d)(2)].
   However, tax must be paid on taxable services that are used or consumed in
   performing the taxable repairing or remodeling services.

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

If you have any questions, please contact Tax Correspondence. You may call toll
free 1-800-252-5555, or our regular number is 512/463-4600. My extension is
3-4662. You may write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Correspondence