Could change orders separate equipment sales from partially completed lump-sum real-property construction contracts for Texas sales-tax purposes?

Plain-English summary

A business had unfinished lump-sum contracts covering construction of an equipment-maintenance facility and delivery of equipment for use there. The owner and contractors wanted change orders that separated the equipment sale from the remaining real-property work.

The Comptroller said partially completed contracts could be changed from lump sum to separated, or equipment could be placed in a separate contract while the real-property work remained lump sum. Both contractor and client had to agree because the change shifted sales-tax responsibility.

The addendum had to separately state the equipment and every component of its purchase, sale, delivery, and installation. The submitted change order also needed a statement that the itemized invoices became part of the contract and were incorporated by reference.

With that addition, the contractors could give suppliers resale certificates for the separately stated equipment and then collect the appropriate tax from the owners.

What this means for you

A change order could alter sales-tax treatment before contract completion, but it needed to be a real bilateral contract amendment with complete equipment pricing and incorporated invoices—not merely an after-the-fact invoice split.

Common questions

Could the parties amend a partially completed lump-sum contract? Yes.

Did both sides have to agree? Yes.

What had to be separated? All equipment purchase, sale, delivery, and installation components.

What wording was missing from the submitted change order? A statement incorporating the invoices into the contract by reference.

Citations and references

The letter did not identify a numbered statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1119B01

Original ruling text

July 8, 1991

Dear **:

Your letter to John Christian concerning change orders to lump-sum
contracts was forwarded to me for response.

As I understand, your client entered into lump-sum contracts for
the construction of a facility for equipment maintenance to be
used by your client in one of its businesses. The contracts also
required the contractors to deliver the equipment for use in the
facility. As of the date of your request, performance of the
contracts has not been completed and the contracts have not been
cancelled or terminated.

Your client and the contractors desire to amend each of the
contracts by executing change orders to each of the contracts for
the purpose of segregating the terms and conditions governing the
sale and delivery of the equipment by the contracts from the
terms and conditions governing the performance of the remaining
provisions of the contracts. You asked that the change orders be
considered separate contracts for the sale of tangible personal
property (equipment) rather than a lump-sum or separated contract
for the improvement to realty.

Change orders can be made to those contracts which are partially
completed to change a contract from lump sum to separated, or to
separate out the furnishing of equipment (tangible personal
property) into a separate contract from the improvement to realty
which remains a lump-sum contract. Such changes must be agreed to
by both the contractor and its client because of the change in
sales tax responsibility. The addendum must separate the charges
for the equipment and all components applicable to the equipment
purchase, sale, delivery, and installation from the charge for the
improvement to realty.

The change order that you sent identifies the personal property
(equipment) and provides that the owner shall pay the contractor
"the purchase price for each item of the equipment upon receipt
thereof together with any applicable sales tax. At the time of
delivery of an item of Equipment, (the Contractor) shall deliver
to (Owner) an invoice which references this Change Order and sets
forth the charges for the item of Equipment, including all
components applicable to the item of Equipment and charges for
delivery or installation."

The change order will change the lump-sum contract to a separated
contract for purposes of the equipment if you will add a statement
to the above-quoted language that "The invoices will become a part
of the contract and are incorporated by reference."

The Contractors may issue resale certificates to their suppliers
in lieu of tax on the equipment separately stated in the change
orders. The Contractors must then collect the appropriate tax
from the Owners.

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 additional information, you may
call toll free 1-800-252-5555 or the regular number 512/463-4600.
My extension is 3-4666. You may write to Tax Administration
Division.

Sincerely,

Jo Ann Dieck
Tax Administration Division