Does the prior contract exemption from a state sales tax rate increase apply to a contract to simply buy electricity (or other goods), or only to a contract/bid to perform work for a third party?

Subject

Tax Rate Increase — Prior Contract Exemption Applies Only To Contracts/Bids To Perform A Contract With A Third Party, Not To A Mere Contract Of Sale

Plain-English summary

A company (Company A, writing on behalf of Company B) asked the Comptroller for a refund under the "prior contract exemption," arguing that Company B's contract to buy electricity from a supplier (Company C) was signed before a state sales and use tax rate increase took effect, so the higher rate shouldn't apply.

The Comptroller's Tax Policy Committee denied the refund. The prior contract exemption (originally written into Texas Tax Code § 151.051 and carried forward through later rate increases) only exempts taxable items purchased to perform a contract or bid with a third party — one that could not be changed or renegotiated because of the tax increase. It does not exempt a straightforward purchase contract between a buyer and its own supplier.

The Comptroller leaned on Texas Attorney General Opinion C-30 (1963), which concluded the exemption applies to a contract the purchaser makes to perform work for someone else, not to the seller-purchaser sale itself. The Texas Supreme Court later confirmed that reading in Calvert v. British-American Oil Producing Co. Because Company B's electricity contract with Company C was just a sale of electricity — with no third-party contract or bid behind it that was locked in and unable to be adjusted for the tax increase — the exemption did not apply, and the rate increase applied to the electricity purchases as normal.

What this means for you

Businesses that locked in supply contracts before a rate increase

Simply having signed a purchase contract (for electricity, materials, or other taxable items) before a sales tax rate increase does not, by itself, exempt you from the new rate. The exemption is aimed at contractors and bidders who are stuck performing a fixed-price contract for someone else and can't pass the tax increase on. If you're just buying goods or utilities for your own use under a supply agreement, expect the new rate to apply once it takes effect.

Contractors bidding on fixed-price jobs

If you submitted a bid or signed a contract with a third party before a rate increase, and that contract or bid could not be changed or modified because of the tax increase, your purchases of taxable items used to perform that contract may still qualify for the old rate. The key facts are: (1) a contract or bid to perform work for someone else, and (2) no ability to adjust price because of the tax change.

Accountants and tax professionals

This ruling is a useful reminder that the "prior contract exemption" language attached to Texas sales tax rate increases has a narrow, well-established meaning going back to the 1961 enactment of the sales tax law, reinforced by AG Opinion C-30 (1963) and Calvert v. British-American Oil Producing Co. (Tex. 1965). Advise clients that a "prior contract" defense requires a fixed third-party performance contract, not merely an early-signed procurement or supply agreement.

Common questions

Q: My company signed a contract to buy electricity before the tax rate went up. Does the old, lower rate still apply?
A: Not under this ruling. A plain contract to purchase electricity (or other taxable goods/services) from a seller is a "mere contract of sale" and does not qualify for the prior contract exemption, even if signed before the rate increase.

Q: What kind of contract does qualify for the prior contract exemption?
A: Only a contract or bid in which the purchaser agreed to perform a contract for a third party, where that contract or bid could not be changed or modified because of the tax rate increase, and the taxable items were used to perform that contract.

Q: What is the legal basis for limiting the exemption this way?
A: Texas Attorney General Opinion C-30 (March 6, 1963) concluded the exemption doesn't cover a mere sale contract, only a purchaser's contract to perform work for a third party. The Texas Supreme Court upheld that interpretation in Calvert v. British-American Oil Producing Co., 397 S.W.2d 389 (Tex. 1965).

Q: Does this exemption language only apply to one specific tax rate increase?
A: No. The letter notes this same prior contract exemption language has appeared, virtually unchanged, since the sales and use tax law was first enacted in 1961, and in each subsequent rate-increase statute.

Q: Can I rely on this letter for my own situation?
A: This is a STAR-published letter ruling. Under 34 Tex. Admin. Code Rules 3.1 and 3.10, it can only be relied on for detrimental-reliance purposes by the taxpayer it was issued to, and it may not reflect current Comptroller policy. Consult a Texas tax professional about your specific facts.

Citations and references

• Texas Tax Code § 151.051 (Vernon's Supplement), legislative notes — text of the prior contract exemption
• Attorney General Opinion C-30 (Mar. 6, 1963) — exemption applies to purchaser's contract to perform work for a third party, not to a mere sale contract
• Calvert v. British-American Oil Producing Co., 397 S.W.2d 389 (Tex. 1965) — Texas Supreme Court decision validating AG Opinion C-30

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9208L1186G03

Original ruling text

August 20, 1992

Dear *****:

Thank you for your letters of June 25, 1992, and July 30, 1992, concerning the
prior contract exemption and refund requested by COMPANY A for COMPANY B.

COMPANY B purchased electricity from COMPANY C under a contract that was
executed before increases in the state sales and use tax rate. Our Tax Policy
Committee reviewed this complex issue and decided that these type contracts do
not qualify for the prior contract exemption.

The prior contract exemption found in the legislative notes under Texas Tax
Code 151.051 (Vernon's Supplement) reads as follows:

There are exempted from the increase in the rate of the limited sales, excise,
excise, and use tax made by this Act the receipts from the sale, use, or rental
and the storage, use, or consumption in this state of taxable items if the
items are used for the performance of a contract entered into before the
effective date of this Act, and the contract is not subject to change or
modification because of the tax rate increase made by this Act... (Emphasis
added.)

This prior contract exemption language is virtually identical to the prior
contract exemption provided when the sales and use tax law as enacted in 1961,
and in the prior contract exemption provisions for subsequent increases in the
state sales and use tax rate.

The Attorney General issued Attorney General Opinion C-30 March 6, 1963 in
response to an inquiry as to whether the prior contract exemption as written
exempted both the seller and purchaser or consumer from the imposition of the
tax. The Attorney General concluded that the prior contract exemption did not
apply to a mere contract of sale of tangible personal property, but only to a
contract made by the purchaser to be used for the performance of a contract.

The Texas Supreme Court validated Attorney General Opinion C-30 in its decision
in Calvert vs. British-American Oil Producing Co., 397 S.W. 2d 389 (Tex. 1965).

In order for your client's purchases of electricity to qualify for the prior
contract exemption, your client must have entered a contract or submitted a bid
to perform a contract with a third party. The contract or bid could not be
changed or modified by reason of the sales and use tax rate increase. This is
not the case under this contract.

The contract in question is a mere contract of sale that does not qualify as a
prior contract.

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

You may call toll free 1-800-252-5555 if you have any questions or need more
information. You may write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division