Texas Letter Ruling 9209439L: Change Orders To Contracts — Rule Amendment — Being Applied Prospectively To Contracts Executed On And After 7/23/92

Subject

Change Orders To Contracts — Rule Amendment — Being Applied Prospectively To Contracts Executed On And After 7/23/92

Plain-English summary

This is a September 16, 1992 notice from the Texas Comptroller's Tax Administration Division to a trade association, telling the association's members that the agency has changed its position on how Rule 3.291(b)(5) applies to construction "change orders."

Under the original position, subsection (b)(5) applied to all change orders issued on or after July 23, 1992, no matter when the underlying contract was signed. Under the new position, the rule is applied prospectively based on the date of the original contract: change orders issued under a contract signed before July 23, 1992 keep the character of that original contract, regardless of the form of the change order.

Practically, this means a change order issued under a contract signed before July 23, 1992 can still be treated on a stand-alone basis — as its own separated contract — as long as the change order is identifiable from the original contract. The letter gives an example: if the original contract is lump sum and the change order is separated out, the change order is treated as a separated contract on its own. Under a separated change order, the contractor may buy incorporated materials for resale and resell them to the customer, and if the customer is exempt, the contractor can accept an exemption certificate instead of paying tax on those materials. The letter also notes that equipment purchased or rented for use under a change order issued after August 14, 1991 became taxable on October 1, 1991, and that consumables remain governed by Rule 3.291(a)(2) and (b)(2).

The Comptroller explains the change was made to stay more consistent with the agency's earlier verbal and written explanations about change orders, and to reduce confusion for the industry. The letter is explicit that this new position affects only Rule 3.291(b)(5) and does not change any other positions taken under that rule. The letter also asks the association to notify its membership of the change, indicating this same notice (or a version of it) went out to trade associations more broadly, not just to one company.

What this means for you

Contractors and construction companies

If you perform work under a construction contract signed before July 23, 1992 and later issue a change order on or after that date, the change order is no longer automatically pulled under the newer (b)(5) treatment just because of its own date. Instead, look at when the original contract was signed. If that original contract predates July 23, 1992, and the change order can be identified separately from it (for example, the original contract is lump sum but the change order itself is separated out), you can treat that change order as a stand-alone, separated contract.

Contractors buying materials and equipment

Where a change order qualifies for stand-alone/separated treatment, incorporated materials can be purchased for resale and resold to the customer, and an exemption certificate can be accepted in lieu of tax if the customer is exempt. Note the letter's separate reminder: equipment purchased or rented for use under a change order issued after August 14, 1991 became taxable starting October 1, 1991, and consumables are still governed by Rule 3.291(a)(2) and (b)(2) — those pieces are unaffected by this change.

Trade associations and their members

The letter is addressed to an association and specifically thanks it for helping notify its membership, indicating the Comptroller was routing this policy change through industry associations so it would reach contractors broadly, not just the original recipient.

Accountants and tax professionals

When advising a construction client on a change order issued on or after July 23, 1992, don't assume the change order automatically falls under the post-7/23/92 (b)(5) treatment. Check the date of the original contract first. If it predates July 23, 1992, and the change order is identifiable from the original contract, stand-alone/separated treatment is available. This only affects Rule 3.291(b)(5) — the letter says explicitly that no other positions under that rule are altered.

Common questions

Q: What changed under this notice?
A: The Comptroller now applies Rule 3.291(b)(5) based on the date of the original contract, not the date of the change order itself. Previously, all change orders issued on or after July 23, 1992 were treated the same way regardless of the original contract's date.

Q: Can a change order issued after July 23, 1992 still get separated/stand-alone treatment?
A: Yes, if it is issued under a contract that was signed before July 23, 1992 and the change order is identifiable from that original contract (for example, where the original contract is lump sum but the change order is separated out).

Q: Does this change anything about equipment or consumables?
A: No new change there. The letter simply restates that equipment purchased or rented for use under a change order issued after August 14, 1991 became taxable on October 1, 1991, and that consumables are subject to Rule 3.291(a)(2) and (b)(2).

Q: Does this notice change any other part of Rule 3.291(b)(5) or the rule generally?
A: No. The letter states this new position and explanation relates only to Rule 3.291(b)(5) and does not alter any other positions taken in relation to that rule.

Q: Who received this letter?
A: It was sent to a trade association, with a request that the association notify its membership — so it was meant to reach contractors industry-wide, not just one taxpayer.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.291(b)(5) (change orders to construction contracts — the rule whose application is being clarified/changed in this letter)
• 34 Tex. Admin. Code Rule 3.291(a)(2) and (b)(2) (consumables used in performing contracts, referenced as unaffected by this change)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209439L

Original ruling text

September 16, 1992

Dear **:

I am writing to notify your association that this agency has altered it's
position on change orders. Thank you for your assistance in notifying your
membership.

Initially, subsection(b)(5) applied to all change orders issued on or after
July 23, 1992, regardless of the date of the original contract. Now,
subsection(b)(5) is being applied prospectively to change orders issued
pursuant to contracts executed on or after July 23, 1992. Change orders issued
pursuant to such contracts will take on the same character as the original
contract regardless of the form of the change order.

So, a change order issued pursuant to an original contract signed before July
23, 1992, may be treated on a stand alone basis when the change order is
identifiable from the original contract. This means when the original contract
is lump sum, and the change order is separated, then the change order will be
treated on a stand alone basis as a separated contract. Please see the other
examples in (b)(5).

Under such a separated change order, the incorporated materials may be
purchased for resale by the contractor and resold to the customer. If the
customer is an exempt entity, an exemption certificate may be accepted in lieu
of tax on the incorporated materials. Equipment purchased or rented for use
under a change order issued after August 14, 1991, became taxable on October 1,
1991. Consumables are subject to the provisions of Rule 3.291(a)(2) and
(b)(2).

By looking at the date of the original contract rather than the date of the
change order, we feel we are staying more in line with our previous verbal and
written explanations regarding change orders. We also hope this will be less
confusing for your industry.

This new position and explanation relates only to the provisions of Rule
3.291(b)(5). It does not alter any other positions taken in relation to this
rule.

You may also write to Tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division