Texas Letter Ruling 9209467L: Chamber Of Commerce — Contract From 10/1/91 — 10/1/93 To Build Building To Be Donated To City

Subject

Chamber Of Commerce — Contract From 10/1/91 — 10/1/93 To Build Building To Be Donated To City

Plain-English summary

The Comptroller answered questions from a Chamber of Commerce (CC) that had contracted to build a building it would later donate to the City. The CC hired a contract manager to oversee the job (but not to act as general contractor) and contracted directly with several prime contractors for the major parts of the work. The CC required all bids and billing to use "separated contracts" (which state materials and labor separately) and required contractors to follow the Comptroller's contractor rule for exempt customers. The CC also issued an exemption certificate to each contractor and checked that payment requests broke out exempt materials from other materials, labor, and overhead.

The Comptroller first corrected two things in the facts as submitted: the statute cited for the CC's exempt status was assumed to be a typo for Texas Tax Code Section 151.310(a)(5), and the contractor rule (Rule 3.291) had since been revised, so some of the specific subsections the CC cited no longer applied in the same way — the relevant provisions were now sections (b) and (e), covering contracts to improve realty for exempt organizations like qualifying chambers of commerce (rather than the old, broader "exempt customers" language, which was now limited to school districts and certain hospitals).

On the substance, the Comptroller ruled:

1. Resale certificates for materials: Prime contractors (and their separated subcontractors) working directly for an exempt organization under separated new-construction contracts may issue resale certificates to their suppliers instead of paying tax on materials that will be permanently built into the real property. They still must pay tax on equipment (rented or purchased) and on materials or supplies used or consumed during construction, subject to a limited exception for certain "consumables."

2. Exemption certificate from the CC: New construction labor is never taxed, so no exemption certificate is needed for labor. Because the CC qualified as an exempt entity, it could issue a properly completed exemption certificate in lieu of tax on the incorporated materials sold to it under a separated new-construction contract. The CC should give its certificate to each prime contractor, and each contractor/subcontractor down the chain should pass along a valid resale certificate for incorporated materials.

3. CC's liability if a contractor doesn't actually comply: As long as the CC had qualified as exempt with the agency's Exempt Organization Section and had issued properly completed, valid exemption certificates to its prime contractors, the CC would not be held liable for tax owed by the prime contractors or subcontractors — even if a contractor represented compliance with the rules but did not actually comply.

The Comptroller closed by clarifying that the CC owes the contractors no tax as long as proper exemption certificates are issued, the separated contractors may use resale certificates for incorporated materials, and the contractors themselves owe tax on equipment and consumables used on the job (unless a specific rule exception applies). The ruling notes it is based on the facts presented and could change if the facts differ.

What this means for you

Chambers of commerce and other exempt organizations building or donating a building

If your organization qualifies as tax-exempt and structures its construction job as a separated contract, you can issue an exemption certificate to your prime contractors to avoid paying sales tax on materials that get permanently incorporated into the building. Confirm your exempt status with the Comptroller's Exempt Organization Section first, and keep your exemption certificates properly completed — that paperwork is what protects you from being held responsible for tax a contractor fails to pay, even if that contractor misrepresented its own compliance.

General contractors and subcontractors

On a separated new-construction contract for an exempt organization, you and your subcontractors can pass resale certificates down the chain in lieu of tax on materials that will become part of the real property. But tax is still owed on equipment (whether rented or purchased) and on materials/supplies that are used or consumed during the job rather than incorporated into the building — items like foundation forms or saw blades — unless a specific consumables exception applies.

Accountants and tax professionals

This ruling illustrates how the Comptroller treats "separated contracts" under (what was then) Rule 3.291 for exempt-organization construction jobs, including the CC's use of exemption and resale certificates and the allocation of tax liability between the exempt owner and its contractors. Note that the ruling itself flags that Rule 3.291 had already been revised by the time of the letter, narrowing which subsections applied — always check the current version of the rule rather than relying on the specific subsection numbers cited in a 1992 letter.

Common questions

Q: Can a contractor avoid paying sales tax on materials for this job?
A: Yes, for materials that will be permanently incorporated into the real property. Prime contractors and their separated subcontractors working directly for the exempt Chamber of Commerce under separated new-construction contracts may issue resale certificates to their suppliers instead of paying tax on those materials. Tax is still owed on equipment and on materials or supplies that are used or consumed (not incorporated) during construction, with a limited consumables exception.

Q: Does the Chamber of Commerce need to give each contractor an exemption certificate?
A: Yes, to cover materials. New construction labor isn't taxed at all, so no certificate is needed for labor. But because the CC qualified as an exempt entity, it should issue a properly completed exemption certificate to each prime contractor in lieu of tax on incorporated materials; each contractor then passes a resale certificate down to its own subcontractors and suppliers.

Q: If a contractor claims to follow the rules but actually doesn't, is the Chamber on the hook for the unpaid tax?
A: No. As long as the CC had qualified as an exempt entity with the Comptroller's Exempt Organization Section and had issued properly completed, valid exemption certificates to its prime contractors, the CC is not liable for tax owed by the prime contractors or subcontractors, even if a contractor misrepresented its compliance.

Q: Does this ruling apply if the facts are different from what's described here?
A: No. The Comptroller states the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.310(a)(5) (the Comptroller notes the CC's cited "Section 151.10(5)" appears to be a typo for this provision, governing exempt organizations)
• 34 Tex. Admin. Code Rule 3.291 — Contractors (specifically subsections (a)(2), (a)(5), (a)(6), (b), (b)(2), (b)(4), (c), and (e), as referenced in the letter; the letter notes Rule 3.291 had been revised since the taxpayer's original request)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209467L

Original ruling text

September 24, 1992

Dear **:

I am responding to your letter questioning the application of sales or use tax
to the construction of a building by a Chamber of Commerce. Your facts are
restated below.

1. A Chamber of Commerce (CC) contracts to build a building that, after
   completion, will be donated to the City.

2. CC employs a contract manager to oversee construction, but not to serve as
   general contractor.

3. CC contracts with various prime contractors for major components of the
   construction work.

4. CC specifies that all bids - and all invoicing as work is done be done in
   the form of "separated Contracts" as defined in Comptroller's Rule 3.291(a)
   (5). It further specifies that the contractors must comply with Comptroller's
   Rule 3.291(c) - Tax Responsibilities of Contractors Improving Real Property for
   Exempt Customers.

5. CC issues an exemption certificate to each contractor.

6. CC verifies that as contractors submit requests for payment during
   construction, those requests break out materials qualifying for exemption from
   sales tax, other materials, labor, and overhead.

7. CC is an organization described in Texas Tax Code Section 151.10(5).

First of all, I presume that Fact 7 contains a typo and is referring to Texas
Tax Code Section 151.310(a) (5). secondly, Rule 3.291 has been revised, copy
enclosed. Fact 4 should be changed to section (a) (6) for the definition of a
separated contract. Section (c) no longer applies to "exempt customers" in
general; this section is now limited to school districts and certain hospitals.
Sections (b) and (e) apply to contracts to improve realty for other exempt
organizations, including chambers of commerce that qualify for exemption. Also,
as long as the controlling contract separately states an amount for materials
to be incorporated (incorporated materials) from an amount for skill and labor
as required in Rule 3.291(a) (6) and (b) (4), the progress billings referenced
in Fact 6, may be lump-sum or separated.

Now, to address your specific questions:

1. Is it proper for the contractors to issue resale certificates to their
   suppliers and not pay sales tax on the purchase of materials to be used in this
   job (excluding personal property that will be consumed but will not become part
   of the real property, such as foundation forms, saw blades, etc.)?

RESPONSE: Prime contractors (and their separated subcontractors) who are
contracted directly with an exempt organization through separated new
construction contracts may issue resale certificates to their suppliers in lieu
of tax on materials that will be permanently incorporated into the realty.
Contractors and subcontractors must pay tax on equipment (rented or purchased)
and on materials or supplies used or consumed during construction. There is an
exception for "consumables" when specific conditions are met. Please Rule
3.291(a) (2) and (b)(2).

2. Is it proper for CC to issue an exemption certificate to each contractor and
   not pay sales tax on any part of the construction materials or labor?

RESPONSE: New construction labor is not taxed. An exemption certificate is not
required for new construction labor.

Based upon your statement that the CC qualifies as an exempt entity, the CC may
issue a properly completed exemption certificate in lieu of tax on incorporated
materials sold to the CC under a separated new construction contract. The CC
should issue its exemption certificate to each prime contractor with whom the
CC is contracted. The prime contractor should issue a properly completed and
valid resale certificate in lieu of tax on incorporated materials to its
subcontractors; the subcontractors should, in turn, issue properly completed
and valid resale certificates in lieu of tax on incorporated materials to their
subcontractors and/or suppliers of incorporated materials.

3. If the contractor represents to CC that he has complied with the procedures
   described in Rule 3.291(c) but in fact that contractor does not comply, can CC
   be held responsible for sales tax?

RESPONSE: The sections of 3.291 that apply to this contract are now sections
(b) and (e). As long as the CC has qualified as an exempt entity with the
Exempt Organization Section of Tax Administration of this agency and the CC has
issued properly completed and valid exemption certificates in lieu of tax on
the incorporated materials to the prime contractors, the CC will not be held
liable for any tax owed by the prime contractors or subcontractors.

Your closing summation requires clarification. Based upon the facts you
presented, the CC does not owe the prime contractors any tax as long as the
proper exemption certificates are issued. Also, the separated contractors may
issue resale certificates in lieu of tax on incorporated materials. The
contractors owe tax on equipment and consumables [unless the conditions in Rule
3.291(b) (2) (B) apply] used in the performance of the contract.

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

Sincerely,

Tax Administration Division