Texas Letter Ruling 9209L1195G12: Military Base — Federal Contract For Both New Construction And Repair/Remodeling Of Real Property

Subject

Military Base — Federal Contract For Both New Construction And Repair/Remodeling Of Real Property

Plain-English summary

The Texas Comptroller answered a contractor's question about how sales tax applies to a single contract with an Air Force base that covered both new construction (building new range buildings) and repair (repairing ranges) at a training facility. The contractor's letter showed a separated dollar amount for materials and for services under each job.

The Comptroller's answer has two parts:

1. Consumable materials, supplies, and equipment used to do the work — under either the repair portion or the new-construction portion — are taxable at the time the contractor buys or rents them. Neither a resale certificate nor an exemption certificate applies to these items. (There is a narrow exception for consumables used only in new construction, addressed by Rule 3.291(a)(2) and (b)(2), but the ruling does not spell out what that exception covers.)

2. Materials that get incorporated into the real property (the realty) are treated differently, and differently between the two contract types:

   • Under the repair portion, incorporated materials can be bought tax-free for resale — the contractor can give its subcontractors or suppliers a valid resale certificate for these materials.
   • Under the new-construction portion, incorporated materials can only be bought tax-free for resale if the contract itself separately states the agreed price for the incorporated materials apart from the agreed price for skill and labor. Just showing a separated dollar amount in a letter to the Comptroller isn't enough — the separation has to be in the contract.

The ruling also flags a special rule for combined contracts: if a single contract covers both new construction and repair/remodeling, the repair/remodeling portion is more than 5% of the total contract, and the new-construction portion is not separately stated from the repair/remodeling portion, then the entire contract is treated as a nonresidential repair or remodeling contract. In that case, incorporated materials may be purchased for resale whether the price is separately stated or given as a lump sum.

The Comptroller enclosed a revised Rule 3.291 (new construction) and a not-yet-revised copy of Rule 3.357 (nonresidential repair or remodeling, then being updated for House Bill 11 changes), noting that references to "exempt jobs" for "exempt organizations" must now be limited to "exempt jobs" for "school districts" and "qualifying hospitals." The opinion is based on the facts as presented and could change if the facts are different.

What this means for you

Contractors on government or military-base jobs

If your contract covers both new construction and repair/remodeling work, you owe tax up front on consumable materials, supplies, and equipment regardless of which part of the job they're used for — you cannot buy those tax-free with a resale or exemption certificate. To buy incorporated materials tax-free for resale on the new-construction side, make sure your contract itself (not just your correspondence) separately states the price for incorporated materials apart from labor.

Contractors with combined new-construction/repair contracts

Watch the 5% threshold: if repair or remodeling work is more than 5% of the total contract value and the new-construction portion isn't separately priced out from the repair portion, the whole job gets reclassified as a nonresidential repair or remodeling contract. That changes how incorporated materials can be purchased (tax-free for resale even on a lump-sum basis), so it's worth structuring and pricing your contract deliberately.

Accountants and tax professionals

This ruling illustrates the Comptroller's practical application of Rule 3.291 (new construction) and Rule 3.357 (nonresidential repair or remodeling) to a mixed federal-government contract, including the mechanics of how a contract must be worded — separately stated pricing for incorporated materials — to preserve tax-free purchasing on the new-construction side.

Common questions

Q: Does the contractor owe tax on tools, supplies, and equipment used on this job?
A: Yes. Consumable materials, supplies, or equipment used to perform work under either the repair or the new-construction portion of the contract are taxable when purchased or rented. No resale or exemption certificate applies to these items (subject to a narrow exception under Rule 3.291(a)(2) and (b)(2) for consumables used only in new construction).

Q: Can the contractor buy materials tax-free for the repair work?
A: Yes, for materials that get incorporated into the realty under the repair contract — those can be purchased tax-free for resale using a properly completed resale certificate issued to subcontractors or suppliers.

Q: Can the contractor buy materials tax-free for the new-construction work?
A: Only if the contract separately states the agreed price for the incorporated materials apart from the price for skill and labor. A separated dollar figure in a letter isn't enough — the contract itself must make that separation for a resale certificate to apply.

Q: What happens if the new-construction and repair work are combined in one contract without separate pricing?
A: If the repair/remodeling portion is more than 5% of the total contract and the new-construction price isn't separately stated from the repair price, the entire contract is treated as a nonresidential repair or remodeling contract, and incorporated materials may be purchased for resale whether priced separately or as a lump sum.

Citations and references

No statutes are cited by section number in this letter. It references two Comptroller rules by number without quoting statutory text: Rule 3.291(a)(2) and (b)(2) (new construction) and Rule 3.357 (nonresidential repair or remodeling, then being revised for House Bill 11 changes).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1195G12

Original ruling text

September 24, 1992

Dear **:

I am responding to your letter requesting information regarding tax exemption
of purchases for a military base job. You stated that your contract with AIR
FORCE BASE, Texas, is for the repair ranges and construct range buildings at
TRAINING FACILITY.

I called your office to clarify that the referenced contract is for both new
construction and repair or remodeling. You were not available, but a member of
your staff verified that the "c" referred to new construction and the "r"
referred to repair. You gave a separated amount for the material and service
under each job.

Your company must pay tax at the time of purchase (or rental) on consumable
materials/supplies or equipment used to perform the work under both repair and
new construction. Neither a resale nor an exemption certificate is appropriate
on these transactions. When specific conditions are met, there is an exception
for consumable used in new construction only. This is found in Rule 3.291(a)
(2) and (b) (2).

Materials incorporated into the realty under the repair contract may be
purchased tax free for resale. Your company should issue a properly completed
and valid resale certificate at the time of purchase on incorporated materials
to your repair subcontractors or to your materials suppliers.

Turning to the new construction, requirements for resale of incorporated
materials differ. Although you showed a separated amount for materials and
service in your letter, your contract must also separately state the agreed
contract price for incorporated materials from the agreed contract price for
skill and labor in order for the incorporated materials to be purchased tax
free for resale. If you have a separated new construction contract, then you
may issue a properly completed and valid resale certificate in lieu of tax on
the incorporated materials.

However, if you have one contract for both new construction and repair or
remodeling and the repair or remodeling is more than 5% of the total contract
and the new construction portion is not separately stated from the repair or
remodeling, then the entire contract is deemed a nonresidential repair or
remodeling contract. Under this contract, the materials incorporated into the
realty may be purchased for resale whether the amounts are separately stated or
given as a lump sum.

I have enclosed revised Rule 3.291, regarding new construction. Rule 3.357,
regarding nonresidential repair or remodeling, is being revised to comply with
House Bill 11 changes; the enclosed copy is not revised. The references to
"exempt jobs" for "exempt organizations" must be limited to "exempt jobs" for
"school districts" and "qualifying hospitals."

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

Sincerely,

Tax Administration Division