Can a contractor and subcontractor use a private written agreement (a 'Subcontractors Acknowledgment') to shift sales tax responsibility between themselves, and will the Comptroller accept and be bound by that agreement?

Plain-English summary

A taxpayer sent the Comptroller's office a "Subcontractors Acknowledgment" form for review, apparently hoping to use it to establish how sales tax responsibility would be allocated between a contractor and a subcontractor. The Comptroller's Tax Administration Division declined to accept the form.

The letter explains that the State cannot be bound by a contract clause between two private parties that shifts sales tax responsibility from one party to the other. Instead, when the State needs to determine who is responsible for sales tax between a contractor and a subcontractor, it looks first to the actual contract between them. If there is no written contract, the State instead looks to the invoices or billings exchanged between the contractor and subcontractor.

Critically, the letter states that having the two parties sign statements swearing a contract is "lump sum" would not relieve the named company ("COMPANY," redacted in the original) of sales tax liability if the subcontractor's contract was actually separated (i.e., billed with materials and labor itemized rather than as one lump sum). In other words, a private acknowledgment or side agreement cannot override the reality reflected in the actual contract or billing documents.

The Comptroller also notes, as is standard, that this opinion is based on the facts presented and could change if the facts are different.

What this means for you

Contractors and subcontractors

If you are trying to allocate sales tax responsibility between a contractor and subcontractor, a private acknowledgment form or side letter will not control. The Comptroller will look to (1) the actual contract, or (2) if there is no written contract, the invoices or billings between the parties. If your paperwork shows a separated (itemized) contract, signing a statement that it is really "lump sum" will not change your sales tax liability.

Business owners and accountants

Structure your actual contracts and billing practices consistently with how you intend sales tax to be handled — because the Comptroller will look at the real contract or invoices, not a separate acknowledgment or certification, to determine tax responsibility. Ensure that lump-sum treatment (if intended) is reflected in the underlying contract and billing documents themselves, not just in a side statement.

Common questions

Q: Can a contractor and subcontractor sign an agreement making the subcontractor solely responsible for sales tax?
A: Not according to this letter. The State will not be bound by a private contractual provision shifting sales tax responsibility between the two parties. It will instead look at the actual contract or, absent a written contract, the invoices and billings.

Q: What if the parties sign a statement saying the contract is "lump sum"?
A: That signed statement alone would not relieve the contractor of sales tax liability if the subcontractor's actual contract was separated (itemized) rather than lump sum.

Q: Does this ruling apply to my situation?
A: This letter is based on the specific facts presented to the Comptroller by the requesting taxpayer. The letter itself notes that the opinion could change if the facts are different, and under STAR's rules a letter can only be relied upon by the taxpayer to whom it was issued.

Citations and references

No statutes or rules are cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9303964L

Original ruling text

March 9, 1993

Dear **:

Thank you for your recent letter submitting your Subcontractors Acknowledgment
for review.

I am sorry that I cannot accept your form. The State cannot be bound by
contractual provisions between two private parties that has the potential for
shifting sales tax responsibilities from one party to another.

When determining who is responsible for sales tax between a contractor and a
subcontractor, the State would first look to the actual contract at issue. If
there is no written contract, the State would then look to the invoices or
billings between the contractor and subcontractor. Having signed statements
between the two parties swearing that a contract is lump sum would not relieve
COMPANY from sales tax liability if the subcontractor's contract was separated.

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 more information, you may call me toll free
at 1-800-531-5441, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division