How does the change to Sec. 151.311, Tex. Tax Code, affect materials and supplies purchased under construction contracts entered into before and after October 1, 1993?

Subject

Contractor Form Contract Update Referencing Sec. 151.311, Tex. Tax Code, Approved For Contracts After 10/01/93

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307L1253F05

Plain-English Summary

A taxpayer wrote to the Comptroller about changes it was making to its construction contracts. The taxpayer was amending its form contract to refer the contractor to the provisions of Sec. 151.311, Tex. Tax Code, and to delete the requirement of separating materials incorporated into the jobs from all other costs. After reviewing the language changes, the Comptroller concluded they are appropriate for contracts executed after October 1, 1993.

The letter then addresses how the transition works for contracts entered into before October 1, 1993. If those earlier contracts separated materials as contemplated, materials incorporated into the job that were purchased before the change in the law would not be taxable, but consumable supplies and services would remain taxable. On an existing contract, once October 1, 1993 arrives, any purchases of items exempted under the changed law will also be exempt from that date forward. As a result, consumable supplies and certain services become exempt under existing contracts after October 1.

The letter is signed by Mike Doyle, Director of Tax Administration, and notes a previous accession number of 9307873L.

What This Means For You

Contract language matters for this exemption. The Comptroller's review here was specifically about whether the taxpayer's revised form-contract language — referring the contractor to Sec. 151.311, Tex. Tax Code, and dropping the old requirement to separate materials costs from other costs — was appropriate going forward. If you use standard construction contract forms, this letter is a reminder that the wording tied to this statute was reviewed and approved for contracts executed after October 1, 1993.

The October 1, 1993 date is the dividing line. For contracts signed before that date where materials were separated as required, materials purchased before the law changed stay non-taxable, while consumable supplies and services purchased before that date stay taxable. But once October 1, 1993 hits, purchases of newly-exempted items made under an existing (older) contract become exempt going forward too — meaning consumable supplies and certain services can become exempt under old contracts starting on that date.

Track your purchase dates, not just your contract dates. Because the taxability of an item can flip on October 1, 1993 even under a contract signed earlier, contractors and their customers need to look at when each purchase was actually made, not simply when the underlying contract was executed.

Q&A

Q: What change was the taxpayer making to its contracts?
A: The taxpayer was amending its form contract to refer the contractor to the provisions of Sec. 151.311, Tex. Tax Code, and to delete the requirement of separating materials incorporated into the jobs from all other costs.

Q: Did the Comptroller approve the revised contract language?
A: Yes. After reviewing the language changes, the Comptroller concluded they are appropriate for contracts executed after October 1, 1993.

Q: What happens to materials purchased under a contract signed before October 1, 1993?
A: If the contract separated materials as contemplated, materials incorporated into the job that were purchased before the change in the law would not be taxable, but consumable supplies and services would be taxable.

Q: If I have an existing contract signed before October 1, 1993, do any purchases become exempt after that date?
A: Yes. On an existing contract, after October 1, 1993, any purchases of items exempted under the change in the law will also be exempt after that date, so consumable supplies and certain services become exempt under existing contracts after October 1.

Q: Who signed this letter and what was the previous accession number?
A: The letter is signed by Mike Doyle, Director of Tax Administration. It notes a previous accession number of 9307873L.

Original ruling text

July 23, 1993

Dear ****:

On July 21, 1993, you wrote concerning changes in the *
*****'s construction contracts. In particular, you were
amending your form contract to refer the contractor to the provisions
of Sec. 151.311, Tex. Tax Code, and to delete the requirement of
separating materials incorporated into the jobs from all other costs.
After reviewing your language changes, I have concluded they are
appropriate for contracts executed after October 1, 1993.

As to contracts entered into prior to October 1, 1993, if they were
separated as contemplated, the materials incorporated purchased before
the change in the law would not be taxable but consumable supplies and
services would be taxable. On an existing contract, after October 1,
1993, any purchases of items exempted under the change will also be
exempt after that date. Therefore, consumable supplies and certain
services will become exempt under existing contracts after October 1.

I hope this satisfactorily answers your questions. Should you have
further questions, please feel free to call me at 463-4783.

Sincerely,

Mike Doyle
Director of Tax Administration

NOTE: Previous Accession Number 9307873L