How does the October 1, 1993 change to Tax Code Section 151.311 affect sales tax on contracts for construction of public roads and highways?

Subject

Tax Code Section 151.311 Change Effective 10/01/93 For Public Road And Highway Construction Contracts

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307L1253G08

Plain-English Summary

A taxpayer contacted the Comptroller's office by fax and phone about the September bid letting for construction of public roads and highways, asking how an upcoming law change would affect their contracts.

The Comptroller's office explained that, effective October 1, 1993, Tax Code Section 151.311 was changing. As a result, contractors on these jobs would be taxed much as they were prior to October 1, 1991 — and it would no longer matter whether their contracts separated out the charges for material and labor, or were billed lump sum. Either way, contractors would continue to owe tax on their purchases and rentals of equipment used to perform the work.

The letter also draws two important lines around the effective date and scope of the change:

• Contracts signed before October 1, 1993 are grandfathered. Any contract not signed by both parties before that date will instead be controlled by the new October 1, 1993 law.
• Highway repair and maintenance contracts are unaffected. The law change does not apply to that category of contract at all.

What This Means For You

Road and highway construction contractors. If you bid on and perform public road or highway construction work, this letter confirms that as of October 1, 1993, it no longer matters whether your contract is a lump-sum contract or one that separately states material and labor — the tax treatment reverts to the pre-October 1, 1991 approach either way. You will still owe tax on equipment you purchase or rent to do the job.

Contractors bidding in the September 1993 bid letting. Because the letter was written in direct response to a question about the September bid letting, timing matters: get contracts signed by both parties before October 1, 1993 if you want to avoid being governed by the new rule, since any contract not signed by both parties before that date falls under the October 1, 1993 law change.

Highway repair and maintenance contractors. This particular law change does not touch repair and maintenance contracts on highways — only the construction contracts described in the letter are affected.

Accountants and tax professionals advising road contractors. When reviewing a client's road or highway construction contract dated around this period, check the date both parties signed it against October 1, 1993, since that single fact determines whether the older or newer version of Tax Code Section 151.311 controls.

Q&A

Q: What changed in Texas sales tax law effective October 1, 1993, for road and highway construction contracts?
A: Tax Code Section 151.311 changed so that contractors are taxed much as they were prior to October 1, 1991, and it no longer matters whether their contracts separate the charges for material and labor or are billed lump sum.

Q: Do contractors still owe tax on equipment used for these jobs?
A: Yes. The letter states contractors will continue to owe tax on their purchases and rentals of equipment to perform these jobs.

Q: Does the October 1, 1993 change apply to a contract that was already signed before that date?
A: No. Contracts that are not signed by both parties prior to October 1, 1993 will be controlled by the October 1, 1993 law change — the implication is that contracts already signed by both parties before that date are not controlled by the new law.

Q: Does this law change affect highway repair and maintenance contracts?
A: No. The letter specifically states the law change will not affect highway repair and maintenance contracts.

Q: What prompted this letter?
A: The Comptroller's office was responding to the taxpayer's fax transmission of July 7, 1993, and a phone conversation on July 14th regarding the September bid letting for construction of public roads and highways.

Q: Who signed this letter and how can the taxpayer follow up?
A: The letter was signed by Al Van Allen of the Tax Administration Division, who provided a direct line, a FAX number, and an address in care of the Tax Administration Division for further questions.

Original ruling text

July 14, 1993

Dear **:

This is in response to your fax transmission of July 7, and, our phone
conversation of July 14th regarding the September bid letting for
construction of public roads and highways.

Effective October 1, 1993, Tax Code Section 151.311 will change. As a
result, contractors will be taxed much as they were prior to October
1, 1991 and it will not matter if their contracts separate the charges
for material and labor or are lump sum. They will continue to owe tax
on their purchases and rentals of equipment to perform these jobs.

Contracts that are not signed by both parties prior to October 1, 1993
will be controlled by the October 1, 1993 law change. The law change
will not affect highway repair and maintenance contracts.

If you have questions or need more information, please call or write.
My direct line number is (512) 463-4680. The number for FAX
transmissions is (512) 475-0900. You may write to me in care of Tax
Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 93070080L.2 and/or 9307080L