Does a contractor owe Texas sales tax on the profit and overhead portion of a cost-plus construction contract, with or without a guaranteed maximum price?

Subject

Cost Plus — Contract — With/Without Guaranteed Maximum Price — Profit And Overhead Treatment

Plain-English summary

This letter answers a contractor's question about how Texas sales tax applies to cost-plus construction contracts, whether or not the contract has a guaranteed maximum price.

The Comptroller confirmed that cost-plus contracts are generally treated as separated contracts under Tax Code § 151.056. That means the contractor collects sales tax on the charges for materials billed to the owner of the job.

Whether tax also applies to the profit and overhead portion depends on how the bill is written:

• If the bill states material charges or costs without tying a profit or additional percentage charge to them, tax is due only on the stated material charges or costs.
• If the bill in any way indicates a profit or mark-up related to the materials, tax is due on the combined total of the material charges and that profit/mark-up.

The letter also notes that none of this prevents the contractor from having lump-sum subcontracts, on which the contractor would not collect additional sales tax from the job owner -- and the Comptroller says that is the case based on the facts presented in this situation.

As with other STAR letters of this era, the opinion is based on the facts presented and may change if the facts are different.

What this means for you

Contractors on cost-plus jobs

If you bill a job owner on a cost-plus basis -- with or without a guaranteed maximum price -- you should collect sales tax on the materials charges. Whether tax also applies to your profit and overhead depends entirely on how you word the invoice: keep the material cost line separate from any profit or markup language if you want tax to apply only to the stated material cost.

Contractors using lump-sum subcontracts

Having a lump-sum subcontract underneath a cost-plus prime contract does not, by itself, require you to collect additional sales tax from the job owner on that subcontracted work.

Accountants and tax professionals

The key distinction is billing form, not contract type: a bill that ties a profit or mark-up percentage to materials pulls that profit/mark-up into the tax base, while a bill that states materials as a flat, untied cost does not. This is a facts-and-billing-procedure test, so review invoice language carefully when advising clients on cost-plus jobs.

Common questions

Q: Are cost-plus construction contracts taxed differently depending on whether there's a guaranteed maximum price?
A: The letter treats cost-plus contracts as separated contracts under Tax Code § 151.056 regardless of whether there is a guaranteed maximum price; the tax result described applies "with/without" a guaranteed maximum price.

Q: Do I owe sales tax on my profit and overhead in a cost-plus contract?
A: It depends on your billing. If the bill states material charges without tying a profit or markup to them, tax is due only on the stated material charges. If the bill in any way shows a profit or markup connected to the materials, tax is due on the combined total.

Q: Can I still use lump-sum subcontracts under a cost-plus prime contract?
A: Yes. The letter says none of the above precludes having lump-sum subcontracts on which the contractor would not collect additional sales tax from the job owner, and confirms that was the case based on the facts presented.

Q: Could this answer change under different facts?
A: Yes -- the letter states the opinion is rendered based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

• Tax Code § 151.056 (separated 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/9607L1428A05

Original ruling text

July 25, 1996

Dear ***:

Thank you for your recent letter regarding cost plus contracts with and
without a guaranteed maximum price. Your facts are included by reference.

Cost plus contracts are generally considered separated
contracts under Tax Code 151.056. In performing cost plus contracts, you
should collect sales tax on charges for materials made to the owner of the job.

The Comptroller has had a policy of letting the tax on
profit and overhead depend on billing procedures; if the bill stated material
charges or costs without tying a profit or additional percentage charge to
them, then tax was due only on the stated material charges or costs, but if the
bill in any way indicated a profit or mark-up related to materials then tax
was due on the combined total of those figures.

None of the above precludes your having lump-sum
subcontracts on which you would not collect additional sales tax from the owner
of the job. Based on the facts presented, that is the case in this situation.

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

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public Accounts.
My Internet address is [email protected].

Sincerely,

Al Van Allen
Tax Policy Division

NOTE: Previous Accession Number 9607496L