Can a Texas seller who is audited by another state (Alabama) and forced to pay that state's tax on the same materials get a multistate tax credit against, or a refund of, the Texas sales tax it already collected from its Texas customer?

Subject

Multistate Tax Credit Disallowed — Texas Sales Tax Assessed — Credit Only Available Against Texas Use Tax, Not Against Texas Tax Collected From Customer

Plain-English summary

A manufacturer of pre-engineered steel buildings normally sold its buildings and collected and remitted Texas sales tax on them. In the transaction at issue, the company also contracted to erect a building in Texas and remitted tax to Texas on the finished price of the materials (but not on the erection/labor cost). Separately, the State of Alabama audited the company's records and said it owed Alabama tax on the cost of materials withdrawn from the company's stock in Alabama. The company asked Texas to refund the Texas tax it had remitted, since it was now also being forced to pay Alabama tax on essentially the same materials.

The Comptroller said no. Texas's multistate tax credit only applies to a taxpayer's own purchases as a consumer — items on which Texas would otherwise impose a use tax when they are brought into Texas. It cannot be used to offset or refund sales/use tax that a seller was required to collect from its customers on sales of materials or taxable services in Texas. Two reasons: (1) tax collected from a customer is actually the customer's money and can't be used by the seller to pay off the seller's own debt to another state, and (2) the tax Alabama assessed and the tax Texas collected are imposed on different people and different transactions.

The letter walks through why: Texas sales/use tax is a transaction tax, and there are two separate transactions here. The first transaction is the company's own purchase of the materials that get incorporated into the Texas building — that's the transaction Alabama was taxing (by disallowing an exemption). Texas would not normally impose a use tax on that purchase because of the sale-for-resale exemption, unless the materials are used in a lump-sum contract for new construction (in which case the company is the consumer, not a reseller, and doesn't collect tax from the customer — see Rule 3.291(a)(5) and (b)(3)). If a lump-sum contractor did pay Texas use tax on incorporated materials, Texas would allow a multistate tax credit under Rule 3.340, provided another state legally taxed that same transaction and the contractor has proof the tax was paid. But if the materials are used in a separated contract for new construction, or in repairing/remodeling nonresidential real property, the company is a seller of the materials, and Texas would not impose use tax on its purchase because of the resale exemption (Rule 3.285; see also Rule 3.291(b)(4) for separated contracts and Rule 3.357 for nonresidential repair/remodeling). Obviously, Texas can't refund tax that was never paid to Texas in the first place.

The second transaction is the erection of the building for the Texas customer — a transaction Alabama was not taxing at all. Depending on the contract type, Texas may or may not tax this transaction (no tax collected on a lump-sum new-construction contract; tax collected on the materials price only for a separated new-construction contract; tax collected on the total charge for nonresidential repair/remodeling).

On the actual facts presented, the company had a separated contract for the new construction of a pre-fabricated building, and had collected tax from its Texas customer on the price of materials (not labor). The Comptroller concluded that none of the tax the company collected from its Texas customer could be refunded because of the Alabama audit — losing a resale/other exemption in Alabama doesn't change the company's obligation to collect and remit Texas state and local tax on the agreed contract price for materials owed by the Texas purchaser.

The letter notes this opinion is based on the facts submitted, and different facts could yield a different result.

What this means for you

Multistate manufacturers and sellers of materials/construction services

If another state audits you and disallows an exemption on your own purchases, that does not automatically entitle you to a Texas credit or refund on tax you separately collected from a Texas customer. Texas's multistate tax credit is aimed at your purchases as a consumer (i.e., Texas use tax you'd otherwise owe), not at sales tax you collected as a seller and that legally belongs to the customer.

Contractors using lump-sum vs. separated contracts

The contract structure drives the tax result. Under a lump-sum contract for new construction, you're the consumer of incorporated materials (no resale exemption, no tax collected from the customer) — and if you paid Texas use tax on those materials, you may be eligible for a multistate credit under Rule 3.340 if another state legally taxed the same transaction. Under a separated contract for new construction, or a contract to repair/remodel nonresidential real property, you're the seller of the materials (resale exemption applies to your purchase, and you collect tax from the customer instead) — and no multistate credit against the customer-collected tax is available.

Accountants and tax professionals

When a client faces a multistate tax dispute involving construction materials, identify which of the two transactions is actually being taxed by each state: (1) the contractor's own purchase/withdrawal of materials, versus (2) the sale/erection transaction with the end customer. The multistate credit under Rule 3.340 only reaches transaction (1), and only if the contractor itself paid Texas use tax on it (i.e., a lump-sum contract situation). Tax already collected from a Texas customer cannot be refunded based on a different state's audit of the seller's own purchases.

Common questions

Q: Can a company use Texas's multistate tax credit to offset sales tax it collected from Texas customers?
A: No. The letter states the multistate tax credit is limited to the taxpayer's own purchases as a consumer where Texas would otherwise impose a use tax — it cannot be used against sales/use tax the seller was required to collect from customers, because that tax is actually paid by the customer.

Q: Why can't Texas just refund the tax to match what the company now owes Alabama?
A: Because the Alabama tax and the Texas tax are imposed on different people and different transactions. Alabama taxed the company's purchase/withdrawal of materials in Alabama; Texas taxed (via tax collected from the customer) the separate transaction of erecting/selling the building to the Texas customer. Also, Texas cannot refund tax that was never paid to Texas.

Q: Does the contract type (lump-sum vs. separated) matter?
A: Yes. Under a lump-sum contract for new construction, the contractor is the consumer of incorporated materials and doesn't collect tax from the customer; if Texas use tax was paid on those materials, a multistate credit under Rule 3.340 could apply if another state legally taxed the same transaction. Under a separated contract for new construction, or a contract to repair/remodel nonresidential real property, the contractor is a seller entitled to the resale exemption on its own purchase, and instead must collect tax from the customer.

Q: What contract type did the taxpayer in this letter actually have?
A: A separated contract for the new construction of a pre-fabricated building. The company collected tax from its Texas customer on the price of the materials, but not on the labor/erection cost.

Q: Could the outcome be different on different facts?
A: Yes — the letter states the opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Citations and references

Comptroller rules cited in the letter:

• Rule 3.291(a)(5) and (b)(3) — lump-sum contracts for new construction
• Rule 3.340 — multistate tax credit
• Rule 3.291(b)(4) — separated contracts for new construction
• Rule 3.357 — nonresidential repair and remodeling services
• Rule 3.285 — sale for resale exemption

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1441D07

Original ruling text

ALERT: Sharp v. Morton Buildings Inc., 953 S.W.2d 300; 1997 Tex. App. LEXIS 3161 held that a taxpayer such as the one associated with this document was not required to pay the Texas use tax when the raw materials were converted into something else out of state and they never existed in Texas. However, in 2003 House Bill 2425 amended Tax Code Section 151.011(a) to reverse the Morton Buildings holding.

September 20, 1996

Dear **:

Thank you for your letter requesting a refund of taxes you must pay to the

State of Alabama for materials incorporated as part of the erection of a

building in Texas. Frank Jones forwarded your request to Tax Policy for a

determination of taxability.

You are a manufacturer of pre-engineered steel buildings which you normally

sell and collect tax and remit to Texas. In the case in question, you also

contracted for the erection of the building and remitted tax to Texas.

The State of Alabama has audited your records and is saying that you owe tax on

the cost of materials withdrawn from your stock in Alabama. You remitted tax to

Texas on the finished price of the material. You hired another party to erect

the building and included tax on material only, not the erection cost. You ask

that Texas refund the tax on which you are having to remit to Alabama.

We cannot advise you regarding Alabama sales and use tax, but the multistate

tax credit that Texas allows is limited to your purchases as a consumer on

which Texas would normally impose a use tax when the items are brought to

Texas. Texas cannot give a multistate tax credit against the Alabama tax you

owe as a purchaser for any sales and use tax that you are required to collect

from customers on sales of materials or on sales of taxable services in Texas.

In the first place, that tax is actually paid by the customer and cannot be

used by a seller to pay a debt or liability owed by the seller. Secondly, the

taxes owed to Alabama are imposed on a different person and on a different

transaction than the taxes imposed by Texas.

Texas sales and use tax is a transaction tax. The first transaction is your

purchase of the materials that are incorporated into the real property. Alabama

is taxing that transaction by not allowing any exemption. Texas will not impose

a use tax on your purchase of materials because of our sale for resale

exemption unless the materials are used in a lump-sum contract for new

construction. In that situation you are the consumer of the materials rather

than a seller and you would not collect tax from the Texas customer. Please

review Rule 3.291(a)(5) and (b)(3) regarding lump-sum contracts for new

construction. If a lump-sum contractor paid use tax to Texas on the purchase of

incorporated materials used in a lump-sum contract, we would allow a multistate

tax credit as explained in Rule 3.340 if another state legally imposed a sales

tax on that same transaction and the lump-sum contractor has records showing

the sales tax has been paid to that state.

If the materials are used in a separated contract for new construction or in a

contract to repair or remodel nonresidential real property, then you are a

seller of the materials and Texas would not impose use tax your purchases of

materials incorporated into the real property because of our sale for resale

exemption. Texas would also allow a sale for resale exemption on purchases by a

material supplier who simply sells tangible personal property in Texas without

incorporating it into real property. See Rule 3.285 regarding the sale for

resale exemption. Obviously, Texas cannot refund tax that was not paid to

Texas. See subsection (b)(4) in Rule 3.291 regarding separated contracts for

new construction and enclosed Rule 3.357 on nonresidential repair and

remodeling services. Nonresidential repair and remodeling is a taxable service

and the service provider is required to collect tax from the customer on the

total charge for the repair or remodeling service.

The second transaction is the erection of a building for a customer in Texas.

Alabama is not taxing this transaction between you and the Texas customer.

Texas may tax the transaction depending on the circumstances. If the contract

is a lump-sum contract for new construction, no tax is collected from the

customer. If the contract is a separated contract for new construction, tax is

collected on your agreed contract price for materials, but not the labor. If

the contract is for the repair or remodeling of existing nonresidential real

property, the service is taxable and tax is collected from the customer on the

total charge. Other than a lump-sum contract for new construction, Texas

provides you a sale for resale exemption on your purchase of incorporated

materials.

The facts stated in your letter indicate that you had a separated contract for

the new construction of a pre-fabricated building. You collected tax on the

price for materials, but not the labor. None of the taxes that you have

collected from Texas customers can be refunded to you as a result of your audit

by Alabama. The fact that you are not allowed a sale for resale exemption or

other exemption by Alabama on your purchases of materials incorporated into a

building in Texas does not change your requirement to collect and remit state

and local taxes owed by the Texas purchaser on the agreed contract price for

the materials.

This opinion is based on the facts you submitted. Other facts, though similar,

may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is

512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville

Tax Policy Division

cc: Frank Jones, Revenue Accounting

NOTE: Previous Accession Number 9609796L