An out-of-state contractor is building 12 miles of fence on the Texas side of the border under a lump-sum contract with the U.S. Section of the International Boundary and Water Commission (IBWC). Is the contractor exempt from Texas sales tax on the materials and services for this job?

Plain-English summary

An out-of-state contractor was preparing a bid to build twelve miles of fence (posts, caps, brackets, gates, fabric) for the International Boundary and Water Commission (IBWC), on a lump-sum basis, with the fence to be built on the Texas side of the border. The bid documents stated all taxes were applicable and no exemption certificates would be issued — so the contractor asked the Comptroller whether an exemption actually applied.

The Comptroller confirmed one does. The IBWC is composed of a United States Section and a Mexican Section; because this contract was specifically with the United States Section, and that Section counts as an agency of the federal government under Rule 3.322(c)(1)(C), the contractor qualifies for the Tax Code Section 151.311 exemption for contractors improving real property for exempt entities like the federal government. That exemption covers materials incorporated into the real property (the posts, caps, brackets, gates, and fabric) as well as consumables that are necessary and essential to the job and completely used up or destroyed at the job site. Taxable services performed at the job site can also be bought tax-free if the contract expressly requires the contractor to provide/purchase that specific service, or if the service is integral to performing the contract.

Two things the exemption does NOT cover: machinery, equipment, tools, accessories, and repair/replacement parts used to perform the contract are always taxable to the contractor — no exemption certificate applies to those. And whether the contract is lump-sum or separated doesn't change whether the Section 151.311 exemption applies at all; it only affects the contractor's invoicing options (a separated contract lets the contractor choose between a resale certificate or an exemption certificate for materials, and is defined by whether the contract terms require separately stated material and labor charges — merely issuing separate invoices doesn't convert a lump-sum contract into a separated one).

Notably, the exemption doesn't depend on getting an exemption certificate at all if the contractor is instead paid via a federal government purchase voucher.

What this means for you

Contractors bidding on federal construction/improvement projects in Texas

Don't assume a bid document saying "all taxes are applicable" is the last word — if your actual contracting counterparty is a genuine federal government agency (verify this, as the Comptroller did here by phone with both the IBWC and the specific agency), Section 151.311 may still exempt your materials purchases even where the solicitation language suggests otherwise.

Contractors deciding between lump-sum and separated contract structures

Remember the exemption for materials applies either way — the lump-sum/separated distinction only changes which certificate you can give (resale vs. exemption) and how invoicing works, not whether you get the benefit at all. But you'll always pay tax yourself on your machinery, equipment, and tools regardless of contract structure.

Accountants and tax professionals

This is a useful reminder that a "separated contract" under Rule 3.322/Section 151.311 turns on the contract's own terms requiring separately stated material/labor charges — issuing separate invoices voluntarily does not, by itself, convert a lump-sum contract into a separated one.

Common questions

Q: Is a contractor building on federal land or for a federal agency always exempt from Texas sales tax?
A: Not automatically — it depends on confirming the counterparty genuinely qualifies as an exempt entity (here, a federal agency under Rule 3.322(c)(1)(C)) and on which category of purchase (materials vs. machinery/tools) is involved.

Q: What can this contractor buy tax-free?
A: Materials incorporated into the real property (posts, caps, brackets, gates, fabric) and consumables necessary and essential to the job that are completely used up at the job site, plus certain job-site services the contract requires.

Q: What must the contractor still pay tax on?
A: Machinery, equipment, tools, accessories, and repair/replacement parts used to perform the contract — no exemption certificate applies to these, regardless of the customer's exempt status.

Q: Does it matter if the contract is lump-sum or separated?
A: It affects which certificate (resale vs. exemption) the contractor can give for materials and how invoicing works, but not whether the underlying exemption applies.

Q: Can I rely on this letter for my own government contract?
A: No. It's based on the specific facts submitted (confirmed IBWC/U.S. Section relationship, specific materials list), and the letter states other facts, though similar, may yield different results.

Citations and references

• Tex. Tax Code § 151.311 (exemption for contractors improving real property for exempt entities)
• 34 Tex. Admin. Code Rule 3.322(c)(1)(C) (federal government agencies for exemption purposes; lump-sum vs. separated contract definitions)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9804536L

Original ruling text

April 30, 1998

Dear Ms. **:

Thank you for your letter of April 29th concerning sales tax exemptions on a
construction project for the International Boundary and Water Commission
(IBWC).

Situation: ** is an out-of-state contractor putting together a
proposal for the International Boundary and Water Commission. You will be
installing twelve miles of fence. Materials will include posts, caps,
brackets, gates, and fabric. The project is bid lump-sum. In the body of the
Invitation to Bid (IFB) the government states that all taxes are applicable and
no exemption certificates will be issued. (Note: ** of
** confirmed that the fence is to be constructed on the Texas side
of the border and that the contract is with the United States Section of the
IBWC).

Response: The International Boundary and Water Commission (IBWC) is an
international agency composed of a United States Section and a Mexican Section.
The United States Section of IBWC is an agency of the federal government as
defined in Rule 3.322(c)(1)(C). (Note: ** of the United States
Section of IBWC confirmed this information by phone). A copy of the rule is
enclosed. Therefore, since the contract is with the United States Section of
the International Boundary and Water Commission, the exemptions found in Texas
Tax Code Section 151.311 (discussed below) are applicable. When you purchase
items covered by the exemption, you must give the vendor a properly completed
exemption certificate that identifies your contract to improve realty is with
the United States Section of the IBWC. Please note that an exemption
certificate is not required when you are paid by a purchase voucher from the
federal government. See subsection (f)(3) of the rule.

Texas Tax Code Section 151.311 provides a sales tax exemption for contractors
who are improving real property for exempt entities such as the federal
government. The exemption includes the purchase of materials incorporated into
the real property (i.e., posts, caps, brackets, gates, and fabric). The
exemption also includes materials (consumable) that are (1) necessary and
essential for the performance of the contract; and (2) completely consumed at
the job site. Completely consumed means after being used once for its intended
purpose the consumable is used up or destroyed. Taxable services performed at
the job site may be purchased tax free if (1) the contract expressly requires
the specific service to be provided or purchased by the contractor; or (2) the
service is integral to the performance of the contract.

You must pay sales tax when purchasing, renting, or leasing any machinery,
equipment, tools, accessories, and repair and replacement parts used in
performance of the contract. An exemption certificate may not be given for
these items.

An exemption certificate (enclosed) may be given for the purchase of taxable
items covered by the exemption. It will not matter whether the contract with
the federal government is lump-sum or separated in order to give an exemption
certificate under the provisions of Section 151.311. If a separated contract,
you have a choice of giving either a resale certificate or an exemption
certificate for the materials incorporated into the realty. A contractor with
a separated contract is considered the seller of materials incorporated into
the real property.

Please be aware that the terms of the contract determine whether the contract
is lump-sum or separated. A separated contract has separately stated charges
for materials and for labor. If the terms of the contract require that the
invoices separately state charges for materials and for labor, the contract
will be considered a separated contract. Otherwise, separated invoices do not
convert a lump-sum contract into a separated contract.

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