Rule 3.288(f) says we can never accept a direct payment exemption certificate from a contractor performing a lump-sum contract, but Rule 3.357(b)(2) says the lump-sum-vs-separated distinction no longer matters for repair/remodeling/restoration work. Can we accept a direct pay certificate for repairing, remodeling, or restoring nonresidential real property under a lump-sum contract?

Plain-English summary

A taxpayer spotted what looked like a conflict between two Comptroller rules and asked for clarification. Rule 3.288(f) (Direct Payment Procedures and Qualifications) states that direct payment exemption certificates can be issued to contractors performing separated contracts, but that a direct pay certificate should never be issued to a contractor performing a lump-sum contract — direct pay permit holders who persist in that practice risk having their permits revoked. Separately, Rule 3.357(b)(2) (governing labor on nonresidential real property repair, remodeling, restoration, maintenance, and new construction) states that the historical lump-sum-vs-separated distinction no longer applies when the contract is for repair, remodeling, or restoration of real property — everyone doing that kind of work must collect tax on the total sales price regardless of billing method (or accept a valid resale/exemption/direct payment certificate instead). The taxpayer asked directly: can a direct pay permit holder accept a direct pay certificate for repair, remodeling, or restoration work billed under a lump-sum contract?

The Comptroller's answer: yes, and the two rules aren't actually in conflict once you see what each one governs. The key distinction is repair/remodel/restoration versus new construction:

• Repair, remodeling, or restoration of real property: the person performing this work is acting as a taxable service provider, not as a "contractor" improving realty. Because of that, the total charge is taxable whether billed lump-sum or separated — and a direct pay permit holder CAN issue a direct pay certificate covering this taxable service (for the permit holder's own use), lump-sum contract or not.
• New construction of real property (the letter's example: building a 1000-barrel tank): here, the traditional lump-sum/separated distinction still governs materials. A direct pay permit holder may issue a direct pay certificate for materials incorporated into realty only if the new-construction contract is separated. Under a lump-sum new-construction contract, the contractor is treated as the consumer of all incorporated materials and simply cannot accept a direct pay certificate for those materials.

So Rule 3.288(f)'s "never for lump-sum contracts" language is really aimed at new-construction contracts, while Rule 3.357(b)(2)'s "distinction no longer valid" language is specifically about repair/remodeling/restoration work, which is taxed as a service regardless of billing structure.

What this means for you

Direct payment permit holders hiring contractors for repair, remodeling, or restoration work

You CAN issue a direct pay certificate to your repair/remodeling/restoration contractor even under a lump-sum contract — that work is taxed as a service, and the old lump-sum restriction doesn't apply to it.

Direct payment permit holders hiring contractors for new construction

The old rule still applies here: you can only issue a direct pay certificate for materials incorporated into new-construction realty if the contract is separated. Under a lump-sum new-construction contract, your contractor is the consumer of the materials and cannot accept your direct pay certificate for them.

Contractors performing a mix of repair/remodeling and new construction work

Track which category each job falls into — repair/remodel/restoration is taxed as a service (direct pay works regardless of billing method), while new construction still follows the traditional lump-sum-versus-separated materials rule for direct pay purposes.

Accountants and tax professionals advising on direct payment permit compliance

This letter resolves an apparent rule conflict by clarifying that Rule 3.288(f)'s blanket "no lump-sum" restriction is really targeted at new-construction contracts, while Rule 3.357(b)(2)'s elimination of the lump-sum/separated distinction applies specifically and only to repair, remodeling, and restoration work.

Common questions

Q: Can a direct pay permit holder accept a direct pay certificate for lump-sum repair or remodeling work on nonresidential real property?
A: Yes — that work is taxed as a service regardless of billing method, so direct pay certificates work fine even under a lump-sum contract.

Q: Can a direct pay permit holder accept a direct pay certificate for materials in a lump-sum NEW CONSTRUCTION contract?
A: No — under a lump-sum new-construction contract, the contractor is the consumer of the incorporated materials and cannot accept a direct pay certificate for them; the contract must be separated for that to work.

Q: Are Rule 3.288(f) and Rule 3.357(b)(2) actually in conflict?
A: No — they govern different categories of contracts (new construction vs. repair/remodeling/restoration), and once you sort a job into the right category, the rules apply consistently.

Q: Can I rely on this letter for my own direct payment permit arrangements?
A: No. This opinion is based on the facts presented, and other facts, though similar, may provide a different result; it can be relied on only by the taxpayer it was issued to.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.288(f) (Direct Payment Procedures and Qualifications — separated vs. lump-sum contracts, new construction)
• 34 Tex. Admin. Code Rule 3.357(b)(2) (Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential Property — repair/remodel/restoration taxed as a service regardless of billing method)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9811993L

Original ruling text

November 16, 1998

Dear Mr. **:

This is in response to your request for clarification regarding the following.

Per section 3.288(f) Direct Payment Procedures and Qualifications-"Direct
payment exemption certificates may be issued to contractors performing
separated contracts. The contractor, in this instance, will purchase the
taxable items for resale and accept the direct payment exemption certificate in
lieu of charging tax. The contractor may not accept a direct payment exemption
certificate in lieu of paying tax on consumables or equipment. In addition,
under no circumstances should a direct payment exemption certificate be issued
to a contractor performing a lump-sum contract. Direct payment permit holders
persisting in this practice may have their permits revoked."

Per section 3.357(b)(2) Labor Relating to Nonresidential Real Property Repair,
Remodeling, Restoration, Maintenance, New Construction, and Residential
Property "All persons who repair, restore, or remodel nonresidential real
property must collect tax on the total sales price to their customers less
separately stated charges for unrelated services or accept valid resale,
exemption or direct payment exemption certificates in lieu of tax. Previously,
lump-sum and separated contracts were treated differently for tax purposes.
This distinction is no longer valid when the contract is for the repair,
remodeling, or restoration of real property.

It seems to us that these two sections are in conflict. Our question is "Can we
accept direct pay exemption certificates for the repair, remodeling or
restoration of real properly given under a Lump-Sum contract?"

Response: Yes. When you repair, remodel, or restore real properly you are
acting as a taxable "service provider" rather than improving realty as a
"contractor." Your total charge whether billed separated or for a lump-sum
amount is taxable. A direct pay permit holder may issue a direct pay
certificate for taxable items, which includes taxable services, for the direct
pay holder's own use.

Under a contract to improve real property, such as the construction of a 1000
barrel tank, the direct pay permit holder may issue a direct pay certificate
for the materials incorporated into realty only if the contract is separated.
Under a lump-sum contract, the contractor is considered the consumer of all
materials incorporated into realty and cannot accept a direct pay certificate.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division