For a private club's construction/renovation contracts billed lump-sum, what kind of written statement or contract language satisfies Rule 3.286(d)(3)'s requirement that a stated price includes sales tax, and which of several possible documents (purchase order, bid, signed contract, invoice) controls for that purpose? Separately, is a CPA firm's computer-prepared payroll tax reports for the club a taxable data processing service?

Plain-English summary

This is a follow-up letter (referencing an earlier 6/14/1999 letter) mostly about a private club's construction, renovation, maintenance, and repair contracts billed as lump sum rather than itemized — plus one separate question about accounting/computer services.

On lump-sum "tax included" billing: Rule 3.286(d)(3) requires that on a "tax included" sale, either the sales tax amount is separately stated on the bill/contract/invoice, or there's a written statement to the customer that the stated price includes sales and use tax. The taxpayer asked which documents can satisfy that written-statement requirement:

• A contractor's letter referencing the invoice by number/date/amount/work performed — the Comptroller would need to see the actual letter language to judge whether it satisfies Rule 3.286(d)(3); a prior hearing, No. 36,504 (9809868H), discusses acceptable and unacceptable language for this requirement, and the seller/customer can also overcome the presumption using the seller's own records showing tax was included.
• A club purchase order covering the work — sufficient if the PO is the sole binding agreement between the parties (signed by both) and contains (or references) the qualifying tax statement.
• A contractor's bid — same rule: sufficient only if the bid itself is the parties' sole binding agreement.
• A signed contract between the club and contractor — yes, this works.
• An invoice/statement for completed work — the terms of a signed contract control over an invoice/statement, unless the invoice/statement is itself the sole agreement.

The overarching principle: the terms of a binding contract control over a mere bid, and any document being relied on for the tax-included statement should clearly and unambiguously identify new construction vs. remodeling, and if new construction, the contractor should get an exemption certificate for the labor portion.

On the separate accounting/computer services question: a CPA firm uses a computer to prepare the club's IRS Form 941, TWC, and Form 940 quarterly reports, which the club then uses to cut its own payment checks. The Comptroller confirmed this is a taxable data processing service under Rule 3.330(a) and (d) — a separately stated charge for it is taxable, and if the CPA firm bundles that taxable work into one charge together with nontaxable accounting services (bookkeeping, posting records, preparing sales tax returns), the entire combined charge becomes taxable once the taxable portion (941/940/1099/W-2/W-3 prep, payroll, A/R billing, and related computer support) exceeds 5% of the total charge.

What this means for you

Private clubs, HOAs, and similar organizations negotiating construction/renovation contracts

If your contractor bills lump-sum and you want the price to be treated as tax-included, make sure a genuinely binding, signed document (ideally the contract itself) clearly states that the price includes sales/use tax — a bid or purchase order alone won't work unless it's the sole binding agreement.

CPA firms and accounting service providers

Computer-prepared payroll tax filings (941, 940, TWC reports) are taxable data processing services. If you bundle that work into a single fee with your nontaxable bookkeeping/accounting services, watch the 5% threshold — cross it, and your whole combined charge becomes taxable, not just the data-processing portion.

Accountants and tax professionals

Two useful, distinct rules from one letter: (1) Rule 3.286(d)(3)'s written-statement test for tax-included lump-sum contracts turns on which document is the parties' actual binding agreement, not just which document mentions tax; and (2) Rule 3.330's 5% bundling threshold for taxable vs. nontaxable accounting/data-processing services.

Common questions

Q: Does a lump-sum construction contract need to separately state sales tax to be valid?
A: No — either the tax is separately stated, or there's a written statement that the price includes tax (Rule 3.286(d)(3)).

Q: Which document controls if a bid, purchase order, and signed contract all exist for the same job?
A: The signed contract's terms control over a bid or purchase order, unless one of those other documents is itself the sole binding agreement between the parties.

Q: Is a CPA firm's computer-prepared payroll tax report (941, 940, TWC) taxable?
A: Yes, as a data processing service under Rule 3.330 -- and if bundled with nontaxable accounting services in one charge, the whole charge becomes taxable once the taxable portion exceeds 5% of the total.

Q: Can I rely on this letter for my own contract documentation or billing structure?
A: No. It's based on the specific facts presented and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286(d)(3) ("tax included" sales -- written statement requirement)
• 34 Tex. Admin. Code Rule 3.330(a) and (d) (Data Processing Services)

Administrative precedent:

• Comptroller Hearing No. 36,504 (9809868H) (acceptable/unacceptable written-statement language under Rule 3.286(d)(3))

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9907560L

Original ruling text

July 16, 1999

Dear Mr. **:

This is in response to your request for a ruling on the following fact
situation and questions:

As stated in my letter dated 6/14/99, this is a follow-up Sales and Use Tax
question pertaining to lump sum contracts and separate contracts. Also, new
construction, renovation, maintenance and repair.

Of course, the perfect situation for both the Comptroller and club would be if
all invoices were itemized (separated contract) and a sales tax was placed on
all sales that were subject to Sales and Use Tax.

That, however, is never going to happen has something to do with how much
profit the contractor is making and how much labor is being charged on which
the profit is built on. Also, contractors often pay one price for materials and
charge the customer a higher price. All of this results in the "lump sum
contract" billing.

Rule 3.286 sets out guidelines for "tax included" sales in subsection (d)(3).
It states, "the amount of the sales tax must be separately stated on the bill,
contract, or invoice to the customer OR there must be a written statement to
the customer that the stated price includes Sales and Use Tax".

For all work performed by a company or individual for new construction,
maintenance, repair or renovation. Please answer the following questions:

1) Is a letter from the contractor referring to the invoice by number, date,
amount, and work performed considered a written statement?

Response: I would need to view a copy of this letter and the language
contained therein to determine if it satisfies the requirements of Rule
3.286(d)(3) for a written statement to the customer that the stated price
includes sales or use taxes. This subsection also provides that "the seller or
customer may overcome the presumption by using the seller's records to show
that tax was included in the sales price." Hearing No. 36,504 (9809868H),
discusses acceptable and non-acceptable language with regard to the written
statement requirement in Rule 3.286(d)(3).

With regard to your statement that "contractors often pay one price for
materials and charge the customer a higher price ... (which) results in the
"lump sum contract" billing." This would not be the case for cost-plus
contracts and other contracts where materials are sold at a marked up price to
customers under a separated contract.

2) If the answer to the above question is 'no', which of the follow documents
should the above mentioned statement appear to release the club from tax
liability.

a. A club purchase order covering the work to be performed.

Response: For tax purposes, the terms of a contract control over the terms of
a bid. If the purchase order constitutes the sole agreement between the
parties, is binding on both parties and is signed off on by both parties, a
statement in the PO or a reference to a specific letter that contains the
qualifying tax statement will be sufficient.

b. A contractor's bid to the club covering the work to be performed.

Response: For tax purposes, the terms of a contract control over the terms of
a bid. If the bid constitutes the sole agreement between the parties, is
binding on both parties and is signed off on by both parties, a statement in
the bid or a reference to a specific letter that contains the qualifying tax
statement will be sufficient.

c. A contract signed by the club and contractor covering the work to be
performed.

Response: Yes.

d. The invoice/statement sent to the club by the contractor for the work
performed.

Response: The terms of a contract will control over an invoice or statement
unless the invoice or statement is the sole agreement between the parties.

e. Is there additional documentation required to be included with all of the
above? If so, what are they?

Response: The language in the contract should be clear if it is new
construction or remodeling. If the contract is for a new improvement to realty,
language or terms in the contract should be clear as to whether the contract is
a lump-sum or separated contact. If new construction, the contractor should be
provided with an exemption certificate for the labor portion of the contract.
In addition, any statement covering "taxes included" should be clear and
unambiguous as to what the taxes apply to.

f. A CPA firm prepares the club's 941's, TWC and 940 quarterly reports. The
reports are returned to the club and the club prepares the checks for the 941,
TWC and 940 payments. Is this considered computer service which is subject to a
Sales and Use Tax?

Response: Using a computer to prepare the club's 941's, TWC and 940 quarterly
reports is a taxable data processing service. A separately stated charge for
this service by the CPA firm is taxable. A single charge for providing
nontaxable services (e.g., accounting, posting records, preparing sales tax
returns, etc.) and taxable services (e.g., IRS forms 941, 940, 1099, W-2, and
W-3, payroll, account receivable billings, and related computer support) is
taxable if the portion relating to the taxable services represents more than
5.% of the total charge. See Rule 3.330 (a) and (d).

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