A materials vendor sold fencing materials for a zoo exhibit to a construction contractor. The zoo's bid documents said the owner was tax-exempt and taxes should NOT be included in the contract price, but the contractor's purchase order listed 'Sales tax: Included' and told the vendor not to charge Texas sales tax because the contractor 'pays direct.' The contractor now wants to deduct that 'included' tax amount from what it owes the vendor, claiming the vendor collected it. Can the contractor do that?

Plain-English summary

A vendor (Company A) won the bid to supply materials for a zoo's Lion Exhibit fence, sold through a construction contractor (Company B). The zoo's own bid instructions said the owner was exempt from state and local sales and use tax on materials, equipment, and labor for the project, and that taxes should not be included in the contract price. Yet Company B's purchase order to Company A listed "Sales tax: Included" as a line item and separately instructed, "Do not charge Texas sales tax since we pay direct." Company A's invoice to Company B, however, showed only a flat price with no indication tax was included. Company B now wants to deduct the "included" tax amount from what it owes Company A, arguing Company A must have collected the tax because it signed the purchase order.

The Comptroller sided with the vendor. Two threshold points mattered less than expected: whether Company A even had to collect tax on this sale turned out not to be the deciding issue, because the materials were exempt for this project in the first place. The real question was whether tax had actually been collected — and the Comptroller found it had not: Company A's own invoice showed a price with no indication tax was included, and Company A issued no tax receipt. Leaning on a prior hearing (Hearing No. 32,994) involving a homebuilder who made the same argument against several contractors — that a document's "included" language proved tax was collected even though it never actually was — the Comptroller concluded Company A did not collect or remit tax on this transaction, so Company B cannot deduct the amount from what it owes on the theory it had already been collected.

What this means for you

Materials vendors and subcontractors on exempt-entity projects

A purchase order or contract stating tax is "included," written by the buyer, doesn't by itself prove you actually collected or remitted tax — what matters is your own invoice and whether you issued a tax receipt. Keep your invoicing consistent with what you actually charged.

General contractors on tax-exempt public projects

You can't simply deduct an "included tax" amount from a vendor's invoice based on your own purchase order language; you need actual proof the vendor collected and remitted the tax (a tax receipt or an invoice reflecting the tax), not just a line item you wrote yourself.

Accountants and tax professionals

A useful example of how the Comptroller resolves a documentation dispute by looking past a self-serving contract label ("Sales tax: Included") to the seller's actual invoice and receipt practices — and by following prior administrative precedent (Hearing No. 32,994) on a materially identical fact pattern.

Common questions

Q: If a purchase order says "Sales tax: Included," does that prove the vendor collected tax?
A: Not by itself. The Comptroller looks at the vendor's own invoice and whether a tax receipt was issued, not just the buyer's purchase-order language.

Q: Can a contractor deduct an "included tax" amount from a vendor invoice based on its own purchase order?
A: Not if the vendor's invoice shows no indication tax was included and no tax receipt was issued — the state treats that as no tax having actually been collected.

Q: Does it matter whether the vendor was legally required to collect tax on this sale?
A: Here it didn't change the outcome, because the materials were exempt for this project regardless; the dispute turned entirely on whether tax was actually collected, not on whether it was owed.

Q: Can I rely on this letter for my own contractor/vendor dispute?
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

Administrative precedent:

• Comptroller Hearing No. 32,994 (a purchase order's "included" tax language doesn't itself prove tax was collected or remitted, on a materially similar homebuilder/contractor fact pattern)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9908640L

Original ruling text

August 17, 1999

Fax. **

Dear Mr. **:

Thank you for sending copies of the relevant documents relating to the
materials you sold to COMPANY B for the ZOO in **, Texas.

You were awarded the bid on the materials for the Lion Exhibit Fence. I have
no information regarding the details of the transaction and cannot comment on
whether COMPANY A was required to collect tax or not. Both the purchase order
and the invoice indicate that the materials were delivered to the job site.
Neither document indicates the method of delivery. If COMPANY A uses a common
carrier for deliveries into Texas, then COMPANY A has no obligation to collect
tax. However, if COMPANY A delivers materials in its own facilities, then it
is engaged in business in Texas and is required to have a permit and collect
any taxes due. Whether COMPANY A was required to collect the tax in this
transaction is not relevant to the resolution of your issue because an
exemption for the materials was applicable.

The "Instructions to Bidders" document contained the following language:

23. SALES AND USE TAXES:

OWNER is exempt from State and Local Sales and Use Taxes on materials,
equipment and labor provided for the Work. Said taxes shall not be included in
the Contract Price. Refer to Supplementary Conditions SC-6.15 for additional
Information.

The invoice from COMPANY A to COMPANY B Construction shows a price of
$** without any indication that tax was included in the amount.
The purchase order issued by COMPANY B however, lists the following:

Base bid quotation: $**
Sales tax: Included
Total amount this purchase order: $**

Furthermore, the purchase order contains this language. "TAXES - Do not charge
Texas sales tax since we pay direct." COMPANY B now wants to deduct
$** from the $** total amount owed to COMPANY A.
COMPANY B claims COMPANY A collected the tax because you signed the purchase
order.

This issue is similar to one where a homebuilder made a similar argument and
asked to be refunded tax that had never been collected nor remitted from
several contractors. The Administrative Law Judge denied the claimants
contention that tax had been collected. I am attaching an edited copy of
hearing no. 32, 994. Based on that hearings decision and on the statute
regarding collection of the tax and issuing tax receipts, the state is of the
opinion that COMPANY A did not issue a tax receipt nor collect tax from COMPANY
B.

This opinion is 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. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Policy Division, Comptroller of
Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Tom Soto
Tax Policy Division