34 TAC §3.291
The Comptroller of Public Accounts proposes a new §3.291,
concerning contractors. The new section replaces the existing §3.291,
which is being repealed so that the content may be restructured and updated.
The new section incorporates legislative changes made to Tax Code, §151.0048
and §151.311, and includes definitions of equipment, exempt contract,
incorporated materials, new construction, and residence or residential property.
The change to Tax Code, §151.0048, excludes real property services purchased
by a contractor as part of the construction of new residential structures
from the definition of real property services. The change to Tax Code, §151.311,
exempts incorporated materials, certain consumable items, and certain taxable
services purchased by a contractor who improves real property for an exempt
organization exempted under Tax Code, §151.309 or §151.310. Other
changes provide specific examples to clarify the tax responsibilities of contractors.
The definition of new construction in subsection (a)(9) reflects the decision
in Administrative Hearing No. 36,375 that the raising of the roof of a building
is not new construction, if new usable square footage is not created.
James LeBas, Chief Revenue Estimator, has determined that for the first
five-year period the rule will be in effect there will be no significant revenue
impact on the state or local government.
Mr. LeBas also has determined that for each year of the first five years
the rule is in effect the public benefit anticipated as a result of enforcing
the rule will be in providing additional information regarding tax responsibilities.
This rule is adopted under the Tax Code, Title 2, and does not require a statement
of fiscal implications for small businesses. There is no significant anticipated
economic cost to individuals who are required to comply with the proposed
rule. .
Comments on the proposal may be submitted to Bryant K. Lomax, Manager,
Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.
This new section is proposed under Tax Code, §111.002, which
provides the comptroller with the authority to prescribe, adopt, and enforce
rules relating to the administration and enforcement of the provisions of
the Tax Code, Title 2.
The new rule implements Tax Code, §§151.0048, 151.056, 151.311,
and 151.707.
§3.291.Contractors.
(a)
Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
indicates otherwise.
(1)
Agreed contract price of materials incorporated into the
realty--The price specified in the contract for the incorporated materials,
i.e., tangible personal property that becomes a part of the real property,
plus any additional charges directly attributable to the incorporated materials.
For example, profit that is calculated as a percentage of the cost of materials,
cost of transportation of the materials, and markup or handling charges that
relate directly to the materials charge are included in the agreed contract
price. A charge that is calculated as a percentage of the total contract cost
is not considered a part of the agreed contract price of materials incorporated
into realty. The agreed contract price of incorporated materials cannot be
less than the price that the contractor paid for materials.
(2)
Consumable item--Nondurable tangible personal property
that is used to improve realty and, after being used once for its intended
purpose, is completely used up or destroyed. Examples of consumable items
are nonreusable concrete forms, nonreusable drop cloths, barricade tape, natural
gas, and electricity. The term "consumable item" does not include machinery,
equipment, accessories to machinery or equipment, repair or replacement parts
for machinery or equipment, or any rented or leased item.
(3)
Contractor--Any person who builds new improvements to residential
or nonresidential real property, completes any part of an uncompleted new
structure that is an improvement to residential or nonresidential real property,
makes improvements to real property as part of periodic and scheduled maintenance
of nonresidential real property, or repairs, restores, maintains, or remodels
residential real property, and who, in making the improvement, incorporates
tangible personal property into the real property that is improved. The term
includes subcontractors but does not include material men, suppliers, or persons
who provide taxable real property services. Persons who provide real property
services should refer to §3.356 of this title (relating to Real Property
Service). Persons who repair, restore, or remodel nonresidential real property
are providing taxable services and should refer to §3.357 of this title
(relating to Real Property Repair, Remodeling, and Restoration; Real Property
Maintenance). Persons who repair, restore, or remodel chemical plants or petrochemical
refineries should refer to §3.362 of this title (relating to Labor Relating
to Increasing Capacity in a Production Unit in a Petrochemical Refinery or
Chemical Plant).
(4)
Equipment--Tangible personal property that a contractor
uses and that is not a consumable item or incorporated material. Examples
include tools, machinery, implements, and the accessories and repair or replacement
parts for the equipment.
(5)
Exempt contract--A contract for the improvement of real
property with an entity that is exempted under Tax Code, §151.309 or §151.310.
An example of an exempt contract is a contract with a nonexempt entity to
improve real property for the primary use and benefit of an organization exempted
under Tax Code, §151.309 or §151.310, provided that the improvements
relate to the exempt purpose of an organization that is exempted under Tax
Code, §151.310(a)(1) or (a)(2). Another example is a contract for development
work that subsection (d) of this section covers. See §3.322 of this title
(relating to Exempt Organizations).
(6)
Improvements to realty--See §3.347 of this title (relating
to Improvements to Realty).
(7)
Incorporated materials--Tangible personal property that
becomes a part of any building or other structure, project, development, or
other permanent improvement on or to such real property including tangible
personal property that, after installation, becomes real property by virtue
of being embedded in or permanently affixed to the land or structure constituting
realty and which property after installation is necessary to the intended
usefulness of the building or other structure.
(8)
Lump-sum contract--A contract in which the agreed contract
price is one lump-sum amount and in which the charges for incorporated materials
are not separate from any charges for skill and labor, including fabrication,
installation, and other labor that the contractor performs. For example, guaranteed-maximum
contracts are considered lump-sum contracts when the charges for incorporated
materials and the charges for skill and all labor are not separately stated.
Contracts to improve realty that do not break out all charges for labor, including
fabrication labor, are considered lump-sum contracts. For example, a contractor
who fabricates and incorporates cabinets into realty under a contract that
includes the fabrication labor in the agreed contract price of materials is
a lump-sum contractor. Contracts to improve realty that have a zero charge
for materials or for labor are considered lump-sum contracts. Separated invoices
issued to the customer will not change a lump-sum contract into a separated
contract unless the terms of the contract require separated invoices.
(9)
New construction--All new improvements to real property,
including initial finish-out work to the interior or exterior of the improvement.
An example is a multiple story building that has had only its first floor
finished and occupied. The initial finish-out of each additional floor before
initial occupancy or use is new construction. New construction also includes
the addition of new usable square footage to an existing building. Examples
include the addition of a new wing onto an existing building or the addition
of a new mezzanine level within an existing building. Reallocation of existing
square footage inside a building is remodeling and does not constitute the
addition of new square footage. For example, the removal or relocation of
interior walls to expand the size of a room or the finish out of an office
space that was previously used for storage is remodeling. Raising the ceiling
of a room or the roof of a building is not new construction if new usable
square footage is not created.
(10)
Sale and installation of tangible personal property--Includes
a contract to furnish and install machinery, equipment, or other tangible
property that is not essential to the building or structure, nor adapted or
intended to become a part of the realty, but which incidentally may, on account
of its nature, be temporarily attached to the realty without loss of its identity
as a particular piece of machinery, equipment, or property and, if attached,
is readily removable without substantial damage to the unit or realty or without
destruction of the intended usefulness of the realty.
(11)
Residence or residential property--Property that is used
as a family dwelling, a multifamily apartment or housing complex, nursing
home, condominium, or retirement home. The term includes homeowners association-owned
and apartment-owned swimming pools that are for the use of the homeowners
or tenants, laundry rooms for tenants' use, and other common areas for tenants'
use. The term does not include hotels or any other facilities that are subject
to the hotel occupancy tax.
(12)
Separated contract--A contract in which the agreed contract
price is divided into a separately stated agreed contract price for incorporated
materials and a separately stated amount for all skill and labor that includes
fabrication, installation, and other labor that is performed by the contractor
. If prices of incorporated materials and labor are separately stated in any
part of the contract or in a document that becomes part of the contract according
to the terms of the contract, adding the charges together to give a sum total
does not change the contract into a lump-sum contract. For example, a contract
that requires separated invoices is a separated contract. Cost-plus contracts
are considered separated contracts if the cost of labor is separately stated
from the cost for incorporated materials.
(b)
Tax responsibilities of contractors who improve real property
of nonexempt customers.
(1)
Equipment. A contractor must pay sales tax at the time
of purchase, lease, or rental on the sales price of equipment used to perform
a contract. A contractor must accrue and remit use tax on the sales price
of equipment purchased, leased, or rented for use in Texas from an out-of-state
seller unless the out-of-state seller collected Texas use tax. See §3.346
of this title (relating to Use Tax). Texas allows a credit against Texas use
tax when the same property is subject to a legally imposed sales or use tax
of another state. See §3.338 of this title (relating to Multistate Tax
Credits and Allowance of Credit for Tax Paid to Suppliers).
(2)
Consumable item. Except as provided by subparagraph (B)
of this paragraph, a contractor must pay tax at the time of purchase on consumable
items that are not physically incorporated into the customer's property.
(A)
A contractor may not collect tax from the customer on a
charge for consumable items except as provided by subparagraph (B) of this
paragraph.
(B)
A contractor who has a separated contract may issue a properly
completed resale certificate to a supplier in lieu of tax for consumable items
if title to the consumable items transfers to the contractor's customer at
or before the time that the contractor takes possession of the consumable
items, and further if the consumable items are immediately marked, labeled,
or otherwise physically identified as the customer's property, when practicable.
The contractor must separately state the charge for these consumable items
to the customer and must collect sales tax from the customer, unless the customer
qualifies for exemption under Tax Code, §151.309 or §151.310, or
under other provisions that grant the customer exemption from sales tax on
its purchases. See §3.322 of this title (relating to Exempt Organizations).
(3)
Lump-sum contracts.
(A)
A contractor who performs lump-sum contracts owes tax on
all materials, consumable items, equipment, taxable services, and other taxable
items that are used by the contractor or incorporated into a customer's property.
The contractor must pay tax to suppliers when the contractor purchases, leases,
or rents the taxable items. The contractor must accrue and remit use tax on
taxable items that are purchased, leased, or rented from an out-of-state seller
unless the out-of-state seller collected and gave the contractor a receipt
for Texas use tax. The contractor shall not collect from a customer any amount
represented to be tax on a lump-sum charge or on any portion of the charge.
A lump-sum contractor must refund to the customer any tax that is collected
in error or the contractor must remit the tax to the state. The contractor
may not retain such tax. See §3.286 of this title (relating to Seller's
and Purchaser's Responsibilities) for a discussion of "tax included" charges
and contracts.
(B)
A contractor who, in addition to performing lump-sum contracts,
sells, leases, or rents taxable items over the counter or performs separated
contracts may maintain a tax-free inventory of items that are held for resale.
A contractor who, in addition to performing lump-sum contracts, performs nonresidential
real property repair, restoration, and remodeling services and resells taxable
items as part of those taxable services may also maintain a tax-free inventory
of items that are held for resale. See §3.357 of this title (relating
to Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration,
Maintenance, New Construction, and Residential Property). A contractor may
issue a properly completed resale certificate instead of paying tax on items
that are purchased for a tax-free inventory when the contractor does not know
at the time of purchase whether the item will be resold or used in the performance
of a lump-sum contract. A contractor must hold a sales tax permit to issue
a resale certificate, and must collect, report, and remit tax to the comptroller
as required by §3.286 of this title (relating to Seller's and Purchaser's
Responsibilities) when the contractor sells, leases, or rents taxable items.
A contractor who separately states a charge for equipment that the contractor
uses is not renting that equipment to the customer.
(C)
A contractor who purchases taxable items under a valid
resale certificate and uses the items in a taxable manner owes sales or use
tax on the items. For example, a contractor who incorporates materials from
a tax-free resale inventory into realty under a lump-sum contract must accrue
and remit tax based on the purchase price of the materials. The contractor
must remit the tax to the comptroller for the reporting period in which the
materials were used. A contractor who purchases items that are specifically
intended for use in a lump-sum contract may not issue resale certificates
in lieu of tax for such items. See §3.285 of this title (relating to
Resale Certificates; Sales for Resale). For city, county, and special purpose
district taxes, see §3.377 of this title (relating to Divergent Use of
a Direct Payment, Resale or Exemption Certificate) and for transit taxes see §3.427
of this title (relating to Divergent Use of a Direct Payment, Resale, or Exemption
Certificate).
(D)
A contractor may not accept a direct payment exemption
certificate when the contractor performs a lump-sum contract for a person
who holds a direct payment permit. The lump-sum contractor owes tax on all
taxable items that are used on the job or that are incorporated into the direct
payment permit holder's realty. A direct payment permit holder may not authorize
a contractor or any other person to purchase tax free any taxable item through
use of the direct payment permit holder's permit. See §3.288 of this
title (relating to Direct Payment Procedures and Qualifications).
(4)
Separated contracts.
(A)
Except as otherwise provided in this section, a contractor
who performs a separated contract is a retailer of all materials that are
physically incorporated into the realty that is being improved. As a retailer,
the contractor must collect tax from the customer based upon the agreed contract
price of the incorporated materials. The tax rate must be applied to the agreed
contract price of materials, or to the price of the materials to the contractor,
whichever is greater. A contractor who performs a separated contract is also
a retailer of taxable services that are sold under the provisions of subparagraph
(D) of this paragraph, and of consumable items that are sold under the provisions
of paragraph (2)(B) of this subsection. The contractor may accept a properly
completed resale or exemption certificate from a customer who claims an exemption.
See §3.286 of this title (relating to Seller's and Purchaser's Responsibilities)
for a discussion of "tax-included" charges and contracts.
(B)
A contractor who performs a separated contract must hold
a sales tax permit and collect, report, and remit the tax as required by §3.286
of this title (relating to Seller's and Purchaser's Responsibilities). A contractor
who purchases taxable items for resale as part of a separated contract may
issue resale certificates to suppliers in lieu of tax. See §3.285 of
this title (relating to Resale Certificate; Sales for Resale). A contractor
may not give a resale certificate and must pay tax on the purchase, rental,
or lease of equipment that is intended for use in the performance of a contract.
(C)
A contractor may maintain a tax-paid inventory of materials.
If the contractor incorporates tax-paid materials into realty under a separated
contract or sells them over the counter or transfers the materials to a customer
as part of a taxable service, then the contractor must collect tax from the
customer based upon the agreed contract price of the materials or upon the
sales price of the taxable service. The contractor may claim a credit for
tax paid on materials resold to customers. The contractor must remit tax to
the comptroller on any difference that exists between the price that the customer
paid and the price that the contractor paid. See §3.338 of this title
(relating to Multistate Tax Credits and Allowance of Credit for Tax Paid to
Suppliers).
(D)
A contractor who performs separated contracts may issue
properly completed resale certificates in lieu of tax on taxable services
that the contractor resells to its customers. Examples include landscaping,
surveying, security services that are incorporated into the customer's realty
(alarm systems), and the final clean-up (janitorial services) of the construction
site. The charges for taxable services that are resold to the customer must
be separated from the charges for incorporated materials and other charges,
and the contractor must collect tax from the customer on charges for the taxable
services and incorporated materials. A contractor who performs a separated
contract may not issue a resale certificate for a taxable service that the
contractor uses or consumes, such as a security service to secure the job
site, telecommunication service, and daily clean-up (janitorial service or
garbage collection and removal) of the construction site. A contractor who
performs residential new construction should refer to paragraph (7) of this
subsection.
(E)
A contractor who improves realty for a direct payment permit
holder may accept a properly completed direct payment exemption certificate
in lieu of tax on all tangible personal property that is incorporated into
the direct payment permit holder's realty. The contractor owes tax on equipment
the contractor purchases, rents, or leases for use in the performance of the
contract with a direct payment permit holder. See §3.288 of this title
(relating to Direct Payment Procedures and Qualifications). A contractor who
performs a separated contract may not accept a direct payment exemption certificate
in lieu of tax on consumable items unless paragraph (2)(B) of this subsection
applies. A contractor who performs a separated contract may accept a direct
payment exemption certificate in lieu of tax on taxable services only under
the circumstances set out in paragraph (4)(D) of this subsection.
(5)
Contracts versus bids and change orders. For tax purposes,
the terms of a contract control over the terms of a bid. For example, if the
bid is lump-sum but the written contract is separated, then the contract determines
the tax responsibilities of the parties, and the customer is liable for tax
on incorporated materials. The terms of a contract also control change orders.
If the contract is lump-sum, then change orders will be treated as lump-sum
even if the change orders show charges for incorporated materials separate
from other charges. If the contract is separated and change orders are for
lump-sum amounts, then the lump-sum amounts will be treated as charges for
incorporated materials unless the contractor can reasonably demonstrate the
portion attributable to labor.
(6)
Different types of contracts between contractors and subcontractors.
For tax purposes, subcontractors are not required to use the same type of
contract as the general contractor. For example, a general or prime contract
may be lump-sum, while some or all subcontracts may be separated. Each subcontractor's
individual contract governs the subcontractor's tax responsibilities. In the
example given, the subcontractors with separated contracts must collect sales
tax from the general contractor. The general contractor must not collect any
tax from the general contractor's customer. When the general or prime contract
separately states labor and incorporated materials but some of the subcontracts
are lump-sum, the prime or general contractor should treat the lump-sum charges
as part of its separately stated labor charge and should not collect tax from
the prime contractor's customer on those charges from lump-sum subcontractors.
(7)
Real property services. A contractor is not required to
pay tax on real property services that are purchased as part of the construction
of a new residential structure or as part of an improvement that is located
immediately adjacent to the new structure and that is used in the residential
occupancy of the structure. The contractor must issue a properly completed
exemption certificate or other acceptable documentation to the service provider.
If the comptroller subsequently determines that the work is taxable, then
the contractor will be liable for all taxes, penalties, and interest that
accrue upon such purchases. For the purposes of this paragraph, "contractor"
includes a builder, developer, speculative builder, or other person who acts
as a builder to improve residential real property.
(8)
Materials that customers provide. A contract may specify
that a customer will provide materials and that the person who performs improvements
will provide the skill and labor that are necessary to incorporate the materials
into realty. Under this type of contract, the person who provides the skill
and labor will not incur tax liability on the materials. The customer is liable
for the tax on the materials and must pay tax at the time of purchase of the
materials.
(9)
Noninstalled items. A person who manufactures an item for
sale but who is not responsible for the incorporation of the item into realty
is a manufacturer who is subject to the provisions of §3.300 of this
title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).
For example, cabinet makers who do not affix the cabinets to realty are manufacturers
and not contractors.
(10)
Local tax. A contractor's responsibility for local sales
and use taxes depends on the type of contract. For information on city, county,
and special purpose district taxes, see §3.379 of this title (relating
to Contractors) and for information on transit taxes, see §3.429 of this
title (relating to Contractors).
(11)
Enterprise projects and defense readjustment projects.
In order for an enterprise project or a defense readjustment project to avail
itself of certain sales tax refunds, the project must enter into a separated
contract, and the charges for items that qualify for enterprise project or
defense readjustment project refunds must be separately stated. A contractor
who performs a separated contract must collect sales tax from the project
on the sales price of the incorporated materials. See §3.329 of this
title (relating to Enterprise Projects, Enterprise Zones, and Defense Readjustment
Zones).
(12)
Manufacturing facilities. For a manufacturer to qualify
for sales tax exemptions on manufacturing equipment that is installed under
a contract to improve real property, the manufacturer must enter into a separated
contract. Additionally, the contract must separately state the charge for
the qualifying manufacturing equipment. See §3.300 of this title (relating
to Manufacturing; Custom Manufacturing; Fabricating; Processing).
(c)
Tax responsibilities of contractors who perform lump-sum
and separated contracts for exempt organizations.
(1)
Exemption certificates and other required proof of exemption.
A contractor must obtain properly completed exemption certificates to document
exempt contracts. Written contracts or written purchase orders that are issued
by governmental entities exempted under Tax Code, §151.309, are acceptable
documentation of exempt contracts.
(2)
Contractor liability.
(A)
A contractor may claim an exemption under Tax Code, §151.311
on a purchase of a taxable item for use under a contract to improve realty
for an organization that is exempt under Tax Code, §151.309 or §151.310.
If the comptroller subsequently determines that the organization is not exempt,
then the contractor is liable for all taxes, penalties, and interest that
accrue upon such purchase. If the validity of a claimed exemption or the exempt
status of the customer is unclear, then the contractor may not accept the
exemption certificate in good faith and should request additional evidence
of the exempt status of the contract. If the customer claims to be an exempt
organization, then a letter of sales and use tax exemption from the comptroller
that is addressed to the customer relieves the contractor from further inquiry
regarding the exempt status of the customer. See §3.287 of this title
(relating to Exemption Certificates).
(B)
A contract with a private party to improve real property
owned by an exempt entity, other than a governmental entity described in Tax
Code, §151.309, is not an exempt contract if the improvement to real
property is for the primary use and benefit of the private party. However,
a contractor in a non-exempt contract may purchase tax free tangible personal
property that is used to improve real property owned by a governmental entity
described in Tax Code, §151.309, if that tangible personal property is
donated to the governmental entity and if the following conditions are satisfied:
(i)
the contract between the contractor and the private party
is a separated contract. See subsection (b) of this section for a discussion
of lump-sum and separated contracts;
(ii)
the contract provides that title to the materials that
are used to perform the contract passes to the private party when the materials
are delivered to the job site but before they are incorporated into the realty
or used by either the contractor or the private party; and
(iii)
the contract provides that the private party intends
to donate the materials to the governmental entity before the materials are
incorporated into the realty or used by the contractor. The private party
must provide the contractor with a letter of intent or other document from
the governmental entity that states its intent to accept the property.
(3)
Materials that exempt customers provide. A contract may
specify that the exempt customer will provide the materials and the contractor
will provide the skill and labor that are necessary to perform the contract.
Under this type of contract, the contractor will not incur tax liability on
the materials. The exempt customer may issue exemption certificates to suppliers
in lieu of tax when purchasing the materials. Materials that are incorporated
into real property improvements that are not related to the exempt purpose
of the customer exempt under Tax Code, §151.310(a)(1) or (2), are taxable.
In this situation, the exempt customer must pay tax to suppliers when purchasing
the materials. See also §3.322 of this title (relating to Exempt Organizations).
(4)
Exempt items. The following items are exempt from sales
and use tax when purchased for use in the performance of an exempt contract:
(A)
tangible personal property that is incorporated into the
realty;
(B)
consumable items that are necessary and essential to the
contract and are completely consumed at the job site; and
(C)
taxable services that are performed at the job site and
are:
(i)
expressly required by the exempt contract to be provided
or purchased by the contractor; or
(ii)
integral to the performance of the exempt contract.
(5)
Contractor's exemption or resale certificate. A contractor
who performs a lump-sum or separated contract may issue a properly completed
exemption certificate to a supplier for the purchase of exempt items that
are identified in paragraph (4) of this subsection. The certificate must be
properly completed and identify the contractor as the purchaser, the exempt
entity for whom the improvements are made, and the project for which the items
are being purchased. See §3.287 of this title (relating to Exemption
Certificates). A contractor may choose to give a properly completed resale
certificate when purchasing materials that will be incorporated into the customer's
realty under a separated contract.
(6)
Equipment. All machinery and equipment, including repair
and replacement parts and accessories, that a contractor uses to perform contracts
for any exempt entity are taxable. A contractor who purchases, rents, or leases
equipment for use on a contract to improve realty for an exempt entity must
pay tax on that purchase, rental, or lease.
(d)
Development work. For the purposes of this subsection,
development work means a contract with a private party to improve real property
by building public infrastructure, such as roads or sewer lines, provided
that the improvements are dedicated to and will be accepted by a governmental
entity. To qualify as an exempt contract, the private party must dedicate
the realty and the improvements to the governmental entity before the work
begins, and the governmental entity must accept or conditionally accept the
realty and the improvements.
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State, on April 12, 2001.
TRD-200102103
Martin Cherry
Deputy General Counsel for Tax Policy and Agency Affairs
Comptroller of Public Accounts
Earliest possible date of adoption: May 27, 2001
For further information, please call: (512) 463-3699