What local sales tax rate does a lump-sum contractor pay on materials for a new construction project, when the contractor buys those materials from a Houston vendor?

Plain-English summary

Note: this ruling's own generic STAR subject-matter heading references "Pasadena Industrial District," but the letter's actual text discusses a Houston-based vendor and Houston-area local taxes generally, with no mention of Pasadena — the summary below reflects only what the letter's text actually says.

A contractor asked about the correct local sales tax rate to pay on materials for a lump-sum new construction contract. The Comptroller explained the sourcing rule:

• A contractor performing new construction under a lump-sum contract is the consumer of the materials incorporated into the real property — the contractor (not the property owner) pays sales tax to the vendor on those materials.
• The local tax rate is based on the vendor's place of business and how delivery happens — not on the job site's location, and not on the contractor's own location.
• If the contractor buys materials from a vendor located in Houston, and the vendor ships or delivers the materials to the job site (outside the Houston MTA), the rate is 7.25% (6.25% state + 1% Houston city) — the vendor does not collect the 1% Houston MTA tax when delivering outside the MTA.
• If the contractor instead takes delivery at the vendor's Houston place of business, the rate is 8.25% (6.25% state + 1% Houston city + 1% Houston MTA).
• Having a direct payment permit, or being located outside any taxing city, does not change this analysis — the tax rate a contractor pays on material purchases turns on the vendor's location and the delivery mechanics, not the contractor's own address or permit status.

What this means for you

Construction contractors on lump-sum contracts

You're the taxable consumer of the materials you incorporate into a job — pay attention to where your vendor is located and how you take delivery, because that (not your own business location or the job site) sets your local tax rate. Picking up materials at the vendor's in-city location can trigger an extra local tax layer (like the Houston MTA's 1%) that wouldn't apply if the vendor ships the materials to you instead.

Contractors with a direct payment permit

Don't assume your direct payment permit or your own out-of-city location changes the tax rate on materials bought under a lump-sum contract — this letter specifically confirms it doesn't.

Accountants and tax professionals

A clean worked example of vendor-location/delivery-point sourcing for a lump-sum contractor's material purchases, useful whenever a client is comparing pickup vs. delivery options from an in-city vendor with overlapping local tax jurisdictions (city + MTA).

Common questions

Q: What determines the local sales tax rate a lump-sum contractor pays on construction materials?
A: The vendor's place of business and how the materials are delivered — not the job site location or the contractor's own address.

Q: Does picking up materials at the vendor's location cost more in tax than having them delivered?
A: It can — in this example, taking delivery at the vendor's in-city location added a 1% MTA tax that wasn't collected when the vendor shipped the same materials to a job site outside the MTA.

Q: Does a direct payment permit change which tax rate applies?
A: No, according to this letter.

Q: Can I rely on this letter for my own contract?
A: No. This opinion is based on the facts presented, and additional or different facts may change the opinion; it can be relied on only by the taxpayer it was issued to.

Citations and references

No statutes or rules are cited by name in the letter's text (it describes rate mechanics rather than citing a specific Tax Code section or Comptroller rule).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200002032L

Original ruling text

February 4, 2000

<**>

Subject: Tax Rate for the Contractor on New Construction Lump-Sum Contracts

Dear **:

Thank you for your recent email concerning the proper tax rate on lump-sum new
construction projects in the Pasadena Industrial District.

A contractor performing new construction under a lump-sum contractor is the
consumer of the incorporated materials. The contractor is required to pay sales
tax to the vendor when buying materials to be incorporated into realty. The
contractor must pay local sales tax based on the location of the vendor's place
of business.

The contractor must pay 7.25% (6.25% state sales and 1% Houston city sales) tax
when buying materials from a vendor located in Houston that ships or delivers
the materials to the job site. The vendor does not collect the 1% Houston MTA
sales tax when delivering materials to a location outside the Houston MTA. The
contractor must pay 8.25% (6.25% state sales, 1% Houston city sales and 1%
Houston MTA sales) tax if the contractor takes delivery of the materials at the
vendor's place of business in Houston.

The fact that you have a direct payment permit and your location is outside any
taxing city does not determine the tax rate a contractor pays on material
purchases.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825. My
e-mail address is .

Sincerely,

Eddie C. Washington
Tax Policy Division