A contractor paid tax in full on a lump-sum new-construction contract to install a manufacturing process line -- can it now claim a manufacturing exemption refund on the qualifying equipment, even though the contract was lump sum?

Plain-English summary

A contractor completed a manufacturing process-line project for a house-siding manufacturer in Texas under a lump-sum new-construction contract, and paid all sales and use tax at the time. Having heard about a possibly-retroactive law letting manufacturers claim a manufacturing exemption even on lump-sum contracts, the contractor asked whether its client could now get a manufacturing refund.

The answer draws a sharp line between NEW construction and REPAIR/remodel work.

For a lump-sum NEW construction contract, the manufacturing exemption is simply not available at all -- Rule 3.300(i) treats the contractor as the "consumer" of everything used on the job, and specifically states neither the contractor nor the manufacturer may claim an exemption on otherwise-qualifying manufacturing equipment installed that way. There's no after-the-fact fix; the exemption door is closed by the lump-sum new-construction structure itself.

For a lump-sum contract to REPAIR, REMODEL, or RESTORE an existing nonresidential improvement, Rule 3.300(i) works completely differently: the lump-sum charge is only presumed taxable, and that presumption can be overcome. The service provider can separately state a reasonable charge for the taxable services at the time of the transaction, OR -- importantly -- if that wasn't done at the time, either the service provider OR the purchaser can later establish, with documentary evidence (purchase invoices, bid sheets, schedules of values), what percentage of the total lump-sum charge relates to exempt qualifying manufacturing equipment. That means a refund claim after the fact is realistically possible for repair/remodel work in a way it categorically is not for new construction.

Because the letter's facts didn't make clear whether the process-line project was installing equipment as new construction, or tearing out and replacing existing equipment as a remodel of an existing improvement, the Comptroller couldn't give a definitive answer and asked the taxpayer for more detail on which category the job actually falls into.

What this means for you

Contractors installing manufacturing equipment under lump-sum contracts

The single most consequential fact is whether your job is new construction or repair/remodel of an EXISTING improvement. New construction under a lump sum permanently forecloses the manufacturing exemption on installed equipment -- there's no later fix. Repair/remodel work, even under a lump sum, preserves a path to carve out the exempt equipment's share, either at billing time or later with documentation.

Manufacturers who paid full tax on a lump-sum project and are now hoping for a refund

Check whether your project was genuinely new construction (no refund possible) or repair/remodeling/restoration of existing real property improvements (a refund may be available if you can document the qualifying-equipment percentage of the charge).

Contractors who didn't separately state taxable services at the time of a repair/remodel job

You're not out of options -- Rule 3.300(i) explicitly allows establishing the exempt equipment percentage LATER, through documentary evidence like invoices, bid sheets, or schedules of values, rather than requiring it to have been itemized on the original bill.

Common questions

Q: Can a manufacturer get a refund on equipment installed under a lump-sum NEW construction contract?
A: No -- per this letter, the manufacturing exemption is categorically unavailable for equipment installed that way; the contractor is treated as the consumer of everything used, with no exemption for either the contractor or the manufacturer.

Q: What if the work is repairing or remodeling an existing facility instead of new construction?
A: Then a lump-sum charge is only presumed taxable, and either the service provider or the purchaser can later document what portion of the charge relates to exempt qualifying manufacturing equipment.

Q: What documentation can establish the exempt equipment's share after the fact?
A: Purchase invoices, bid sheets, or schedules of values, per Rule 3.300(i) and Rule 3.357.

Q: Does this letter bind the Comptroller for this taxpayer's actual project?
A: No -- the letter itself says the facts as presented were too unclear to give a definitive ruling, and asks for more detail; like all these letters, it's informal 2001 guidance on specific facts, not a modern Private Letter Ruling or General Information Letter.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.300(i) (manufacturing exemption treatment under lump-sum new-construction vs. repair/remodel contracts)
• 34 Tex. Admin. Code Rule 3.291 (contractors)
• 34 Tex. Admin. Code Rule 3.357 (labor relating to nonresidential real property repair, remodeling, restoration, maintenance, new construction, and residential property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200108408L

Original ruling text

August 13, 2001

Dear **:

Thank you for your inquiry requesting a written ruling on the following fact
situation and questions.

COMPANY completed a project in CITY, Texas for a company that manufactures
house siding. The project was a lump-sum contract for new construction of a
process line. COMPANY paid all sales and use tax. In our phone conversation the
other day you mentioned a new law allows manufacturers to receive a
manufacturing exemption even though the contract is lump sum. You also thought
that the law could possibly be retroactive. Would our client qualify for a
manufacturing refund now, even though it was a lump sum contract?

Response: The manufacturing exemption is not available for equipment installed
under a lump-sum contract for new construction. The contractor is considered
the consumer of all the goods that the contractor uses in the performance of a
lump sum new construction contract, and neither the contractor nor the
manufacturer may claim an exemption on otherwise qualifying manufacturing
equipment. Subsection (i) of Rule 3.300 - Manufacturing; Custom Manufacturing;
Fabricating; Processing (copy enclosed) states in part:

. . . . A lump-sum charge to perform new construction as covered in sec. 3.291
of this title (relating to Contractors) is not taxable. The contractor is the
consumer of all the goods that the contractor uses in the performance of a lump
sum new construction contract, and neither the contractor nor the manufacturer
may claim an exemption on otherwise qualifying manufacturing equipment.

Emphasis added.

If on the other hand, your company is repairing, remodeling or restoring an
existing nonresidential improvement to realty under a lump-sum charge,
subsection (i) of this rule does allow for either the service provider or the
purchaser to later establish the percentage of the total charge for the taxable
service that relates to exempt manufacturing equipment.

. . . . A lump-sum charge to repair, remodel, or restore nonresidential realty
is presumed taxable. The presumption may be overcome by the service provider
at the time the transaction occurs by separately stating to the customer a
reasonable charge for the taxable services. However, if the charge for the
qualifying manufacturing equipment is not separately stated at the time of the
transaction, the service provider or the purchaser may later establish for the
comptroller, through documentary evidence, the percentage of the total charge
that relates to exempt qualifying manufacturing equipment. Examples of
acceptable documentation include purchase invoices, bid sheets, or schedules of
values. See sec. 3.357 of this title (relating to Labor Relating to
Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New
Construction, and Residential Property).

Emphasis added.

From the fact situation that you presented, it is unclear if you are providing
new construction, i.e., installing equipment as an new improvement to realty
under a lump-sum contract, or remodeling an existing improvement to realty
(i.e., tearing out existing equipment and replacing it with new equipment that
qualifies as an improvement to realty).

You may wish to provide additional details on this job, so that we can give you
a definitive ruling on whether you fall in the second category (remodeling
service) that allows you to restate your lump-sum charge.

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, you may e-mail our tax help section at .
You may also 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.

Sincerely,

Gilbert Zamora
Tax Policy Division