If a nontaxable engineering firm passes along the cost of taxable materials or services to its client with a markup, does the whole reimbursement become taxable, or just the markup?

Plain-English summary

An engineering firm (a nontaxable-service provider that doesn't hold a Texas sales tax permit) sometimes buys taxable surveying services or project materials on behalf of its pipeline-industry clients, pays sales tax on those purchases itself, and then bills the client back — sometimes at exact cost, sometimes with a markup like 15%. It also runs a separately billed "project manager" service (overseeing the project, coordinating engineers, compiling a materials list). It asked the Comptroller how to handle all three billing situations.

The Comptroller's answers:

1. Exact-cost reimbursement of taxable purchases: Nontaxable service providers CAN pass through the exact cost of a taxable item or service they bought and were charged tax on, without becoming a "seller" required to collect tax — but they must separately state the reimbursement amount AND separately state the amount of sales tax being reimbursed on the invoice.
2. Reimbursement WITH markup: The moment any markup is added — even a small percentage over cost — the transaction becomes a taxable sale of the item, and the provider must collect sales tax on the entire reimbursement (cost plus markup), not just the markup portion.
3. Project manager service: Not taxable at all — overseeing the project, developing materials lists, and coordinating engineers aren't enumerated taxable services, as long as the charge is kept separate from any taxable item/service being resold.

What this means for you

Engineers, consultants, and other nontaxable-service providers who pass through client costs

If you're reimbursed at your exact cost for taxable items/services you buy on a client's behalf, keep that pass-through completely separate from your own service fee, and separately state both the reimbursed cost and the sales tax you paid. The instant you add a markup or "purchasing fee" to that reimbursement, you become a retailer of that item for tax purposes and owe sales tax on the full marked-up amount — the markup doesn't stay outside the tax base.

Businesses billing clients for pass-through project costs generally

This "no markup on tax-free reimbursements" rule isn't unique to engineering — it reflects a general Texas sales tax principle: a true cost reimbursement (invoice matches exactly what you paid, tax included) is not itself a sale, but adding value/margin on top converts you into a seller of that item.

Accountants and tax professionals

The key mechanical point is in Tex. Tax Code § 151.007(a): a marked-up charge is part of the taxable item's "sales price," so tax applies to the whole thing, not just the incremental markup. Compare STAR Accession Nos. 9508403L (1995) and 200206210L (2002) for the exact-cost reimbursement rule, and STAR Accession No. 200009737L (2000) for the separate "unrelated consulting services" carve-out that covers the project-manager fee here.

Common questions

Q: Can I reimburse myself at cost-plus-a-small-fee and only charge tax on the fee portion?
A: No — per this ruling, any markup on a pass-through reimbursement makes the ENTIRE reimbursement (cost plus markup) taxable, not just the markup.

Q: Do I need a sales tax permit if I only ever pass through exact costs, never marking up?
A: Not necessarily, per the ruling — a nontaxable service provider that only reimburses exact costs (with tax separately reimbursed and stated) generally doesn't need to register as a seller for those pass-throughs. But check your specific facts; permit requirements can turn on other activities too.

Q: Can another business rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts in the request. If your invoicing practices differ (e.g., you don't separately state the reimbursement and tax), your result could differ.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.010 (Taxable Item); § 151.0101 (Taxable Services)
• Tex. Tax Code § 151.008 (Seller or Retailer); § 151.052, § 151.103 (collection duties)
• Tex. Tax Code § 151.007(a) (sales price includes markup)
• 34 Tex. Admin. Code § 3.286(b)(1) (seller permit responsibilities)

Cited prior guidance:

• STAR Accession No. 9406L1313G06 (June 23, 1994) — nontaxable service providers and permits
• STAR Accession Nos. 200904585N (2009), 9508403L (1995), 200206210L (2002) — exact-cost reimbursement mechanics
• STAR Accession No. 200009737L (2000) — separately stated unrelated consulting services

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202503025L

Original ruling text

March 28, 2025

RE: Private Letter Ruling No. PLR20240418163729

Dear Mr. **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to the request dated April 18, 2024. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of **’s (Taxpayer) charges to its clients.

Facts Presented

Taxpayer provides engineering and related consulting services, primarily for oil and natural gas pipelines and related facilities. Taxpayer’s staff includes engineers, drafters, designers, and project managers. Taxpayer does not construct improvements to real property, and Taxpayer does not hold a Texas sales and use tax permit.

Taxpayer subcontracts inspection and surveying services when necessary for its engineers to complete their services, as Taxpayer does not have its own employees to perform these services. Taxpayer pays tax on its purchases of any taxable surveying services.

Typically, Taxpayer provides its customer an Engineering Bill of Materials, which lists specific materials the client needs for the construction of its project. The client normally purchases those items for itself. On some projects, however, Taxpayer directly purchases the necessary materials and services, pays any applicable sales tax at the time of purchase, and charges its client for the purchase. Taxpayer either charges an exact reimbursement to its client for materials and services that it directly purchases or applies a markup on the charges (ex: 15 percent of cost). Taxpayer has not been charging sales tax on either exact reimbursement or markup charges.

Taxpayer also employs staff who provide a “project manager” service, which includes duties such as overseeing the project, obtaining surveying services, reviewing survey data and easement lines, developing a list of materials necessary to complete the project, and coordinating engineering services. The project manager service is provided in conjunction with engineering services.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: When Taxpayer purchases a taxable surveying service and separately states a charge for that service to be reimbursed for that expense by its customer, should Taxpayer separately state the charge for reimbursement of taxes paid on those services?

Ruling One: Yes, as a nontaxable service provider, Taxpayer should separately state the charge for reimbursement of the taxable surveying service and tax paid on the taxable service. If Taxpayer charges a markup on the reimbursement, Taxpayer must collect sales and use tax on the total reimbursement and not just the markup.

Question Two: When Taxpayer bills customers to be reimbursed for the purchase of materials, should Taxpayer separately state the charge for reimbursement of taxes paid on those materials?

Ruling Two: Yes, as a nontaxable service provider, Taxpayer should separately state the charge for reimbursement of the materials and tax paid on the materials. If Taxpayer charges a markup on the reimbursement, Taxpayer must collect sales and use tax on the total reimbursement and not just the markup.

Analysis for Ruling One and Two: Texas imposes sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Only specifically enumerated services are taxable in Texas. Section 151.0101 (Taxable Services).

A seller is a person engaged in the business of making sales of taxable items. Section 151.008 (Seller or Retailer). Each seller who is engaged in business in this state must apply to the Comptroller and obtain a sales and use tax permit. Rule 3.286(b)(1) (Seller’s and Purchaser’s Responsibilities). A seller is responsible for collecting and remitting Texas sales and use tax on its sales of taxable items in Texas. Sections 151.052

(Collection by Retailer) and 151.103 (Collection by Retailer; Purchaser’s Receipt).

Engineering services are not included in the list of taxable services under Section 151.0101 and are not taxable. Providers of nontaxable services, such as engineering services, generally do not make sales of taxable items and are not required to have a permit. STAR Accession No. 9406L1313G06 (June 23, 1994).

Agency guidance allows nontaxable service providers to separately state costs for taxable items that they purchase and are reimbursed for by their customers. Under this guidance, the reimbursement charge must be the cost of the taxable item without markup. The nontaxable service provider must also separately state the amount of sales tax that is being reimbursed. Taxpayer must clearly identify the reimbursement for sales tax on a bill or invoice. See STAR Accession Nos. 200904585N (April 1, 2009) (“reimbursement for sales tax”) and 9406L1313G06 (“tax reimbursement” or “reimbursement of tax”).

A markup or purchasing fee that exceeds the sales price is taxable as part of the taxable item’s sales price, and sales tax is due on the entire charge for the taxable item. See Section 151.007(a) (Sales Price or Receipts) and STAR Accession Nos. 9508403L (Aug. 17, 1995) (separately state the item and the associated tax) and 200206210L (June 24, 2002) (reimbursement of exact price without adding a mark-up). Therefore, Taxpayer is making a sale of a taxable item when it sells the item with a markup and must collect sales tax on the total sales price as required for Texas sellers. See Sections 151.007(a) and 151.052(a).

Question Three: Is Taxpayer’s “project manager” service subject to sales tax?

Ruling Three: No, Taxpayer’s “project manager” service is not subject to sales tax.

Analysis for Ruling Three: Taxpayer’s project manager service involves overseeing a project, developing a list of materials necessary to complete the project, and coordinating engineering services. These activities are not one of the enumerated taxable services listed in Section 151.0101. As long as the project manager is not providing a taxable surveying service (or other taxable item) and the service is separately stated if provided with a taxable item, the service is not taxable. See for example STAR Accession No. 200009737L (Sept. 28, 2000) (“Unrelated consulting services which are the expert or professional opinions of the consultant are not taxable when they are separately stated and not connected in any way to the sale of a taxable item.”).

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20240418163729.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.