How did Texas apply an October 2, 1984 tax-rate increase to change orders and undelivered work under older contracts?

Plain-English summary

The Texas Comptroller addressed amendments made after October 2, 1984 to contracts entered into before that date.

When a property owner's request for upgraded or more expensive materials, or a change in the original specifications requiring additional materials, increased material costs, the entire amount charged under the change order was subject to the additional 1/8% tax.

The additional tax did not apply when material costs increased only because the supplier raised its price or materials had to be substituted because of availability.

The still-undelivered portion of the original contract remained subject to the pre-October 2 tax rate.

What this means for you

Contractors

Identify why a change order increased costs. Owner-driven upgrades and specification changes received different treatment from supplier pricing or availability changes.

Property owners

An owner-requested upgrade could expose the entire change-order charge—not just the incremental material cost—to the added 1/8% tax described in the letter.

Accountants and tax professionals

Keep the original contract, change order, material specifications, supplier pricing records, and delivery status needed to separate the old-rate work from later changes.

Common questions

Q: Did an owner-requested material upgrade trigger the additional tax?
A: Yes. The entire change-order amount was subject to the additional 1/8% tax.

Q: Did a supplier's price increase trigger the additional tax?
A: No.

Q: What if materials were substituted only because the originals were unavailable?
A: The letter said the materials were exempt from the additional tax.

Q: Which rate applied to undelivered work in the original contract?
A: The pre-October 2 rate.

Citations and references

• The letter identifies an additional 1/8% tax effective October 2, 1984 but cites no statute or rule number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8411L0597D12

Original ruling text

November 9, 1984

Dear **:

Thank you for your recent letter regarding the effect of change orders
on contracts entered into prior to October 2, 1984. In your letter
you ask the following questions:

1. What is the proper tax applicable to a post-October 2 amendment
   of a preexisting contract?

ANSWER: A change order, necessitated by the property owner's request
for upgraded or more expensive materials or by a change in the original
specifications resulting in additional materials, which increases the
cost of materials would make the entire amounts charged under the
Change Order Subject to the additional 1/8% tax. Where the increase in
the cost of materials is due to a supplier's price increase or
substitution of materials because of availability, the materials would
be exempt from the additional tax.

2. What is the tax applicable to the original portion of an amended
   contract that is still undelivered as of October 2, 1984?

ANSWER: That portion of the original contract would be subject to the
pre October 2 rate.

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

Please feel free to contact me if you have additional questions. You
may write me or call toll-Free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Al Van Allen
Tax Policy
Tax Administration Division