Who paid and collected tax under lump-sum versus separated home-improvement contracts?

Plain-English summary

A lump-sum contract used one total contract price without separating materials from skill and labor. Separate customer invoices did not convert it into a separated contract unless those invoices were a controlling part of the contract.

For lump-sum work, the contractor was the consumer of materials, supplies, and equipment used or incorporated into the customer's property. The contractor paid tax to suppliers when purchasing those items and did not collect tax from the customer on the lump sum or any part of it.

For a separated contract, which separated materials from labor, the contractor was a retailer of materials physically incorporated into the improved realty and collected tax from the customer on the agreed materials price.

The letter then stated that, because the submitted contract was lump sum, the contractor was the consumer and "you do not have a valid deduction for income tax purposes." The body gives no explanation for that income-tax statement, so this page does not infer what deduction was meant.

Common questions

Did separate invoices always make a contract separated? No; they had to be a controlling part of the contract. Did the contractor collect tax from a lump-sum customer? No. What was taxed to the customer under a separated contract? The agreed contract price of incorporated materials.

Citations and references

The reproduced letter cites no numbered statute or 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/8504L0634A07

Original ruling text

April 15, 1985

Dear ***:

Thank you for your letter of April 4, 1985, concerning a lump-sum
contract for home improvements and sales tax.

A lump-sum contract means a contract in which the agreed contract price
is one lump-sum amount and in which the charges for materials are not
separate from the charges for skill and labor. Separated invoices issued
to the customer will not change a lump-sum contract into a separated
contract unless the invoices are a controlling part of the contract.
Contractors performing lump-sum contracts are consumers of all materials,
supplies, and equipment used or incorporated into a customer's property.
As a consumer, a contractor must pay tax to suppliers at the time the
materials are purchased. A contractor will not collect tax from a cus-
tomer on a lump-sum charge or on any portion of the charge.

Contractors performing separated contracts, (contracts which separate
materials from labor) are considered retailers of all materials
physically incorporated into the realty being improved. As a retailer, the
contractor must collect tax from the customer based upon the agreed
contract price of the materials.

Since the contract you submitted is lump-sum, the contractor is the
consumer, therefore, you do not have a valid deduction for income tax
purposes.

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

If you have any, questions or need more information, please call us at
1-800,-252-5555 toll free from anywhere in Texas.You may write us at the
Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division