How did Texas treat lump-sum subcontracts, itemized change orders, and freight under separated construction contracts?

Plain-English summary

The Comptroller said it would examine subcontracts individually. When a lump-sum subcontract was for improving real property, the subcontractor was responsible for paying the tax rather than charging sales tax to the general contractor on the lump-sum bill.

The Comptroller agreed that a later change order did not become a separated contract merely because the change-order costs and billing were itemized. If the original subcontract was lump sum, the described change order remained lump sum.

For separated subcontracts involving fabricated items stored at the subcontractor's yard, the Comptroller agreed with the stated freight treatment where the contract transferred title at the subcontractor's place of business before delivery. Separately stated transportation after that sale was not taxable.

Common questions

Did the general contract alone determine a subcontractor's responsibility? No. The Comptroller said it would examine each subcontract individually. Did itemizing a change order convert a lump-sum subcontract? No under the stated facts. Why was the freight not taxable? It was separately stated, occurred after the sale, and the contract passed title before transportation.

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/8504L0642D08

Original ruling text

April 25, 1985

Dear ***:

Thank you for your letter concerning your understanding of the tax
responsibilities of contractors improving real property.

You stated that, "**** is a general contractor
with commercial construction projects including office buildings,
hospitals and hotels ranging in size from ten to one hundred million
dollars. All of our work is now construction, and as a general
contractor, we assume responsibility for the entire contract."

1. When we are awarded a lump sum contract and, in turn, issue lump sum
   subcontracts for furnishing and installing kitchen equipment, toilet
   accessories or similar items, the subcontractor is considered to be the
   consumer of this equipment and pays the appropriate sales tax to his vendor.
   Items of this nature including soap dispensers, paper towel dispensers,
   counters and cabinets, stoves, work stations, benches, lockers, saunas, etc.
   are considered to be part of the ready. Subcontractors who furnish and install
   these items under lump sum contracts should not be charging sales tax when
   billing the general contractor for these items.

Response: We will look to the subcontracts individually to determine the
responsibilities of the parties to the contract. If the lump-sum subcontracts
are for the improvement to real property, then the subcontractor is responsible
to pay the tax.

2. When we are awarded a lump sum contract and, in turn, issue a lump sum
   subcontract, subsequent change orders to the subcontract in which costs are
   separately itemized do not become separated contracts. Since the original
   subcontract is lump sum, the change order is also lump sum although the change
   order itself as well as the subcontractor's billing may separately itemize the
   change order's cost.

Response: I agree.

3. When we are awarded a separated contract and, in turn, issue separated
   subcontracts for, the fabrication, installation and/or erection of items like
   precase and structural steel, the finished fabricated items are generally stored
   for some length of time at the subcontractor's yard until needed by the job.
   The subcontractor rightfully bills the general contractor for these stored items,
   and the general contractor, in turn, bills the owner. When the owner pays for the
   fabricated stored items, by contract, title to the stored materials becomes vested
   in the owner and, if requested, his construction lender may hold a perfected first
   security interest in the stored materials. When the stored materials are delivered
   to the job site, the transportation charges are not taxable if separately stated
   since the freight occurred after the sale and the contract provisions specify that
   title passes at the subcontractor's place of business.

Response: I agree.

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
l-800-252-S555 toll free from anywhere in Texas. You may write us at the Tax
Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division