Did change orders and extras added to a pre-1987 Texas contract automatically qualify for the prior-contract sales-tax rate exemption?

Plain-English summary

A written contract or bid signed before January 1, 1987 would usually qualify for exemption from the tax-rate increase then at issue. A seller that accepted a contractor's prior-contract exemption certificate in good faith, without knowledge that it was invalid, had sufficient audit proof for not collecting at the current rate.

Change orders and extras did not automatically qualify. The certificate issuer had to prove to an auditor that the changes resulted from factors beyond the parties' control. The letter's example was a supplier's inability to provide specified materials, requiring a more expensive substitution without destroying the exemption.

The burden of proving the added work qualified rested on the person issuing the certificate, assuming the seller accepted it in good faith.

What this means for you

The original contract date alone did not protect later additions. The reason for the change and the certificate issuer's supporting proof mattered, while the receiving seller's protection depended on good-faith acceptance without knowledge of invalidity.

Common questions

Did every pre-1987 written contract qualify? The letter said a written contract or bid signed before January 1, 1987 would usually qualify for the rate-increase exemption.

Did change orders automatically qualify? No.

What kind of change could preserve the exemption? The letter gave the example of an unavoidable material substitution caused by supplier unavailability.

Who bore the burden of proof? The person issuing the prior-contract exemption certificate.

Citations and references

• Comptroller Rule 3.376 — prior-contract exemptions and the sample certificate.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8703L0807G06

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller March 24, 1987

Dear ***:

Thank you for your letter of March 12, 1987 concerning prior contract
exemptions.

A written contract or written bid signed prior to January 1, 1987 will
usually qualify for exemption from the increase in the tax rate. If a
contractor issues a prior contract exemption certificate to you and you accept
it in good faith, lacking any knowledge that the claimed exemption is invalid,
you have sufficient proof in the event of an audit, as to why you did not
collect tax at the current rate.

Change orders or extras added-on to an original contract do not
automatically qualify for exemption. The contractor has to be able to prove
to an auditor that the changes were due to factors beyond the control of
parties to the contract. For example, if a supplier could not obtain materials
called for in the original contract and a substitution of more expensive
materials was necessary, then the prior contract exemption would not be lost.
This, however, is often not something that you would be able to prove. The
burden of proof would be on the person issuing the prior contract exemption
certificate to you assuming that you accept the certificate in good faith.

I have enclosed a copy of Rule 3.376 Prior Contract Exemptions. Copies
of the sample certificate may be used for changes in state, local or MTA sales
and use tax.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
Julie Pesl
Tax Policy Section
Tax Administration Division