When did a pre-July 21, 1987 trash-collection contract qualify for the prior-contract exemption, and did automatic renewal preserve the exemption?

Plain-English summary

A trash collection company used contracts that automatically renewed for three years unless canceled. One customer changed that clause to renewal every 30 days.

The Comptroller said an original contract could qualify for the prior-contract exemption if it was entered before July 21, 1987, set a fixed price, specified the level of service, and covered a definite period such as three years. Service provided only on request or as needed did not qualify.

The renewal option did not extend the old exemption: exercising it created a new contract. The 30-day arrangement did not qualify. The company also could not accept a prior-contract exemption certificate if it knew the claimed exemption was invalid; certificates had to be accepted in good faith.

What this means for you

The historical exemption required more than an old signature date. The agreement itself needed a fixed price, defined service, and definite term, and later renewal was treated as a new contract.

Common questions

Did an automatically renewed three-year contract qualify forever? No. The original contract could qualify, but exercising the renewal option created a new contract.

Did a 30-day renewable contract qualify? No.

Did special or as-needed pickups qualify? No. The letter excluded service provided on request or as needed.

Could the company accept any signed exemption certificate? No. It could accept one only in good faith and not when it knew the exemption was invalid.

Citations and references

• 34 Tex. Admin. Code Rule 3.319 (prior contracts)
• 34 Tex. Admin. Code Rule 3.356 (real property services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0845D09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 5, 1987

Dear ***:

Thank you for your telephone call October 30, 1987, concerning prior
contracts.

You stated that you are a trash collection company with automatic
renewable
contracts. You asked the following questions:

1. Our contracts read, "automatically renewed for three years," if not
   cancelled at the end of each three year period. Does that qualify as a
   prior contract?

2. One of our customers crossed out the phrase in #1 above and inserted
   "at the end of each thirty days". Does that qualify for the prior con-
   tract exemption?

3. If our customer signs a prior contract exemption certificate and
   really doesn't qualify, do we have to collect tax?

Answers:

1. The contract may qualify as a prior contract if it is (1) entered
   into before July 21, 1987; (2) at a fixed price; (3) to provide a spe-
   cific level of service (specified number of pick-ups per week, etc;)
   and (4) is for a specified period of time, i.e., three years.

A contract which calls for service to be provided upon request or
on an as needed basis does not qualify as a prior contract.

Exercise of the option to renew the lease is a new contract.

2. No.

3. An exemption certificate can be accepted from a customer in lieu of
   tax only if accepted in good faith. You cannot accept an exemption cer-
   tificate if you have knowledge that the claimed exemption is invalid.

I am enclosing Rules 3.319 and 3.356 for your information.

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 Policy Division.

Sincerely,
(Mrs.) Jo Ann Dieck
Tax Policy Division