Could a contractor acting as agent for a direct-payment-permit holder buy construction consumables tax-free with the customer's permit?

Plain-English summary

This October 27 letter corrected the Comptroller's earlier August 15 response about consumables bought by a contractor claiming to act as agent for a customer with a direct-payment permit.

Private contracts could not change who legally owed the tax. Rule 3.291(b)(1) required the contractor to pay tax when buying consumables and barred the contractor from billing the customer tax on those supplies. Because the customer was not the principal legally required to buy and pay tax on the consumables, it could not appoint an agent to do so tax-free.

Rule 3.288(a) allowed a direct-payment exemption certificate only for items the permit holder bought for its own use. Section (f) expressly barred a contractor from using a direct-payment permit to buy consumables tax-free, and an agency agreement could not avoid that restriction.

Materials incorporated into real property under a separated contract were different because the tax incidence fell on the customer. The contractor could buy those materials tax-free with a resale certificate and did not need an agency agreement for that result.

Common questions

Could the contractor use the customer's direct-payment permit for consumables? No.

Could an agency agreement change that result? No.

Who paid tax on contractor consumables? The contractor at purchase.

How could incorporated materials under a separated contract be bought tax-free? With a resale certificate.

Citations and references

• 34 Tex. Admin. Code Rule 3.291(b)(1)
• 34 Tex. Admin. Code Rule 3.288(a) and (f)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8910L0992F05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

October 27, 1989

Dear *****:

Please accept my apology for the delay in responding to your
second letter, dated August 21, 1989, concerning "consumables"
purchased by a contractor acting as agent for the customer, a
direct payment permit holder.

Legal Services Division has now reviewed both of your letters and
my original response, dated August 15, 1989. This letter is to
correct my first response.

According to Legal Services Division, our position is as follows.
First, the State is not bound by private contracts to which it is
not a party, especially those that change the incidence of tax.
Rule 3.291(b) (1) says that the contractor must pay tax on consum-
ables at the time of purchase, and may not bill the customer tax
on these supplies. Because the customer is not "the principal"
who must buy and pay tax on consumables, he cannot designate an
"agent" to do this for him.

Second, direct payment Rule 3.288(a) states that a direct payment
exemption certificate may only be given for items the direct pay-
ment permit holder purchases for its own use. Section (f) express-
ly states that a contractor may not use a direct payment permit to
purchase consumables tax free. These provisions also preclude the
use of an agency agreement to "use" the direct payment permit.

The distinction from incorporated items used in a separated contract
is that the incidence of tax for those items falls on the customer
(*****). The "agency agreement" allowing the contractor, as
agent for the customer, to use the customer's direct payment permit
instead of a resale certificate does not change the incidence of that
tax.

A separated contractor can purchase materials incorporated into a
customer's property tax free with a resale certificate and doesn't
really need an agency agreement to do that.

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

Please feel free to contact me if you have any additional questions.
You may write me, call toll-free 1-800-252-5555 (ext. 3-4685) from
anywhere in the United States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Correspondence