How did Texas calculate tax on materials and contractor profit under a cost-plus contract with a guaranteed maximum price?

Plain-English summary

A cost-plus-fee construction contract with a guaranteed maximum cost was a separated contract when material and labor costs were separately stated.

Tax on materials was computed on the higher of the contractor's actual material cost or the material cost charged to the owner, regardless of the guaranteed maximum. A profit or fee expressly designated as a materials markup—for example, 10% of materials—was part of the taxable materials price.

Using material cost merely as one input in calculating an overall fee did not necessarily make the profit taxable as material price, such as a percentage of all costs or a fixed fee derived from the contractor's private estimate.

Common questions

Was the guaranteed-maximum contract separated? Yes, when materials and labor were separately stated.

Which material cost controlled? The higher of actual contractor cost or cost to the owner.

Was all contractor profit taxable? No. It depended on whether the contract assigned it to the materials price.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9003L0990E03

Original ruling text

March 7, 1990

Dear **:

As we discussed on the telephone, a cost plus fee basis contract that provides
a guaranteed maximum cost is a separated contract when the cost of material and
labor are separately stated.

There are a couple of things about cost plus fee contracts that I should
mention. Both relate to the cost of materials.

Regardless of the guaranteed maximum cost to the owner for either labor,
materials or both, the tax on the materials is figured on the higher of the
actual cost of the materials to the contractor or the cost of the materials to
the owner. The source of this requirement is the last sentence of Section
151.056 (b), Tax Code.

Another point is that if the contract specifically designates a portion of the
profit or fee as a part of the sales price of the materials, the fee or markup
is taxed as part of the agreed price of the materials (example: the contract
states that profit or fee is 10% of materials).

However, the use of the material cost as a basis for all or a part of the
profit does not necessarily cause the profit or fee to be a part of the selling
price (example: the contract states that profit or fee is a percentage of all
costs including material, or if it is a fixed amount derived from the
contractor's private estimated cost of materials).

If you have other questions or need more information please call our toll-free
number 1-800-531-5441; the regular number is (512) 463-3830. You may write me
at the Taxability Section of Legal Services.

Sincerely,

Martin Cherry
Assistant Director,
Legal Services