Could a prime contractor act as a direct-payment permit holder's agent and issue direct-payment exemption certificates for construction materials?

Plain-English summary

The Comptroller recognized an agency agreement under which a prime contractor acted for a direct-payment permit holder when buying materials to be incorporated into the permit holder's realty. If the agreement authorized it, the contractor could issue purchase orders and direct-payment exemption certificates on the permit holder's behalf and pay its bills.

The approval had two express limits. Both the agent and principal could be held liable for tax the principal owed on purchases made under the agreement, and the agency arrangement did not cover consumable supplies or other taxable items the contractor used to perform the construction contract.

What this means for you

A direct-payment permit holder could use a documented agency arrangement for incorporated construction materials. The letter did not turn the contractor's own taxable job supplies into exempt purchases, and it did not shield either party from liability for tax due on agency purchases.

Common questions

Could the contractor issue direct-payment exemption certificates? Yes, when the agency agreement authorized the contractor to act for the permit holder.

What purchases did the letter cover? Materials that would be incorporated into the permit holder's realty under the construction contract.

Were consumable contractor supplies covered? No. The Comptroller expressly declined to recognize the agency arrangement for those supplies and other taxable items used to perform the contract.

Who was liable if tax was due? The letter says the agency held both the agent and principal liable for tax owed by the principal on purchases under the agreement.

Citations and references

• The letter does not identify a numbered statute or administrative 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/9110L1139C14

Original ruling text

October 7, 1991

Dear *****:

This letter is to confirm our telephone conversation last week concerning
new construction contracts and agency agreements.

Your specific question was whether the Comptroller's office would recognize
an agreement between a prime contractor and a direct payment permit holder
allowing the contractor to be the agent of the permittee for the purpose of
purchasing materials that will be incorporated into the permittee's realty
under a contract between the contractor and the permittee.

This kind of agreement is recognized by our agency. This means, assuming
the agreement so stipulates, that the contractor is allowed to issue
purchase orders and direct payment exemption certificates on the
permittee's behalf to the material suppliers and to pay the permittee's
bills.

I'd like to point out that this agency holds both the agent and principal
liable for any taxes owed by the principal for purchases made under the
agency agreement.

In addition, please note that we do not recognize such agency agreements
regarding the consumable supplies and other taxable items used by the
contractor in performing the construction contract.

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

You may call me toll free at 1- 800-252-5555, ext. 34697. The Austin
number is 512/463-4697. You may also write to Tax Administration at the
above address.

Sincerely,

Sandi Skaggs
Tax Administration Division