How did Texas allocate tax on remodeling a jointly owned power facility between exempt cities and private utilities holding direct-payment permits?

Plain-English summary

The facility was 44% publicly owned by two cities and 56% privately owned by two power companies. More than 5% of the work remodeled an occupied nonresidential building.

Because this was nonresidential remodeling, the entire service—including labor, materials, and overhead—was taxable unless the customer qualified for exemption. Lump-sum versus separated pricing did not change that rule for either the prime contract or subcontracts.

Special joint-ownership provisions treated each owner as sole owner of its percentage. The private utilities could give direct-payment exemption certificates, purchase the contractor's services without vendor-collected tax, and accrue use tax according to their ownership shares. The cities could use exemption certificates or official government vouchers and accrued no tax on their exempt shares.

The contractor could give suppliers resale certificates for materials incorporated into the owners' real property but paid tax on other materials and equipment used on the job. It could also give remodeling subcontractors resale certificates regardless of subcontract form.

The letter noted that the cities' certificates cited a repealed statute, but alternate proof—government purchase vouchers or naming the cities as contract parties—could establish exemption under Section 151.309.

What this means for you

For jointly public-private generating projects, invoices and certificates should map each owner's percentage. Contract separation did not change the taxable-service classification, but it remained important to document direct payment, government exemption, and resale purchases.

Common questions

Did lump-sum versus separated pricing change the remodeling tax? No. How was tax divided? By ownership percentage. Did the cities owe tax? No on their exempt shares. What did private direct-payment permit holders do? Bought without vendor-collected tax and accrued their own use tax. Could the contractor buy incorporated materials for resale? Yes.

Citations and references

• Texas Revised Civil Statutes Article 1435a
• Texas Tax Code Sections 151.309 and 151.311
• 34 Tex. Admin. Code Rules 3.291 and 3.357(b)(2)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9111L1146E05

Original ruling text

November 19, 1991

Dear ****

Thank you for your recent letter and telephone calls. As I
understand it, you are entering into contract for the renovation
of a facility owned jointly by the City of Austin,
the City of Houston, *** Lighting and Power, and
** Power and Light Company. Public ownership is 44%
and private ownership is 56%. You indicated that more than
5% of the cost of the work is related to remodeling of an
existing occupied nonresidential building.

The cities have issued exemption certificates and the power
companies have issued direct payment exemption certificates
to purchase your remodeling services tax free. According to
the contract, your company will structure its invoicing in
such a way as to identify applicable portions of the contract
price subject to the direct payment exemption certificates.
You asked the following questions:

1. Since this is a renovation project, would it be correct
   to calculate the applicable portion of the contract price
   to be 100%?

Answer: As I mentioned in our first telephone conversation,
I did not understand this question. I believe you indicated
that you did not require an answer.

2. Should the contract between the owner and contractor be a
   separated contract in order to identify materials and services?

Answer: As we discussed on the telephone, because this is a
contract for remodeling of an existing nonresidential improvement
to real property, it makes no difference whether the contract is
separated or lump-sum. The entire service, including labor,
materials, overhead, etc., is subject to tax unless the
customer is entitled to claim an exemption.

Contracts of this type are treated uniquely because of special
provisions in the law regarding joint ownership of electric
generating projects between 'governmental entities and private
entities. See Tex. Rev. Civ. Stat. Ann. art. 1435a, generally.
Basically, each owner is responsible for payment of tax (or
issuance of a certificate) according to its percentage ownership
of the facility. In other words, each part owner is treated for
tax purposes as though it is the sole owner of the project.

Under your facts, the private companies hold direct payment permits
and may therefore purchase your remodeling services tax
free by issuing direct payment exemption certificates. Each company
is then required to accrue use tax on the purchase of your
remodeling services according to its percentage ownership of The
project. The governmental entities in your example may issue
exemption certificates or official government purchase vouchers
to purchase your services tax free, and they would be required to
accrue no tax due to their exempt status.

Because this is a remodeling job, your company (as the "general
service provider") may issue a resale certificate to purchase,
tax free, materials that will be incorporated into your customers'
real property. Your company would be responsible for paying tax
on other materials and equipment bought, leased, or rented for
use on the job. (I believe you indicated that this contract does
not qualify as a prior contract for purposes of the amendments
to Tax Code Sec. 151.311 that became effective October 1, 1991.)

3. Should the subcontracts between the contractor (**) and
   subcontractors be separated contracts in order to identify materials
   and services?

Answer: See answer 2, above. It makes no difference whether the
subcontracts are separated or lump-sum because this is a
nonresidential remodeling job. Your company may issue a resale
certificate to each subcontractor who performs remodeling services for
you, whether under a separated or a lump-sum subcontract. For
this job, the subcontractors are entitled to make the same types
of tax free purchases as your company.

4. Does the requirement in the contract that invoices be structured
   to identify applicable portions constitute a separated contract?

Answer: For informational purposes, I have enclosed a copy of Rule
3.291, which contains the definitions of separated and lump-sum
contracts. As stated above, however, these distinctions make no
difference when the service provided is repair or remodeling of a
nonresidential improvement to real property. See enclosed Rule 3.357
(b)(2).

Although it does not affect the above answers, I should
point out that the two exemption certificates offered by the
city governments are out-of-date. The statute they cite as
the basis for their tax-exempt status was repealed quite
some time ago and replaced with Tax Code Sec. 151.309. However,
our rules provide that exempt governmental entities may
provide their exempt status by official purchase voucher
alone, and also by simply being named parties to the service
contract. A properly completed exemption certificate is not
necessary if such alternate proof of exemption is provided.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have further questions, feel free to write or call me at
1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division