What documentation made a municipal construction contract separated, and did a Texas city need to issue exemption certificates with progress payments?

Plain-English summary

A city asked whether it had to issue an exemption certificate with every progress payment or could wait until project completion. The Comptroller said neither was necessary: a separated contract with a Texas municipality was sufficient proof that incorporated materials were sold to an exempt governmental entity.

The contractor still had to issue its suppliers resale or exemption certificates as appropriate. Those supplier certificates could be blanket or transaction-specific under the applicable rules.

Because the city's base bid was unit-price and did not separate incorporated materials from skill and labor, the sales-and-use-tax instructions and exemption terms had to become a binding part of the contract for it to qualify as separated.

The letter also addressed a classroom-building remodel for a diocese. Although its unit-price bid was lump sum, nonresidential repair or remodeling could use either a lump-sum or separated contract.

What this means for you

Municipalities and public contractors

The executed separated contract can supply exemption proof without repeated certificates from the city. Supplier-side certificates remain the contractor's responsibility.

Accountants and tax professionals

A unit-price bid is not necessarily a separated contract. Binding contract terms must actually separate incorporated materials from labor.

Common questions

Did the city need an exemption certificate for every draw? No.

Was an end-of-project city certificate required? No.

What proved the exemption? The separated contract with the exempt municipality.

Could nonresidential remodeling be lump sum or separated? Yes, according to the letter.

Citations and references

• H.B. 11 (contractor-law implementation discussed in the letter)
• 34 Tex. Admin. Code Rule 3.291 (contractors)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1167C01

Original ruling text

February 3, 1992

Dear **

Thank you for the opportunity to assist you during the
implementation of House Bill 11. I am writing to provide your
office a written record of the verbal responses given to you in
September and October, 1991. I trust the verbal responses and
the other information that was faxed or mailed proved helpful.

You submitted two situations via fax transmittal to my attention.
I will restate each situation and provide the written verification
of my verbal response below.

The first situation we discussed was the ** development
project for the City of ****. I reviewed the proposed
instructions to contractors and the exemption certificate which you
faxed to my attention. I provided verbal instructions for
corrections. I have enclosed a copy of those corrections for your
permanent records.

You also asked whether the municipalities should issue an
exemption certificate with every request for payment, or whether
the municipalities can issue an exemption certificate at the
completion of the project?

Response: A municipality is not required to issue an exemption
certificate with every progress payment. In fact, the separated
contract between the contractor and a municipality that is a
political subdivision of Texas is sufficient proof that the
contractor sold the incorporated materials to an exempt entity.
Exemption certificates are not required between a seller and a
governmental entity exempt from Texas sales tax. However, the
contractor must issue resale or exemption certificates, as
appropriate, to the contractor's supplier(s). The contractor's
certificates may be blanket or per transaction as allowed in the
appropriate rules.

Because the base bid proposal is unit price and does not separate
the incorporated materials from the skill and labor portion of the
bid, the sales and use tax instructions along with the exemption
certificate must be included as a binding part of the contract in
order for the contract to qualify as separated.

The second situation is the contract to remodel a classroom
building for the Diocese of **. You asked whether the
contract would qualify as a separated contract?

Response: The basic bid documents are unit price which is a
lump sum bid. However, because this is nonresidential repair or
remodeling the bid and/or contract may be lump sum or separated.

I will forward a revised version of Rule 3.291 regarding
contractors when it is available.

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

You may also write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Tax Administration Division