When could federal real-property contractors buy incorporated materials without Texas tax after the 1991 House Bill 11 changes?

Plain-English summary

Federal real-property contractors had owed tax on equipment and consumable supplies since October 2, 1984, regardless of construction type or contract format. An administrative policy had nevertheless allowed exemption certificates for materials incorporated into federal realty until that policy changed on October 1, 1991.

After the change, incorporated materials could be exempt only if the contractor qualified for prior-contract relief, used a separated new-construction contract with the federal agency, or performed otherwise taxable nonresidential repair or remodeling for the federal government.

Prior-contract relief applied only to incorporated materials. A qualifying agreement had to meet Rule 3.319 and be signed on or before August 14, 1991. A lump-sum federal new-construction contractor without prior-contract relief had to pay suppliers tax on incorporated materials.

Equipment and other items used to perform the contract remained taxable to the contractor. The letter also noted that, under certain conditions from the Day & Zimmerman court case, consumable supplies used by separated contractors might be treated as resold to the property owner, but it did not state those conditions.

What this means for you

Federal construction contractors

Separate incorporated materials from equipment and consumables. The historical relief was not a blanket exemption for everything used on a federal job.

Accountants and tax professionals

Contract date and form were decisive. Confirm Rule 3.319 eligibility or separated-contract treatment before assuming incorporated materials were exempt.

Common questions

Did prior-contract relief cover equipment? No.

What did it cover? Incorporated materials only.

What signing date did the letter require? On or before August 14, 1991, plus compliance with Rule 3.319.

Did a nonqualifying lump-sum new-construction contract exempt materials? No.

Citations and references

• H.B. 11 (1991 contractor-law changes discussed in the letter)
• 34 Tex. Admin. Code Rule 3.319(c)(5) (federal prior-contract exemption)
• 34 Tex. Admin. Code Rule 3.291 (contractors)
• 34 Tex. Admin. Code Rule 3.357 (nonresidential repair and remodeling)
• Day & Zimmerman court case (consumable-supply treatment discussed in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1167E01

Original ruling text

February 3, 1992

Dear ***:

Thank you for your inquiries regarding the effects House Bill 11
has on federal contractors. Please forgive the delay in providing
a response to your question. There have been numerous questions
regarding this law change.

Contractors improving realty belonging to the federal government
were required to pay tax to their suppliers on equipment and
consumable supplies used in the performance of those contracts
beginning October 2, 1984. This applied whether the contract was
for new construction, repair, remodeling, residential,
nonresidential, lump-sum, separated, or any combination of these
possibilities.

However, in October, 1984, this agency implemented an administrative
decision which allowed federal contractors to continue issuing an
exemption certificate when purchasing materials that were
incorporated into realty belonging to the federal government. That
decision has been changed effective October 1, 1991.

A contractor improving realty belonging to the federal government
must continue to pay tax on equipment and other items used in the
performance of such a contract. However, in order to exempt the
incorporated materials, the contractor must either qualify for the
prior contract exemption, enter a separated new construction
contract with the federal agency, or be performing otherwise taxable
nonresidential repair or remodeling services for the federal
government.

The prior contract exemption for federal contractors applies only
to incorporated materials. A contract that meets the specifications
set out in the enclosed copy of Rule 3.319 and that was signed on
or before August 14, 1991, will qualify for the prior contract
exemption. Please note subsection (c)(5) of this rule. A federal
contractor operating under a lump-sum new construction contract that
does not qualify for the prior contract exemption must pay tax to
his supplier on incorporated materials.

I have enclosed the available version of Rule 3.291 on
contractors, Rule 3.357 on nonresidential repair and remodeling,
and the August 15, 1991, guidelines for contractors. These rules
do not reflect changes required by House Bill 11. However, the
basic information regarding separated and lump-sum contracts will
remain the same. Please review the rules with the guidelines as a
revised information packet. I will forward a copy of the revised
rules as soon as they are available.

Based upon information found in the Day & Zimmerman court case, this
agency has determined that under certain conditions, consumable
supplies used by separated contractors may be considered resold to
the property owner. If you would like additional information on
this topic, please call.

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