How did resale certificates and sales-tax permits work through general contractors and subcontractors on separated Texas construction contracts?

Plain-English summary

For separated new-construction contracts, both general contractors and subcontractors were sellers of materials incorporated into the owner's real property. Each needed its own sales-and-use-tax permit, issued its own resale certificates, and either accepted resale certificates from customers or collected tax.

A separated subcontractor could accept a resale certificate from a general contractor operating under its own separated contract with the owner. The general contractor then sold to the end owner and collected the tax.

Rule 3.291 applied to new construction and residential repair or remodeling. Separately stated labor was not taxed in those transactions.

Nonresidential repair and remodeling was different: it was a taxable service, incorporated materials were bought for resale under either lump-sum or separated contracts, and the total customer charge was taxable under either form. A subcontractor could accept a resale certificate from the general contractor, which collected tax from the owner.

What this means for you

General contractors and subcontractors

Each business in a separated new-construction chain had its own permit and certificate duties. Do not rely on another contractor's registration as a substitute for your own.

Accountants and tax professionals

Separate new construction from nonresidential remodeling. The same certificate chain could exist, but the customer tax base was different.

Common questions

Did every separated contractor need a permit? Yes.

Could a subcontractor accept a resale certificate from the general contractor? Yes, when both contracts were separated as described.

Was labor taxed on separated new construction or residential remodeling? No.

Was nonresidential remodeling taxed only on materials? No. The total charge was taxable under either lump-sum or separated contracts.

Citations and references

• 34 Tex. Admin. Code Rule 3.285 (resale certificates)
• 34 Tex. Admin. Code Rule 3.291 (new construction and residential repair or remodeling)
• H.B. 11 (exempt-organization contractor changes noted by 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/9202L1167E11

Original ruling text

February 3, 1992

Dear ***:

I am writing in response to your request for information about
separated construction contracts and resale certificates. I
apologize for the long delay in providing this response.

Separated new construction contractors (both general and subs) are
the sellers of the materials incorporated into the customer's
realty. As a seller, each entity must hold its own sales and use
tax permit, must issue its own resale certificates, and must
accept resale certificates or collect the tax from its customers.
If comparing the construction industry to the retail industry, the
separated subcontractor would be equivalent to a wholesaler
(selling to someone who will resell) and the general contractor
would be equivalent to a retailer (selling to the end consumer).

I have enclosed a copy of Rule 3.285 which sets out the requirements
for issuing and receiving resale certificates. When you are
subcontracted (under a separated contract) to a general contractor
who, in turn, is contracted with the property owner or project
owner (under a separated contract) you will accept a resale
certificate from the general contractor. The general contractor
is selling to the project/property owner and will collect the tax.

The above paragraphs apply to new construction. Rule 3.291
applies to new construction and residential repair or remodeling.
The labor charge is not taxed even though separately stated. The
following paragraph will apply to nonresidential repair or
remodeling.

Nonresidential repair and remodeling is a taxable service. The
materials incorporated into the customer's realty are purchased
for resale whether the contract is lump sum or separated. The total
charge is taxed whether the contract is lump-sum or separated.
If you are subcontracted to the general, who is contracted to the
property/project owner, you may accept a resale certificate from
the general who will collect the tax from his customer.

You did not mention or question the changes House Bill 11 had on
persons improving realty belonging to exempt organizations. Your
contracts may not be affected by this change, but I have included
a copy of the guidelines dated August 15, 1991. I have also
enclosed a copy of the rules for contractors and nonresidential
repair or remodeling service providers. I will forward a revised
version showing House Bill 11 changes when 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