Is road grading/reworking exempt 'maintenance,' and what documentation lets a subcontractor buy highway-contract materials tax-free?

Plain-English summary

This 1992 letter answers two unrelated sales tax questions from a company that had billed customers for road work and highway materials.

The first question involved a private individual's ranch road. The company billed him sales tax for hourly labor and equipment used to rework the road, and the individual claimed the work was exempt "maintenance." The Comptroller disagreed: having a road reworked "as needed" is not maintenance for tax purposes -- it is either a repair or a restoration, and both are taxable services. The company's existing documentation (an earlier letter to the individual and his own statement) was not enough to prove the work qualified as exempt maintenance.

The second question involved hot mix material sold to "Company A," a subcontractor on a state highway project. The company had accepted an exemption certificate that named a different entity ("Company B") as the seller and the State Department of Highways as the purchaser, along with an undated cover letter identifying Company A as Company B's subcontractor. The Comptroller ruled this was not sufficient. A highway construction contract entered into by a prime contractor before August 14, 1991 can qualify for a tax exemption, but when a subcontractor buys materials to use on that exempt job, the subcontractor itself must issue the supplier a prior contract exemption certificate -- not just point to the prime contractor's older paperwork or an informal cover letter.

Both answers turn on the same underlying theme: general assertions or secondhand documents are not a substitute for the specific certificate or proof the Comptroller requires to support a tax-exempt sale.

What this means for you

Contractors and suppliers billing for road/property work

Don't assume "as-needed" repair or reworking of a road (or similar real property) is exempt maintenance just because the customer characterizes it that way. If the work restores or repairs the property rather than performing routine, scheduled upkeep, it is a taxable service, and you need documentation that actually supports the maintenance characterization -- not just correspondence recounting the dispute.

Suppliers on highway/government contract jobs

If a customer claims exemption because it is a subcontractor on a state highway job, do not accept the prime contractor's old exemption certificate or an unrelated, undated cover letter as proof. Require the subcontractor to issue its own prior contract exemption certificate tied to the pre-August 14, 1991 contract before selling tax-free.

Accountants and tax professionals

This letter is a useful reminder that exemption claims must be backed by the correct, purchaser-specific certificate type (here, a prior contract exemption certificate for a subcontractor), and that recycling documentation issued to or naming a different party in the contract chain will not satisfy the Comptroller.

Common questions

Q: Is reworking a private road as needed considered exempt maintenance?
A: No. The Comptroller found that having a road reworked "as needed" is either a repair or a restoration of the road, both of which are taxable services, not exempt maintenance.

Q: What documentation is needed to prove a road-work exemption claim?
A: In this case, an earlier letter to the customer and the customer's own statement claiming the work was maintenance were not enough documentation to prove the labor qualified as exempt maintenance.

Q: Can a subcontractor rely on the prime contractor's exemption certificate to buy materials tax-free?
A: No. The subcontractor buying materials for use on the prime contractor's exempt pre-August 14, 1991 highway contract must issue the supplier its own prior contract exemption certificate; an exemption certificate naming the prime contractor and an unrelated cover letter are not sufficient.

Q: Does the type of contract matter for the highway-materials exemption?
A: Yes. The exemption depends on the contract having been entered into by the prime contractor with the State Department of Highways and Public Transportation before August 14, 1991.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1171D01

Original ruling text

May 18, 1992

Dear ***:

Thank you for your recent letter asking about sales tax as it applies to the
following situations restated below.

(a) We billed INDIVIDUAL sales tax for hourly work, labor and equipment only,
at his ranch on January 4, 1992. He is claiming the work is exempt as
"maintenance."

Question: Do we have enough documentation to prove that the labor qualifies as
exempt maintenance?

Response: I have reviewed the documentation provided including our letter to
INDIVIDUAL of March 16, 1992, and his statement to your company of March 26,
1992. Having the road reworked as needed is not maintenance. While INDIVIDUAL
may consider his road to be maintained, for tax purposes, INDIVIDUAL's road was
either repaired or restored. Repairing or restoring the road is a taxable
service.

In answer to your specific question, you do not have enough documentation to
prove that the labor qualifies as maintenance.

(b) We billed COMPANY A sales tax for hot mix material which we delivered on
December 4, 1991. COMPANY B issued us an exemption certificate dated March 16,
1990, with COMPANY B as the seller and the State Department of Highways as the
purchaser. Attached was a cover letter, which was not dated and which was
addressed to whom it may concern, stating COMPANY A as a subcontractor for
COMPANY B on the state highway contracts.

Question: Can these two documents be accepted for our records or must they fill
out a prior contract exemption or resale certificate?

Response: Your customer, COMPANY A, must provide you with a prior contract
exemption certificate in lieu of tax.

A contract for highway construction that was entered into by a prime contractor
(COMPANY B in this case) prior to August 14, 1991, with the State Department of
Highways and Public Transportation qualifies for exemption from tax. When a
subcontractor (COMPANY A) on that exempt job buys materials in December 1991,
to use on that job, the subcontractor must issue the supplier a prior contract
exemption certificate in lieu of tax.

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

You may also write to the Tax Administration Division.

Sincerely,

Tax Administration Division