Can a company holding a Texas Direct Payment Permit use it (instead of a resale certificate) to buy equipment it will resell to a customer, and is welding/repair labor on that equipment taxable?

Plain-English summary

A company (Company A) holding a Texas Direct Payment Permit -- but no regular sales and use tax permit -- was awarded a contract to provide design, engineering, and construction management for fabricating two drilling rigs in Texas that would first be used in federal waters off California. Company A might sell some equipment to the rig owner instead of the owner buying it directly, and it would also incur welding and repair charges along the way. The company asked the Comptroller three questions about how its Direct Payment Permit, resale certificates, and sales tax collection duties applied.

First, the Comptroller explained that a Direct Payment Permit only lets the holder buy taxable items tax-free for its own use, with the company later self-accruing state and local tax when it first stores or uses the item in Texas. It cannot be used for items purchased for resale to a customer -- those purchases require a resale certificate (validated by the buyer's Texas sales/use tax permit or out-of-state tax number) instead.

Second, welding and repair labor on tangible personal property is taxable: the total charge to repair TPP, including labor, is fabrication, manufacturing, or repair and is subject to tax. The one exception is that if the welding is performed on property that will itself be resold in the ordinary course of business, a resale certificate can cover that welding charge too. Repair done for the company's own use, however, remains taxable to the company.

Third, if Company A is actually selling equipment to the rig owner, it must hold a limited sales and use tax permit and collect tax on those sales. But as the entity that uses machinery or equipment to fabricate or manufacture the rig, Company A is treated as the consumer of that equipment and owes tax on it -- unless it resells the equipment before making any use of it in Texas.

The original STAR heading for this letter, "Welding Tpp — Repair/Remodeling Service," only reflects the second of the letter's three questions; the letter as a whole is broader, also covering direct payment permit limits and resale certificate/permit obligations. subject_title above has been rewritten to capture the full scope.

What this means for you

Contractors and fabricators holding a Direct Payment Permit

A Direct Payment Permit is not a universal tax-free pass. It only works for purchases you make for your own use, where you self-accrue the tax later. If you're buying items you intend to resell to a customer, you need a resale certificate (backed by your own sales/use tax permit or out-of-state tax number) -- using the Direct Payment Permit for those purchases is improper.

Businesses performing welding or repair work

Charges for welding, fabricating, or repairing tangible personal property -- including the labor portion -- are taxable. If you're welding property that will be resold rather than kept for your own use, you can accept a resale certificate for that specific work; otherwise the repair charge is taxable to whoever is having the work done.

Accountants and tax professionals advising on rig/equipment sales

If a client is actually selling fabricated equipment to a customer (rather than just billing for reimbursed costs), the client needs a limited sales and use tax permit and must collect tax on the sale. Absent an actual resale before Texas use, the client is the consumer of equipment used in fabrication and owes use tax on it directly.

Common questions

Q: Can I use my Direct Payment Permit to buy equipment tax-free that I plan to resell to my customer?
A: No. The Direct Payment Permit only covers tax-free purchases for your own company's use, with tax accrued later. For items purchased to resell, you must issue a resale certificate instead, validated by your Texas sales/use tax permit or out-of-state tax number.

Q: Is labor to weld or repair equipment subject to Texas sales tax?
A: Yes. The total charge to repair tangible personal property -- including labor -- is taxable, because welding of TPP counts as fabrication, manufacturing, or repair.

Q: Is there any way to avoid tax on welding charges?
A: Yes, if the welding is performed on property that will be resold in the regular course of business, a resale certificate may be issued to cover that welding charge. Repair done for your own company's use remains taxable regardless.

Q: Do I need a sales tax permit if I'm building equipment for a customer but the customer reimburses my costs?
A: It depends on whether you're actually selling equipment to the customer. If so, you need a limited sales and use tax permit and must collect tax on the sale. If you're just being reimbursed for costs without a resale, you're the consumer of the equipment you use in fabrication and owe use tax on it yourself.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1176A11

Original ruling text

May 22, 1992

Dear **:

I am responding to your letter requesting an opinion regarding proper sales and
use tax policies and procedures relative to direct payment exemptions and
resale exemptions.

You stated that ** (COMPANY A) holds a Texas Direct Payment Permit
but does not hold a Texas sales and use tax permit. You stated your company
does not purchase for resale. However, COMPANY A has been awarded a contract to
provide design, engineering and construction management expertise for the
fabrication of two rigs in CITY A, Texas. According to the contract, first use
of these rigs will occur in Federal Waters offshore from California. COMPANY A
may sell some equipment to the owner of the rigs in lieu of the owner
purchasing such equipment on the open market. Otherwise, costs incurred by
COMPANY A in providing the above services will be reimbursed by the owner. I
presume that COMPANY A is not contractually responsible for incorporating the
rig into real property.

You asked the following questions:

1. Can COMPANY A provide the Texas Direct Payment Permit Number to the vendors
   for purchases of equipment - cost reimbursed by the owner? If not, what is the
   proper procedure?

Response: The Direct Payment Permit is issued to your company for the purpose
of purchasing taxable items for your company's own use tax-free. Your company
must then accrue Texas state and local taxes based upon the first storage or
use of these items within Texas. Direct Payment Permit exemption certificates
may not be issued when purchasing taxable items for resale to your customer.

Items that are purchased in Texas by your company to be sold to your customer
within the geographical limits of the United States, its territories or
possessions may be purchased tax-free by issuing a resale certificate to your
supplier. The resale certificate must be validated by your Texas sales or use
tax permit or by your out-of-state tax number when your company is not engaged
in business in Texas.

2. If COMPANY A incurs repair, welding and labor charges, are these costs
   subject to Texas sales tax?

Response: The total charge to repair equipment (tangible personal property) is
taxed. The total charge includes the labor charges. Welding of tangible
personal property is either fabrication, manufacturing, or repair of tangible
personal property and is taxed. If the welding is being performed on tangible
personal property that will be resold in the regular course of business, a
resale certificate may also be issued for the welding of the property being
resold. Repair of equipment for your company's use is taxable to your company.

3. Does COMPANY A need a resale permit number in order to sell equipment to the
   owner that will be used in the fabrication of these rigs?

Response: COMPANY A is required to hold a limited sales & use tax permit if it
in fact is selling equipment to its customer. It must collect tax on such
sales. COMPANY A is the consumer of and owes tax on machinery or equipment used
to fabricate or manufacture the drilling rig unless COMPANY A actually resells
such equipment prior to making any use of the equipment in Texas.

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

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

Sincerely,

Tax Administration Division