Can a contractor accept a direct payment exemption certificate for underground storage tank, fence, and concrete replacement work, and how does the answer depend on whether the work is new construction or remodeling?

Plain-English summary

A contractor working under a subcontract to replace underground fuel storage tanks and ancillary piping wrote in asking two things: whether that tank-replacement contract was lump-sum or separated (for direct payment certificate purposes), and whether a direct payment exemption certificate could be used for a related but separate fence and concrete job at the same site.

On the tank job, the Comptroller explained that installing a new underground storage tank is new construction. The contract stays lump-sum -- meaning the contractor, not the customer, owes tax on materials -- unless the material tickets that are part of the contract show separate charges for materials and those tickets are actually given to the customer. Only in that separated-charges scenario could the contractor accept a direct payment certificate from whoever it was contracting with.

On the fence, the answer turned entirely on how much of the fence was replaced. Tearing down and completely replacing a wood fence counts as new construction of a realty improvement; under a lump-sum new-construction contract, neither the materials nor the labor are taxable to the customer, so a direct payment certificate isn't appropriate (the contractor instead owes tax on its own materials cost). But if only part of the fence had been replaced, that would be remodeling instead, and remodeling labor -- unlike new construction labor -- is taxable.

The same remodeling/new-construction line decided the third question. The concrete replacement work, billed at a per-square-foot rate, was remodeling. Since remodeling makes both labor and materials taxable to the customer, a direct payment exemption certificate was appropriate for that portion. The letter adds that for remodeling contracts where the contractor already paid tax on materials at purchase and later gets a direct payment certificate on file, the contractor can obtain a refund of that materials tax from its supplier under Rule 3.338.

What this means for you

Contractors on mixed new-construction/remodeling jobs

Whether you owe tax on materials only, or your customer owes tax on both labor and materials, depends on whether each piece of work is new construction or remodeling -- not on the overall project. A single job site (here, tank replacement, fence work, and concrete work) can contain multiple contracts taxed differently, and even a single fence job flips from exempt-labor new construction to taxable-labor remodeling depending on whether the whole fence or only part of it is replaced.

Business owners negotiating direct payment certificates

A direct payment certificate is only appropriate where both labor and materials would otherwise be taxable to you (i.e., remodeling). It is not appropriate for a true new-construction lump-sum contract, where the contractor -- not you -- bears the tax on materials.

Accountants and tax professionals

If a contractor already paid tax on materials at purchase and a direct payment certificate later shows up for a remodeling contract, Rule 3.338 lets the contractor seek a refund of that materials tax from its supplier rather than leaving the tax stranded or double-collected.

Common questions

Q: If a fence is completely torn down and rebuilt, is the labor taxable?
A: No. Total replacement of a fence is new construction of a realty improvement, and under a lump-sum new-construction contract, neither labor nor materials are taxable to the customer.

Q: What if only part of the fence is replaced instead of the whole thing?
A: That's remodeling, not new construction, and remodeling labor is taxable (unlike new construction labor).

Q: Can a direct payment exemption certificate be used for the concrete replacement work?
A: Yes -- the concrete work was remodeling, so both labor and materials were taxable to the customer, making a direct payment certificate appropriate there.

Q: Is installing a brand-new underground storage tank new construction or remodeling?
A: New construction. The contract remains a lump-sum contract (tax owed by the contractor on materials) unless material tickets showing separate material charges are actually presented to the customer.

Citations and references

Statutes:

• 34 Tex. Admin. Code Rule 3.338 (refund of tax paid on materials for remodeling contracts with a direct payment certificate on file)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206L1176A01

Original ruling text

June 9, 1992

Dear **:

Thank you for your recent letter asking for clarification on rulings concerning
direct payment certificates. You provided a copy of a contract document and
asked us if the contract was lump sum or separated and if you could accept a
direct payment exemption certificate in lieu of tax.

Response: After reviewing the contract, it appears that ** is a
subcontractor in the replacement of underground fuel storage tanks and
ancillary piping. Under this contract, ** is not providing the
tanks. It appears ** is providing labor, gravel, and sand for
backfill. Someone else is providing the tanks and ancillary piping. The
contract does state that actual cost will be based on material tickets. For tax
purposes, the installation of a new underground storage tank is new
construction. The contract is a lump-sum contract unless the material tickets,
which are part of the contract, state separate charges for materials these
tickets are presented to the customer. If tickets showing charges for materials
are presented to the customer, ** may accept a direct payment
exemption certificate from the person with whom ** has the
contract.

You next stated that in connection with the tank replacement, but separate from
the above contract, you removed and replaced an existing wood fence at the
location. You gave your customer a lump-sum amount which included your labor,
materials, and equipment, with sales tax figured on the entire amount . You
asked if ** could accept a direct payment exemption certificate
since the materials and labor were both considered taxable?

Response: If the fence was an improvement to realty and ** took it
totally down and completely replaced it, the replacement was also new
construction of an improvement to realty. When a fence is installed as an
improvement to realty under a new construction contract for a lump-sum amount,
neither the materials nor labor is taxable to **'s customer.
** owes tax on the cost of materials. A direct payment exemption
certificate would not be appropriate under these circumstances. The answer
would be different if only part of the fence was being replaced. If only part
of the fence was being replaced, then ** would be remodeling the
old fence. The remodeling labor would have been taxable; however, new
construction labor is not taxable.

You further stated that included in your original contract (not the contract
enclosed with your 4/20/92 letter?) was an amount for the replacement of
concrete. Your rate for the concrete replacement was a per square foot rate.
Since you considered the labor to pour concrete as taxable, you wanted to know
if a direct payment exemption certificate would be appropriate for the concrete
work?

Response: Yes. In this situation, ** is remodeling. As stated
earlier, remodeling labor is taxable. Since both labor and materials are
taxable to **'s customer, it would be appropriate for
** to accept a direct payment exemption certificate from
**'s customer in lieu of tax. For those remodeling contracts, where
DETSC0 paid tax on the materials at the time of purchase and for which a direct
payment exemption certificate is on file from the customer, it is acceptable
for ** to obtain a tax refund from the supplier as outlined in Rule
3.338.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. If you have any questions or need more
information, you may call me toll free at 1-800-252-5555, extension 3-4633. The
regular number is 512/463-4633. You may also write to the Tax Administration
Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division