A Texas general contractor has a written separated new construction contract with a nonprofit entity but sends monthly lump-sum progress billings (only separated into materials/labor/profit in a final summary billing). Does that billing practice turn the whole contract into a lump-sum contract for sales tax purposes?

Plain-English summary

A taxpayer asked the Comptroller's office to resolve conflicting oral guidance about whether a construction contract's billing method can override its written contract terms for Texas sales tax purposes. A Texas general contractor had a written separated new construction contract with a nonprofit entity — meaning the contract adequately separated the charge for materials incorporated into the realty from the charge for skill and labor. (The letter notes it was not stated whether the nonprofit had also qualified as an exempt organization.) Despite the separated contract language, the contractor sent the nonprofit monthly lump-sum progress billings, only breaking billings out by material, labor, and profit in a final summary billing at the end of the job.

The question: does that lump-sum progress-billing practice cause the entire contract to lose its separated-contract status for sales tax purposes?

The Comptroller's answer was no — with an important caveat. Lump-sum progress billings alone do not convert a written separated contract into a lump-sum contract. However, the outcome changes in two situations:

• If there is no written separated contract at all, lump-sum progress billings by themselves cause the transaction to be treated as a lump-sum contract.
• If the contract language itself incorporates the progress billings as a legally binding part of the contract, then the contract and the lump-sum billings together may be construed as a lump-sum contract — even though the base contract was drafted as separated.

In short: it's the written contract that controls how the transaction is classified, not the mechanics of interim billing — unless the parties draft the billing terms into the contract in a way that changes that classification.

What this means for you

General contractors on separated contracts

You can bill progress payments in a single lump sum during the course of the job without automatically losing separated-contract treatment, as long as your underlying written contract genuinely separates the charge for materials from the charge for skill and labor, and your progress billing practice isn't written into the contract as a term that redefines it.

Contract drafting

Be careful about how progress-billing provisions are worded. If a contract's own language makes lump-sum progress billings a legally binding part of the deal, the Comptroller may treat the whole arrangement as a lump-sum contract — even if other parts of the contract look separated. The safer path is to keep the contract's separation of materials/labor charges intact and treat interim billing format as administrative only.

Contractors without a written contract

If there's no written separated contract in place, using lump-sum progress billings will cause the job to be treated as a lump-sum contract for sales tax purposes. A written, properly separated contract is what preserves separated treatment.

Nonprofit and exempt-organization customers

This letter doesn't address whether the nonprofit's exempt status (if any) changes the analysis — the ruling only addresses how the contract type (separated vs. lump-sum) is determined, which matters because Texas sales tax treats materials incorporated into realty differently under separated versus lump-sum contracts.

Common questions

Q: Does billing a separated construction contract with monthly lump-sum progress payments turn it into a lump-sum contract?
A: No, not by itself. A written separated contract keeps its separated status even if progress billings during the job are issued as lump sums, as long as the final billing is properly separated.

Q: What if there's no written separated contract at all?
A: Then lump-sum progress billings alone will cause the transaction to be treated as a lump-sum contract.

Q: Can billing language in the contract itself change the outcome?
A: Yes. If the contract incorporates the progress billings as a legally binding part of its terms, the contract and the lump-sum billings may together be construed as a lump-sum contract.

Q: Does this letter address whether the nonprofit customer is tax-exempt?
A: No. The letter notes the requester didn't state whether the nonprofit had also qualified as an exempt organization, and the ruling doesn't resolve that question.

Q: Can other contractors rely on this letter for their own contracts?
A: No. This opinion is based on the facts presented, and it can be relied on only by the taxpayer to whom it was issued — different or additional facts could produce a different result.

Citations and references

No specific statutes or rule numbers were cited in this 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/9207L1182G12

Original ruling text

July 13, 1992

Dear **:

Thank you for your letter questioning whether lump-sum progress billings will
cause a separated new construction contract to be treated as a lump-sum
contract. You stated that you had been given conflicting oral answers on this
situation.

You explained that a Texas general contractor entered into a separated
(adequately separates the charge for materials incorporated into the realty
from the charge for skill and labor) new construction contract with a nonprofit
entity. (You did not state whether the nonprofit entity has also qualified as
an exempt organization.) The general contractor invoices the nonprofit
entity-with monthly lump-sum progress billings.

Question: Does the contractor's system of monthly progress billings not
separated as to material, labor and profit but which is separated in a summary
billing at the conclusion of the contract cause the entire contract to not be
treated as a separated contract for sales tax purposes?

Response: No; lump-sum progress billings alone will not change a written
separated new construction contract into a lump-sum contract. However lump-sum
progress billings in the absence of a written separated contract causes the
transaction to be treated as a lump-sum contract. It's also possible to have
contract language incorporating the progress billings as a legally binding part
of the contract; with this language the contract and the lump-sum billings may
be construed as a lump-sum contract.

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