After Texas amended its rule on construction contracts, do change orders on contracts signed before the amendment have to be redone under the new rule?

Subject

Change Orders To Contracts — Rule Amendment — Being Applied Prospectively To Contracts Executed On And After 7/23/92

Plain-English summary

This is a short internal memo from the Texas Comptroller's Assistant Director of Tax Administration, following up on a meeting held the day before with the recipient (a taxpayer or their representative). It settles one question and confirms one unrelated exemption.

The main question: the Comptroller's office had amended its rule on how construction contracts are taxed when a "change order" (a modification adding or altering work) is made. The recipient was worried that contracts already in place would have to be reworked to comply with the new rule. The memo confirms that will not happen — the rule change applies only prospectively, to contracts executed on or after July 23, 1992.

The memo explains the practical difference this makes for how a change order is taxed:

• Before July 23, 1992: a change order could be treated as its own stand-alone contract, separate from the original contract, as long as it was identifiable from the original. So if the original contract was a lump-sum contract but the change order separately stated materials and labor, the change order itself could be taxed as a "separated" contract even though the underlying contract was lump sum.
• On and after July 23, 1992: a change order automatically takes on the same character as the original contract, no matter how the change order itself is written. So a change order under a lump-sum original contract is now treated as lump sum too, even if it separately lists materials and labor.

The memo closes with an unrelated, one-off confirmation: a letter from an (unnamed, redacted) Airport Board accepting a donation of materials and consumable supplies satisfied the Comptroller's requirements, so those donated materials can be purchased tax-free under an exemption certificate.

What this means for you

Contractors with contracts signed before July 23, 1992

If your original contract was executed before July 23, 1992, change orders under it keep following the old rule: a change order can still be treated as its own separate, stand-alone contract (and taxed accordingly) if it is identifiable from the original contract, regardless of how the original contract itself was structured for tax purposes.

Contractors with contracts signed on or after July 23, 1992

For contracts executed on or after that date, change orders no longer stand on their own for tax purposes — they automatically pick up the tax treatment (lump sum vs. separated) of the original contract, even if the change order paperwork itself looks different (e.g., separately itemizes materials and labor under an otherwise lump-sum contract).

Anyone purchasing materials for donation to a government entity

The memo shows the Comptroller accepting a letter of acceptance from a governmental body (here, an Airport Board) as sufficient documentation to let a donor buy materials and consumable supplies tax-free under an exemption certificate, where those items are being donated to that government entity. This is a fact-specific, taxpayer-specific approval, not a general rule — but it illustrates the kind of documentation the Comptroller looks for in similar donation scenarios.

Common questions

Q: Does the amended change-order rule apply to my existing contract?
A: Only if your original contract was executed on or after July 23, 1992. If your contract predates that date, change orders under it continue to follow the prior approach (treated as stand-alone if identifiable from the original contract).

Q: What actually changed under the amended rule?
A: Before the amendment, a change order's tax treatment could differ from the original contract's if the change order was separately identifiable. After the amendment, a change order automatically takes on the same tax character (lump sum or separated) as the original contract, regardless of how the change order itself is drafted.

Q: Can I rely on this memo for my own contract or donation situation?
A: No. This is an internal Comptroller memo addressing one taxpayer's specific concern raised in a meeting; per the disclaimer, STAR letters can only be relied on by the taxpayer to whom they were directly issued, and the letter may no longer reflect current policy.

Q: What was the Airport Board issue about, and does it relate to the change-order question?
A: It's unrelated. The memo separately confirms that a letter from an Airport Board accepting a donation of materials and consumable supplies met the Comptroller's requirements, so those materials could be purchased tax-free under an exemption certificate. No statute or rule number is given for this determination in the text.

Q: Does this letter cite a specific statute or rule number?
A: No. The letter refers only to "the amended rule" and "the rule amendment" without citing a specific rule or statute number in the text provided.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1191B13

Original ruling text

September 10, 1992

Dear ***:

After our meeting yesterday, I discussed the application of the amended rule on
prior contracts as affecting change orders with tax administration personnel.
Your concern was that existing contracts would have to be amended as a result
of the new rule. We have concluded that the rule as concerns change orders will
only apply to contracts executed on and after July 23, 1992.

Prior to July 23, 1992, a change order could be treated on a stand alone basis
if it was identifiable from the original contract. Therefore, if the original
contract was lump sum but the change order was separated, the change order
would be treated on a stand alone basis as a separated contract.

From the effective date of the rule amendment, change orders will take on the
same character as the original contract regardless of the form of the change
order. Therefore, if the original contract was lump sum and the change order
separated materials and labor, the change order would be treated as lump sum.

Finally, the letter from the *** Airport Board regarding the
acceptance of the donation of materials and consumable supplies meets our
requirement. Therefore, these materials may be purchased tax free under an
exemption certificate.

Sincerely,

Wade Anderson
Assistant Director of Tax Administration