Texas Letter Ruling 9209L1194E11: Change Orders To Contracts — Rule Amendment — Being Applied Prospectively To Contracts Executed On And After 7/23/92

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 September 16, 1992 notice from the Comptroller's Tax Administration Division to a trade association, telling it that the agency changed its position on how change orders to construction contracts are taxed under Rule 3.291(b)(5), and asking the association to pass the news on to its membership.

At an August 27, 1992 meeting, the Comptroller had told the association that all change orders issued on or after July 23, 1992 had to follow the terms and conditions of the original contract. That explanation has now been superseded. The new position instead looks at the date of the original contract: Rule 3.291(b)(5) applies prospectively to change orders issued under contracts executed on or after July 23, 1992. Change orders under those contracts automatically take on the same tax character as the original contract, no matter what form the change order itself takes.

For change orders issued under an original contract signed before July 23, 1992, the old flexibility still applies: the change order may be treated as a stand-alone contract if it is identifiable and separated from the original contract. For example, if the original contract was lump-sum but the change order is a separated item, the change order can be taxed as its own separated contract (the letter points readers to "the other examples in (b)(5)" for more detail).

Under a separated change order, the contractor may buy incorporated materials for resale and resell them to the customer; if the customer is a tax-exempt entity, the contractor can accept an exemption certificate instead of paying tax on those materials. Equipment purchased or rented for use under a change order issued after August 14, 1991 became taxable on October 1, 1991. Consumables used under a change order are governed by Rule 3.291(a)(2) and (b)(2).

The letter says the Comptroller is looking at the date of the original contract, rather than the date of the change order, because that approach stays more consistent with the agency's earlier verbal and written explanations and should be less confusing for the industry. It closes by stating that this new position relates only to Rule 3.291(b)(5) and doesn't change any other positions taken regarding that rule, and thanks the association for the chance to speak at its convention.

What this means for you

Contractors and subcontractors

Look at the date your original contract was signed, not the date of the change order, to figure out how a change order will be taxed under Rule 3.291(b)(5). If the original contract was executed on or after July 23, 1992, any change order issued under it takes on the same tax character as the original contract, regardless of how the change order itself is written or formatted.

Contractors with older (pre-7/23/92) contracts

If your original contract was signed before July 23, 1992, a later change order can still be treated as its own stand-alone contract, but only if it is identifiable and separated from the original contract (for example, a separated item carved out of an otherwise lump-sum contract). Under a separated change order you may purchase incorporated materials for resale and resell them to the customer, accepting an exemption certificate if the customer is tax-exempt. Note that equipment bought or rented for use under a change order issued after August 14, 1991 has been taxable since October 1, 1991, and consumables follow Rule 3.291(a)(2) and (b)(2).

Trade associations and their members

This notice was sent to "your association" with a request to pass it on to "your membership," so if you belong to a trade association in the affected industry, check whether your association received and circulated this update. It supersedes the verbal explanation the Comptroller gave at the association's August 27, 1992 meeting, so don't rely on that earlier verbal guidance.

Accountants and tax professionals

This is informal correspondence to one association explaining an internal policy shift on Rule 3.291(b)(5), not a generally applicable ruling. It's useful for understanding the agency's reasoning at the time, but confirm current guidance before relying on it, since STAR documents can be superseded by later rulings.

Common questions

Q: How does the Comptroller decide whether a change order gets the original contract's tax treatment or its own separate treatment?
A: By the date the original contract was signed. If the original contract was executed on or after July 23, 1992, every change order issued under it takes on the same tax character as the original contract. If the original contract was signed before July 23, 1992, a change order can still be treated as a stand-alone, separately taxed contract if it's identifiable and separated from the original.

Q: Does this change how equipment used under a change order is taxed?
A: No — the letter notes this new position relates only to Rule 3.291(b)(5) and doesn't alter other positions taken under that rule. It separately confirms that equipment purchased or rented for use under a change order issued after August 14, 1991 has been taxable since October 1, 1991.

Q: What happened to the explanation given at the August 27, 1992 meeting?
A: It's been replaced. At that meeting, the Comptroller said all change orders issued on or after July 23, 1992 had to follow the terms of the original contract. The position described in this letter instead keys off the date of the original contract, not the date of the change order.

Q: Can incorporated materials under a separated change order be purchased tax-free for resale?
A: Yes, according to this letter — under a separated change order, incorporated materials may be purchased for resale by the contractor and resold to the customer, and an exemption certificate may be accepted in lieu of tax if the customer is an exempt entity.

Citations and references

Rules cited in this letter:

• 34 Tex. Admin. Code § 3.291(b)(5) (change orders to contracts — the rule whose application is the subject of this notice)
• 34 Tex. Admin. Code § 3.291(a)(2) and (b)(2) (consumables used under a change order)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1194E11

Original ruling text

September 16, 1992

Dear *****:

I am writing to notify your association that this agency has altered it's
position on change orders. Thank you for your assistance in notifying your
membership.

The new position is different from the explanation I gave during our August 27,
1992, meeting. I had explained that all change orders issued on or after July
23, 1992, must follow the terms and conditions of the original contract. Now,
subsection(b)(5) is being applied prospectively to change orders issued
pursuant to contracts executed on or after July 23, 1992. Change orders issued
pursuant to such contracts will take on the same character as the original
contract regardless of the form of the change order.

So, a change order issued pursuant to an original contract signed before July
23, 1992, may be treated on a stand alone basis when the change order is
identifiable from the original contract. This means when the original contract
is lump sum, and the change order is separated, then the change order will be
treated on a stand alone basis as a separated contract. Please see the other
examples in (b)(5).

Under such a separated change order, the incorporated materials may be
purchased for resale by the contractor and resold to the customer. If the
customer is an exempt entity, an exemption certificate may be accepted in lieu
of tax on the incorporated materials. Equipment purchased or rented for use
under a change order issued after August 14, 1991, became taxable on

October 1, 1991. Consumables are subject to the provisions of Rule 3.291(a)(2)
and (b)(2).

By looking at the date of the original contract rather than the date of the
change order, we feel we are staying more in line with our previous verbal and
written explanations regarding change orders. We also hope this will be less
confusing for your industry.

This new position and explanation relates only to the provisions of Rule
3.291(b)(5). It does not alter any other positions taken in relation to this
rule.

Again, I'd like to express my personal appreciation to you and your association
for the opportunity to address your convention and for your wonderful
hospitality.

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

Sincerely,

Tax Administration Division