Texas Letter Ruling 9210L1200G07: Navigation District — Loading Dock Facility Construction — Lump — Sum And Separated Contract Guidelines

Subject

Navigation District — Loading Dock Facility Construction — Lump — Sum And Separated Contract Guidelines

Plain-English summary

The Texas Comptroller's Tax Administration Division answered a contractor's question about the sales tax treatment of a contract to build a new Liquid Loading Facility — a dock used to load petrochemicals and other industrial products onto ships — for a county navigation district.

Based on the facts described, the Comptroller confirmed that building this dock is an "improvement to realty" under Rule 3.347 and meets the definition of "new construction" in Rules 3.357 and 3.291. Because the navigation district is a political subdivision of the State of Texas (a "151.309 entity"), the contract can be treated as a contract to improve realty for a governmental entity.

How much tax the contractor owes depends entirely on whether the contract is lump-sum or separated:

• Lump-sum contract: the contractor must pay tax on all incorporated materials, supplies, and equipment used in the job.
• Separated contract: the contractor may purchase the materials that get incorporated into the dock tax-free for resale, but must still pay tax on equipment and supplies. Consumable supplies may also be purchased tax-free for resale if the conditions in Rule 3.291(b)(2)(B) are met.

The Comptroller also confirmed that the wording in Rule 3.291(c)(2) does not stop the navigation district from issuing an exemption certificate for incorporated materials or other taxable items it purchases — and this remains true even though private companies will end up using the loading dock.

Separately, the letter notes that a refund request tied to a related "home port" project was reviewed and approved.

What this means for you

Contractors building for navigation districts or other political subdivisions

Whether you owe tax on materials for a governmental construction job hinges on how your contract is structured. A lump-sum contract makes you responsible for tax on everything — materials, supplies, and equipment. A separated contract lets you buy incorporated materials tax-free for resale, but you still pay tax on equipment and on supplies (except consumable supplies that qualify under Rule 3.291(b)(2)(B)). Confirm which type of contract you have before assuming any exemption applies.

Navigation districts and other governmental entities

A navigation district can issue an exemption certificate for incorporated materials and other taxable items it purchases for a construction project, even if private businesses will ultimately use the completed facility (here, a loading dock used to load ships). Rule 3.291(c)(2) does not take away that ability.

Accountants and tax professionals

This letter is a useful illustration of how the Comptroller applies the lump-sum/separated contract distinction (Rules 3.291 and 3.357) to a governmental improvement-to-realty project (Rule 3.347), including the interaction with the resale exemption for consumable supplies under Rule 3.291(b)(2)(B) and the exemption-certificate rule in Rule 3.291(c)(2).

Common questions

Q: Does a navigation district count as a governmental entity for sales tax purposes?
A: Yes — the letter describes it as a political subdivision of the State of Texas, referred to as a "151.309 entity."

Q: Do I owe tax on materials if I have a lump-sum contract with the navigation district?
A: Yes. Under a lump-sum contract, the contractor must pay tax on all incorporated materials, supplies, and equipment.

Q: Do I owe tax on materials if I have a separated contract?
A: You may purchase the materials that get incorporated into the facility tax-free for resale, but you must still pay tax on equipment and supplies. Consumable supplies can also be bought tax-free for resale if the conditions in Rule 3.291(b)(2)(B) are met.

Q: Does it matter that private companies will use the loading dock once it's built?
A: No. The Comptroller confirmed that the navigation district can still issue an exemption certificate on its purchases of incorporated materials and other taxable items even though private entities will use the dock.

Citations and references

No statutes or rules were formally cited as authority beyond internal references to Comptroller Rules 3.347, 3.357, and 3.291 (including 3.291(b)(2)(B) and 3.291(c)(2)), which are quoted directly in the ruling text above.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9210L1200G07

Original ruling text

October 27, 1992

Dear***:

I apologize for the delay in providing your written confirmation of my
telephone response to you. I trust the verbal answer provided to you was
sufficient to satisfy the navigation district.

Your company has a contract with a County *** to build a Liquid Loading
Facility. This is a new dock facility that will be used to facilitate the
loading of petrochemicals and other industrial products on to ships. Based upon
your statements the project constitutes an improvement to realty as defined in
Rule 3.347 and meets the definition of new construction found in Rules 3.357
and 3.291.

A synopsis of my telephone response is: the contract may be treated as a
contract to improve realty for a political subdivision of the State of Texas
(151.309 entity). The tax responsibilities of your company will be determined
by the type of contract, lump-sum or separated. If lump-sum, your company must
pay tax on all incorporated materials, supplies, and equipment. If separated,
your company may purchase the incorporated materials for resale but must pay
tax on equipment and supplies. Consumable supplies may also be purchased for
resale when the provisions of Rule 3.291(b) (2) (B) are met.

The wording in Rule 3.291(c) (2) does not invalidate the navigation district's
ability to issue an exemption certificate on incorporated materials or other
taxable items purchased by the governmental entity. This is true even though
private entities will use the loading dock.

I also wanted to advise you that the request for refund of the taxes paid on
the "home port" project has been forwarded to me for review. I have approved
this refund, if you need any other assistance, please call.

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

Sincerely,

Tax Administration Division