Texas Letter Ruling 9212685L: Unjust Enrichment/Error Tax — Collected From Customer — Cannot Be Retained By Or Refunded To Retailer/Contractor — Must Be Remitted To State Or Refunded To Customers

Plain-English summary

This is a December 1, 1992 internal memo from the Comptroller's Tax Administration Division (Wanda Hutcheson) responding to an audit question from Tom Grimes about a taxpayer who sells and installs water conditioners, mostly in homes. The installer cuts the home's cold water supply pipe so the conditioner becomes part of the house's plumbing -- meaning the job is an improvement to realty, and the installer is acting as a lump-sum contractor who owes tax on the cost of the materials he incorporates into the job, not on the full contract price.

The taxpayer's contracts had a "tax block" that was sometimes marked "Inc" (tax included), sometimes "NC," sometimes "0," and sometimes left blank. To file, the taxpayer divided total gross sales by 1.0775 (1 plus the tax rate) and reported the result as taxable sales, then asked for a credit because he'd been told he should have been paying tax on his cost of materials instead.

The ruling draws a bright line based on what the contract itself says:

• Contracts marked "Inc": This tells the customer that sales tax is being collected as part of the price. The Comptroller treats these as contracts on which tax was collected from the customer. That collected tax cannot be used to offset the tax the contractor separately owes on his cost of materials, and the contractor cannot get it refunded to himself -- it can only go to the state or be refunded to the customer.
• Contracts marked "NC," "0," or left blank: These show tax was not collected from the customer. For these, the taxpayer is entitled to a refund of the difference between what he actually remitted to the state and what he actually owes based on his cost of materials.

The ruling also rejects two prior hearing decisions (fiche 0926B05 and 1173E08) as inapplicable, because those dealt with general contract language merely stating that "all taxes owed had been paid" -- different from a specific "Inc" notation indicating tax was charged to the customer.

What this means for you

Contractors who install fixtures that become part of real property

If you install something in a way that makes it part of the structure (like tying into the plumbing), you're likely a lump-sum contractor who owes tax on your cost of materials, not on the full contract price you charge the customer. How you mark the "tax" line on your contract matters a great deal: marking it as tax-included is read as evidence you charged your customer tax, and that tax cannot later be used to reduce your own materials tax bill or be refunded to you.

Businesses that collected tax from customers by mistake or under a misunderstanding

Money you collected as "tax" from a customer isn't yours to keep or apply to your own tax liability just because it turns out you weren't supposed to charge it that way. Under this ruling, tax collected from a customer has to be remitted to the state or refunded to that customer -- not credited back to the business.

Accountants and tax professionals reviewing contractor audits

This ruling is a useful example of how the Comptroller reads contract-level evidence (a "tax block" notation) to decide whether tax was collected from the customer, on a contract-by-contract basis, rather than applying one rule to the whole taxpayer. It also shows that general "all taxes paid" language in a contract is not treated the same as a specific notation that tax was charged, which affects how older favorable hearing decisions may or may not apply to new fact patterns.

Common questions

Q: Why does it matter whether the contract says "Inc" versus "NC" or is left blank?
A: The Comptroller uses that notation as the evidence of whether tax was actually collected from the customer. "Inc" indicates tax was collected and included in the price; "NC," "0," or a blank space indicates it was not.

Q: Can the contractor use tax he collected from customers to offset the use tax he owes on materials?
A: No. Where the contract shows tax was collected from the customer, that money cannot be used to offset the contractor's own liability for tax on the cost of incorporated materials.

Q: Can the contractor get that collected tax refunded to himself?
A: No. The ruling states the taxpayer may not obtain a refund of that tax unless and until it is refunded to his customers.

Q: What happens on the contracts where no tax was collected (marked "NC," "0," or blank)?
A: The taxpayer is due a refund of the difference between the amount he remitted to the state and the amount he actually owes based on his cost of materials for those contracts.

Q: Do the earlier hearings (fiche 0926B05 and 1173E08) help this taxpayer?
A: No. The ruling says those hearings do not apply because they involved general contract language stating that all taxes owed had been paid, which is different from a specific tax-included notation.

Citations and references

The original ruling text does not cite any specific statutes, administrative rules, or code sections by number. It references two prior Comptroller hearing decisions by fiche number -- fiche 0926B05 and fiche 1173E08 -- and distinguishes them as inapplicable to this fact pattern.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9212685L

Original ruling text

December 1, 1992

TO: Tom Grimes, ** Audit

FROM: Wanda Hutcheson, Tax Administration Division

SUBJECT: TAXPAYER

FACT: The Taxpayer is in the business of selling and installing water
conditioners, primarily in residences. The cold water supply pipe to the house
is cut and the conditioner becomes part of the house water supply system. The
Taxpayer writes a contract which states that he will sell and install a
conditioner and gives a lump-sum price. (see the exhibits enclosed). Some of
the contracts have Inc" in the tax block, some have "0", some have "NC" and
some are blank. To prepare their tax return, the gross sales are divided by 1 +
the tax rate (1.0775) and the resulting figure is reported as taxable sales.
The taxpayer is requesting a credit because he was told that he should have
been paying tax on his cost of materials.

Exhibit A is contracts and Exhibit B is a worksheet showing the tax
calculation.

It is ** Audit's opinion that the installations are improvements to
realty.

Inquiry: Is the fact that the taxpayer put "Inc in the tax block of his
contracts sufficient to say that he is charging tax to his customers on the
contracts where this has been done?

If the taxpayer is charging tax in error, should the error tax be used to
offset any use tax that may be due?

Response: When the taxpayer installs water conditioner units in residential
real property as described, taxpayer is acting as a contractor. Taxpayer is a
lump-sum contractor and owes tax on the cost of incorporated materials.

When taxpayer puts "Inc" on the contracts in the area for taxes, taxpayer is
indicating to his customers that sales tax is being collected. Contracts
showing "tax included" should be treated as contracts upon which tax was
collected from customers. This tax cannot be used to offset the taxpayer's
liability.

The taxpayer may not obtain a refund of this tax unless and until the tax is
refunded to his customers.

The hearings covered by fiche 0926B05 and 1173E08 do not apply. These hearings
dealt with general language that indicated that all taxes the lump-sum
contractor owed had been paid.

Where "NC", "O", or where the space for tax is blank in the contract, the
taxpayer has not collected tax. For these invoices, the taxpayer is due a
refund of the difference between the amount he remitted to the state and the
amount he owes on the cost of materials.