If a construction contract says the contractor will 'pay all sales taxes,' does that satisfy Texas's tax-included-price rule, and who is liable for the tax?

Subject

Tax-Included Contract Language Too Ambiguous To Prove Tax Was Paid

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1270G12

Plain-English Summary

A firm that deals with remodelers of commercial buildings asked the Comptroller about its standard contract purchase order, which states: "Contractor shall pay all sales, consumer, use and other taxes for the work or portions thereof provided by the contractor." The firm wanted to know whether it would be liable for any sales tax on the contract.

The Comptroller pointed to Rule 3.286(d)(3), which requires that the sales tax amount either be separately stated on the bill, contract, or invoice, or that there be a written statement telling the customer that the stated price includes tax — and an out-of-state seller must specifically identify that included amount as Texas tax.

Measured against that rule, the purchase order contract fell short. The Comptroller found the "shall pay all taxes" language ambiguous: it does not specifically state that the sales price includes applicable sales taxes, and different parties could easily attach different meanings to it. The letter even flags a more serious risk — the clause "could easily be interpreted as a representation that the contractor would absorb or assume the tax," which the letter identifies as a criminal act under Tax Code Section 151.704(a)(1). The Comptroller also noted that while this contractual language might let the firm seek indemnification from the contractor, that is a private arrangement between the firm and the contractor — it does not bind the state.

To fix the problem, the Comptroller suggested wording to the effect of "includes Texas sales and use taxes," placed on the first page of the contract where the scope of work and price are discussed, with a matching statement included on the contractors' billings or invoices.

What This Means For You

If your contracts use a "contractor shall pay all taxes" clause: This letter is a warning that such language, standing alone, is not the same as stating that the price includes tax. Under Rule 3.286(d)(3), you need either a tax amount stated separately or clear wording that the stated price already includes Texas sales and use tax.

Watch the criminal-liability angle: The letter specifically flags that ambiguous "pay all taxes" language could be read as the contractor agreeing to absorb or assume the tax itself — something the letter says is a criminal act under Tax Code Section 151.704(a)(1). Vague contract drafting isn't just a compliance headache; it can create this more serious exposure.

A private agreement won't protect you from the state: Even if your contract language lets you seek indemnification from a contractor, the Comptroller made clear that such an arrangement is strictly between the private parties — it does not bind or satisfy the state's requirements.

Fix it with specific wording, placed prominently: The Comptroller recommended contract language along the lines of "includes Texas sales and use taxes," appearing on the first page where scope of work and price are addressed, and mirrored on associated billings and invoices — for both Texas and out-of-state contractors.

Q&A

Q: Does a clause stating "Contractor shall pay all sales, consumer, use and other taxes" satisfy Texas's tax-included-price requirement?
A: The letter says this language is ambiguous and does not specifically state that the sales price includes applicable sales taxes, so it does not clearly satisfy Rule 3.286(d)(3).

Q: What does Rule 3.286(d)(3) actually require?
A: Per the letter, the amount of sales tax must be separately stated on the bill, contract, or invoice to the customer, or there must be a written statement to the customer that the stated price includes tax; an out-of-state seller must identify the tax as Texas tax.

Q: Why is ambiguous "pay all taxes" language risky beyond just being unclear?
A: The letter states this kind of clause "could easily be interpreted as a representation that the contractor would absorb or assume the tax, a criminal act under Tax Code Section 151.704(a)(1)."

Q: Does an indemnification arrangement with the contractor protect the firm from the state's tax requirements?
A: No. The letter states that while the contractual language may let the firm seek indemnification from the contractor, "the state is not bound by a private agreement between your firm and the contractor."

Q: What specific wording did the Comptroller suggest to fix the ambiguity?
A: Wording to the effect of "includes Texas sales and use taxes," appearing on the first page of the contract where the scope of work and price are discussed, with a like statement on associated billings or invoices.

Original ruling text

September 16, 1993

Dear ****:

Thank you for your letter of August 20, 1993, concerning commercial remodeling
contracts.The contract purchase orders used by your firm in dealing with
remodelers of commercial buildings states "Contractor shall pay all sales,
consumer, use and other taxes for the work or portions thereof provided by the
contractor." You questioned whether your firm would be liable for any sales
tax on the contract.

Enclosed Rule 3.286 (d)(3) concerning seller's and purchaser's
responsibilities states that the amount of the sales tax must be separately
stated on the bill, contract, or invoice to the customer or there must be a
written statement to the customer that the state price includes tax. An
out-of-state seller must identify the tax as Texas tax.

The purchase order contract (signed by the contractor, however, not
provided by the contractor) does not specifically state that the sales price
includes applicable sales taxes. The language is ambiguous and there is a
possibility that the different parties attach different meanings to the clause.
In fact it could easily be interpreted as are presentation that the contractor
would absorb or assume the tax, a criminal act under Tax Code Section 151.704
(a)(1). While the contractual language may be sufficient to enable your firm
to seek indemnification from the contractor, the state is not bound by a
private agreement between your firm and the contractor.

In order to clarify the tax responsibilities of the contractual parties,
you should include language that more clearly conforms to Rule 3.286 (d)(3).
Wording to the effect of "includes Texas sales and use taxes" would satisfy the
requirements for Texas and out-of-state contractors. I would also suggest that
the language appear on the first page of the contract discussing the scope
ofthe work and price and that the contractors include a like statement on
associated billings or invoices.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct
line is 512/475-0613. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

NOTE: Previous Accession Number 9311075L.3 and/or 9311075L