When a contractor or repair/remodeling firm uses consumable supplies on a job, who owes Texas sales tax on those supplies — and does it matter if the job is for a tax-exempt organization?

Subject

Repair/Remodeling/Renovations Contract — Lump — Sum Or Separated

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1288A08

Plain-English Summary

This letter addresses how Texas sales tax applies to consumable supplies — items used up on the job rather than incorporated into the finished project — when contractors and repair/remodeling firms perform work on real property.

Effective October 1, 1993, Tax Code Section 151.311 was amended to add a new subsection (b). Under it, the purchase of tangible personal property (other than machinery or equipment and its accessories and repair/replacement parts) used to perform a contract for an improvement to realty for an organization exempt under Section 151.309 or 151.310 is itself exempt, if the property is (1) necessary and essential for performing the contract, and (2) completely consumed at the job site.

Because of this, contractors and repair/remodelers working under contract for entities exempt under Sections 151.309 or 151.310 may give their suppliers an exemption certificate instead of paying tax on qualifying consumable supplies. The letter notes that the text of Sections 151.309 and 151.310 was enclosed as an addendum. For any other purchaser of consumable supplies (i.e., not working for a Section 151.309/151.310 exempt entity), tax must be paid at the time of purchase.

Separately, the letter addresses billing: individuals performing taxable services such as repair or remodeling of non-residential real property must charge tax on the total charge to their customers, including the cost of consumable supplies whether that cost is folded into the price or stated as a separate line item. The letter quotes an Administrative Law Judge's comment from Hearing 12,761, explaining that a business paying sales tax on the supplies it consumes and then charging sales tax again on the total sale price to its own customer is not illegal double taxation — it's simply how a business's tax costs get reflected in its pricing.

What This Means For You

If you are a contractor or repair/remodeling firm working for a Section 151.309 or 151.310 exempt organization: You may issue an exemption certificate to your suppliers for consumable supplies, but only for supplies that are necessary and essential to performing that specific contract and that are completely consumed at the job site. Machinery, equipment, and their accessories and repair/replacement parts do not qualify for this exemption even on an exempt-entity job.

If you are a contractor working for any other customer: You must pay tax on your consumable supplies when you buy them — you cannot use an exemption certificate. You must then also charge sales tax on the total amount you bill the customer for taxable repair/remodeling of non-residential real property, whether or not you break out the cost of supplies as a separate charge.

If you are worried about "double taxation": Paying tax on supplies you consume and then charging tax again on your total invoice to the customer is not double taxation under this letter's reasoning — each is a tax on a separate transaction (your purchase, and your customer's purchase of your taxable service).

Q&A

Q: Can a contractor buy consumable supplies tax-free if the job is for a tax-exempt organization?
A: Only if the exempt organization is exempt under Tax Code Section 151.309 or 151.310, and only for supplies that are necessary and essential to performing the improvement-to-realty contract and completely consumed at the job site. The contractor gives its supplier an exemption certificate for that purchase.

Q: Does this exemption cover machinery or equipment used on the job?
A: No. Section 151.311(b), as amended, expressly excludes machinery or equipment and its accessories and repair and replacement parts from the exemption — it applies only to consumable supplies.

Q: If a repair/remodeling firm separately states the cost of consumable supplies on the customer's invoice, can it avoid charging tax on that line item?
A: No. The letter states that individuals performing taxable services such as repair or remodeling of non-residential real property must charge tax on the total charge to their customers, which includes the cost of consumable supplies whether built into the price or separately stated.

Citations

• Tex. Tax Code § 151.311 (as amended effective October 1, 1993, adding the consumable-supplies exemption for improvement-to-realty contracts for certain exempt organizations)
• Tex. Tax Code § 151.309 (referenced as one category of exempt organization whose contractors may qualify for the exemption)
• Tex. Tax Code § 151.310 (referenced as another category of exempt organization whose contractors may qualify for the exemption)

Original ruling text

March 7, 1994

Dear *:

This is to follow up our phone conversation of March 7, regarding the tax
treatment of consumable supplies used by contractors and repair/remodeling
firms.

Effective October 1, 1993, Tax Code Section 151.311 was amended to add
the following subsection.

(b) The purchase of tangible personal property, other than machinery
or equipment and its accessories and repair and replacement parts, for
use in the performance of a contract for an improvement to realty for an
organization exempted under Section 151.309 or 151.310 of this code is
exempt if the tangible personal property is:

(1) necessary and essential for the performance of the contract; and

(2) completely consumed at the job site.

Accordingly, contractors and repair/remodelers performing contracts for
entities exempted under Tax Code Sections 151.309 or 151.310 may give
exemption certificates to their suppliers in lieu of tax. I am enclosing
the text of Tax Code Sections 151.309 or 151.310 as an addendum to this
letter. Other purchasers of consumable supplies must pay tax at the time
of purchase.

Individuals performing taxable services such as repair or remodeling of
non residential real property must charge tax on the total charge they
make to their customers. This includes the cost of consumable supplies
built into their pricing structure and includes separately stated charges
to their customers.

An Administrative Law Judge commented on this issue in Hearing 12,761 by
stating:

It is well understood that any business must consider all its costs of
production and expenses when pricing its product(s), and understood that
a business pays various taxes, including sales tax on the tangible
personal property it uses or consumes, and understood that whatever price
the product sells for will have sales tax computed on it, but that
situation does not result in illegal double taxation.

If you have questions or need more information, please call or write.
You may reach me by calling toll free, (800) 531-5441 (ext. 3-4680). My
direct line number is (512) 463-4680. The number for FAX transmissions
is (512) 475-0900. You may write to me in care of Tax Administration
Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9403087L