When a contractor pulls materials out of a valid tax-free inventory located inside a city and MTA (mass transit authority) taxing jurisdiction, and uses those materials on a lump-sum new construction job located outside that city/MTA area, which city's and MTA's local use tax applies?

Plain-English summary

An accountant asked the Comptroller how to allocate local sales/use tax when a contractor removes materials from its own valid tax-free inventory to use on a lump-sum new construction job. The contractor's client builds residential and commercial buildings and also performs taxable nonresidential repair and remodeling. It keeps a tax-free inventory of parts at a place of business located inside both a city's limits and a mass transit authority (MTA) taxing jurisdiction — but the lump-sum construction job where the materials are actually used is outside any city or MTA jurisdiction.

The Comptroller explained that a contractor is treated as the consumer of materials pulled from a valid tax-free inventory for use on a lump-sum contract, and therefore owes use tax on those materials. The key point for local tax purposes: the city and MTA use tax is based on where the inventory is stored or kept at the time of, or just before, the materials are removed for use — not on where the construction job site is located. Because the inventory sits inside the city and MTA jurisdiction, the contractor must accrue local (city and MTA) use tax there, even though the job itself is located outside any city or MTA area. The letter cites Rules 3.377 and 3.427, Subsection (b)(4), as the basis for this allocation rule.

What this means for you

Contractors with a tax-free inventory

If you maintain a valid tax-free inventory and later pull materials out of it for use on a lump-sum contract, you become the consumer of those materials and owe use tax. The local (city/MTA) portion of that use tax is keyed to where the inventory was stored just before removal — not to where the job site is.

Contractors working lump-sum jobs outside city/MTA limits

Don't assume that because your job site is outside any city or MTA taxing jurisdiction, no local use tax is owed. If the materials came from a tax-free inventory located inside a city or MTA area, local use tax is still due based on the inventory's location.

Businesses with inventory locations in multiple taxing jurisdictions

Track which taxing jurisdictions (city, MTA, or other special districts) cover each inventory location, since that location — not the ultimate job site — determines the local use tax accrual.

Common questions

Q: Does the location of the construction job determine which city/MTA use tax applies to materials pulled from inventory?
A: No. The letter says the use tax is based on the city and MTA where the materials were stored or kept at the time of, or just prior to, use or consumption — that is, the inventory location, not the job site.

Q: Is a contractor a "consumer" of materials taken from a valid tax-free inventory for a lump-sum contract?
A: Yes. The letter states the contractor is considered the consumer of such materials and must accrue use tax on them.

Q: What rules does the letter rely on for this local tax allocation?
A: Subsection (b)(4) of Rules 3.377 and 3.427.

Q: Can I rely on this letter for my own contracting business?
A: No. The letter states its opinion is based on the facts presented, and if there are any additional or different facts, the opinion may change. It also binds the Comptroller only as to the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.377, Subsection (b)(4) (as cited in the letter for local tax allocation on materials removed from tax-free inventory)
• 34 Tex. Admin. Code Rule 3.427, Subsection (b)(4) (as cited in the letter for local tax allocation on materials removed from tax-free inventory)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602278L

Original ruling text

February 15, 1996

Dear **:

Thank you for your letter of February 6, 1996. You asked that we address the
local tax allocation on the cost of materials removed from a contractor's valid
tax-free inventory for use in a new construction lump-sum contract.

As I understand it, your client is a contractor providing new construction of
residential and commercial buildings. In addition, the client provides taxable
nonresidential repair and remodeling services. The client maintains a valid
tax-free inventory of parts used in the performance of these services. The
client's place of business where the inventory is located is inside the taxing
jurisdiction of a city limits and a mass transit authority (MTA). You question
how local taxes are allocated on the cost of materials removed from the
inventory to perform a lump-sum new construction contract outside of a city or
MTA taxing jurisdiction.

The contractor is considered the consumer of materials removed from a valid
tax-free inventory for use in the performance of a lump-sum contract. The
contractor should accrue use tax on the materials removed from the tax-free
inventory based on the city and MTA where the items are stored or kept at the
time of or just prior to use or consumption. Please refer to Subsection (b)(4)
of Rules 3.377 and 3.427.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,
Lindey Osborne
Sales Tax Policy Division