If a subcontractor never gets a resale certificate from the general contractor on a separated construction contract, who owes sales tax on the materials -- even though the ultimate customer holds a direct-pay permit?

Plain-English summary

Company A (a direct-pay permit holder) entered a separated new-construction contract involving manufacturing equipment, then subcontracted part of the same job to Company B under a separated contract. Company B never obtained a resale certificate from Company A -- and by the time the question came up, the two companies were in arbitration over an unrelated issue, making it impossible to get one now. Company B asked what its tax liability was on the materials it purchased for the job.

The Comptroller ruled that under Rule 3.291, a contractor performing a separated contract is treated as the retailer of all materials physically incorporated into the improved real property, and must collect tax from its customer based on the agreed contract price of those materials. Because Company B never received a valid resale certificate from Company A, Company B is required to bill and collect sales tax on the materials charge under the separated contract. That tax liability belongs to Company A until Company A either pays the tax directly or issues Company B a valid resale certificate. Critically, the fact that the underlying customer holds a direct-pay permit does not substitute for a valid resale certificate between the general contractor and subcontractor.

What this means for you

Subcontractors on separated construction contracts

Get a resale certificate from the general contractor before or at the time of sale -- don't wait. If a dispute (like arbitration) later makes that certificate impossible to obtain, you're still on the hook to collect tax from the general contractor on your materials charge, even if the ultimate project owner has a direct-pay permit.

General contractors

A direct-pay permit held by your own customer does not flow down to relieve you of the resale-certificate paperwork with your subcontractors. If you don't give your subcontractor a resale certificate, expect to be billed sales tax on the materials, and that tax remains your liability until you pay it or issue the certificate.

Accountants and tax professionals

This is a straightforward application of Rule 3.291's treatment of separated-contract material sales, showing that a direct-pay permit's benefit is specific to the permit holder's own purchases -- it doesn't cure a missing resale certificate one level up the contracting chain.

Common questions

Q: Does a customer's direct-pay permit excuse a subcontractor from collecting tax on materials?
A: No, per this letter -- the direct-pay status doesn't overcome the requirement for a valid resale certificate between the contractor and subcontractor.

Q: Who ends up owing the tax if no resale certificate was ever issued?
A: The subcontractor must bill and collect it from the general contractor, but the tax remains the general contractor's liability until it pays the tax or issues a valid resale certificate.

Q: What if the general contractor and subcontractor are in arbitration and can't exchange paperwork?
A: This letter doesn't excuse the tax collection requirement on that basis -- the subcontractor must still collect tax absent a valid resale certificate.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.291 (Contractors)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9708333L

Original ruling text

August 27, 1997

Subject: Arbitration

Dear Mr. **:

This is in response to your request for a ruling on the following fact
situation:

Company A entered into a separated contract for new construction with a
direct-pay holder, involving manufacturing equipment. Company A awarded a
separated contract on the same job to Company B.

Company B did not get a resale certificate from Company A, as they should have
at the time of sale and cannot get one now because Company A and B are in
arbitration on a different issue in the job.

If Company B could provide a copy of both contracts and documentation
supporting the direct-pay certificate, what would be the status of their tax
liability on the material purchases that went into the job?

Response: As you know under Rule 3.291, contractors performing separated
contracts are considered retailers of all materials physically incorporated
into the realty being improved and must collect tax from the customer based
upon the agreed contract price of the incorporated materials. Because B did
not receive a valid resale certificate from A, B is required to bill and
collect sales tax on the charge for materials under the separated contract.
The tax is a liability of A to B until A either, pays the tax, or issues B a
valid resale certificate.

The fact that the contracts reflect that the customer is a direct-pay holder
does not overcome the requirement for a valid resale certificate.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please
call me toll-free at 1-800-531-5441, extension 3-4502. The direct line is
512/463-4502. You may also write to Tax Policy Division, Comptroller of Public
Accounts. My e-mail address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division