Can a general contractor holding an owner's direct payment permit pass that permit or exemption certificate on to its subcontractors and vendors?

Plain-English summary

An owner revising a construction contract asked the Comptroller to confirm, in writing, how its direct payment certificate should flow through a multi-tier contractor relationship. The contract required bids to itemize material versus labor, making it a "separated" contract — which the Comptroller said is a good practice because it removes the guesswork over which charges are taxable and who is liable for the tax, and recommended further breaking work into "New Construction," "Repair work," and "Scheduled & periodic maintenance" categories.

The core rule: a direct payment certificate is nontransferable. Only the entity actually named on the certificate may issue it. When the owner gives its direct pay permit to a general contractor, that's where the certificate's reach ends — the general contractor cannot hand the owner's direct pay number, or a copy of the certificate, to its own subcontractors or vendors. Instead, the general contractor issues its own resale certificate to its subcontractors, and each subcontractor in turn issues its own resale certificate to its suppliers. The letter illustrates this with a tank-repair example: if the owner contracts with Company X, which uses Company Y for body work and Company Z for painting, the owner gives its direct pay number only to X; X gives Y and Z resale certificates; X never shares the owner's direct pay number or certificate with anyone else.

The Comptroller also noted that requiring contractors to disclose their Texas sales tax permit number in the contract is legal and a good practice.

What this means for you

Owners who hold a direct payment permit and hire general contractors

Your direct pay certificate only authorizes the specific contractor you give it to — it cannot be passed down to subcontractors or vendors further down the chain, no matter how many tiers of subcontracting exist.

General contractors receiving an owner's direct pay certificate

Use your own resale certificate when purchasing from your subcontractors and vendors; don't pass along the owner's direct pay number. Each subcontractor should likewise issue its own resale certificate to its suppliers.

Anyone drafting construction contracts

Requiring separately stated material/labor charges (a "separated" contract), breaking work into new construction/repair/maintenance categories, and requiring contractors to disclose their sales tax permit number are all practices the Comptroller endorses for clarity on tax liability.

Common questions

Q: Can our general contractor give our direct payment certificate to its subcontractors?
A: No. A direct payment certificate is nontransferable and can only be issued by the entity it's issued to. The general contractor should use its own resale certificate with subcontractors instead.

Q: How does tax flow through a multi-tier contracting arrangement then?
A: The owner gives its direct pay number only to the general contractor; the general contractor issues its own resale certificates to its subcontractors; each subcontractor issues its own resale certificate to its suppliers.

Q: Is it a good idea to require separated material/labor billing in construction contracts?
A: Yes, per this letter — it removes ambiguity about what's taxable and who's liable, especially when combined with breaking work into new construction, repair, and maintenance categories.

Q: Can I rely on this letter for my own contract structure?
A: No. This opinion is based on the facts presented, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• No specific Tax Code section or Comptroller rule number is cited in the body of this letter; it addresses direct payment certificate and resale certificate mechanics as a matter of general Comptroller administrative practice.

Subject

Direct Payment Certificate — Nontransferable — Contractor Cannot Issue To Subcontractors Or Other Vendors

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712444L

Original ruling text

December 11, 1997

Dear Mr. **:

Thank you for allowing me to help with your contract revisions and for asking
for written confirmation of our telephone discussion. With this letter I will
respond to questions you asked in your facsimiles dated November 19, November
24, and December 1.

Your "contract documents" provision in the contract effectively incorporates
and makes the bids part of the contract. The bid form requires a breakdown
between material and labor causing the contract to be viewed as a separated
contract.

Requiring the vendor to separately state the charges for material, labor,
markup on labor and material, rental reimbursement is a good idea because it
eliminates guess work as to what charges are subject to sales and use tax and
whose liability the tax is. It is also a good idea to have the charges for
work broken down into the three job types; "New Construction," "Repair work,"
and "Scheduled & periodic maintenance."

You should not allow anyone but ** to issue your direct pay
certificate. When you issue your direct pay exemption certificate to the
contractor, that is as far as the certificate goes. The contractor should not
pass the certificate on to other vendors or subcontractors. The contractor
should issue its own resale certificate to the subcontractors. The
subcontractors should in turn issue their own resale certificates to their
suppliers. If you sign a contract with X company to work on a tank and they
use Y company to do the body work and Z company to do the painting, you give
your direct pay number to X company. X company gives Y and Z a resale
certificate. X company does not give your direct pay permit number or a copy
of your certificate to anyone.

Requiring contractors to disclose their Texas sales tax permit in the contract
is not a violation of any law and is a good idea. I did not receive the two
pages of your contract that addresses sub-contractor that you refer to in your
last facsimile.

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. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Administration Division, Comptroller
of Public Accounts. My internet address is .

Sincerely,

Tom Soto
Tax Policy Division