On a separated new-construction contract for an Enterprise Zone project, are a contractor's charges to the customer for its own equipment, rented equipment, equipment-with-operator, and profit markup taxable — and does the Enterprise Zone designation change any of this?

Plain-English summary

A contractor building a new facility for a customer (ABC) inside a Texas Enterprise Zone asked the Comptroller to confirm four separate points about how the job's billing would be taxed under a separated new-construction contract (materials and labor itemized).

Own equipment used on the job: the contractor's equipment purchases are always taxable to the contractor — there's no exemption for a contractor's own tools/equipment. But when the contractor bills ABC a charge specifically for using that equipment on the job, that charge is not taxable, because it's part of a nontaxable new-construction job and isn't a rental (the contractor never gives up possession/control of the equipment to ABC). If the same work were real property repair/remodeling instead of new construction, that equipment charge would be taxable.

Rented equipment passed through: the contractor pays tax to the equipment-rental company when it leases equipment for the job (no double-tax exemption exists there), but when it passes that rental cost through to ABC as part of the new-construction bill, that pass-through charge isn't separately taxed again. Under a repair/remodeling job instead, the full charge — including passed-through rental costs — would be taxable.

Equipment-with-operator (crane, backhoe, loader, etc., billed by the hour/day): neither the equipment portion nor the operator portion of that charge is taxable, as long as the underlying work is new construction — this isn't a rental (so no resale certificate applies to the equipment purchase), it's simply part of an untaxed new-construction charge. Again, the same charge on a repair/remodeling job would be fully taxable.

Markup/profit on labor vs. materials: labor and any markup applied to labor are never taxable in new construction. Markup on materials, though, depends entirely on the billing mechanics: if the contractor marks up labor and materials separately and then adds them, the material markup counts as part of the taxable "agreed price of material." But if the contractor first subtotals materials and labor together and applies one combined markup percentage to that combined subtotal, the markup is not additionally taxed — tax applies only to the underlying materials subtotal, not to the markup layered on top of the combined figure.

Enterprise Zone status changes nothing for the contractor. The letter is explicit: there's no special tax treatment for this job just because it's in an Enterprise Zone — all of the above rules are the same as for any other separated new-construction contract with a non-exempt customer. Where the Enterprise Zone designation does matter is for the property owner, ABC: because ABC has enterprise-project designation, it can claim a state sales tax refund on some of the tax paid on building materials and other assets purchased for use in the zone, scaled to the number of jobs it creates there. But ABC only keeps that refund right if the building is built under a separated contract. If it were built under a lump-sum contract instead, the contractor (or subcontractors) would be solely liable for the material tax as the purchaser/consumer of the materials — and ABC would lose the ability to claim that refund entirely.

What this means for you

Contractors doing new construction (Enterprise Zone or not)

Charges to your customer for your own equipment use, passed-through equipment rental, and equipment-with-operator are all untaxed on a new-construction job — but you still pay tax yourself on buying or leasing that equipment. None of this changes just because the project sits in an Enterprise Zone.

Contractors setting markup structure

If you want to avoid tax on your profit markup, combine your materials and labor subtotals before applying your markup percentage — marking up materials and labor separately makes the material-side markup part of the taxable materials price.

Property owners with Enterprise Zone/project designation

Your state sales tax refund on building materials depends on your contractor using a separated contract. Insist on separated billing (not lump-sum) if preserving your Enterprise Zone refund eligibility matters to you — lump-sum billing shifts full material tax liability onto the contractor and eliminates your refund path.

Accountants and tax professionals

This letter is a comprehensive, multi-part illustration of new-construction taxability mechanics (equipment charges, rental pass-throughs, operator-included equipment, and markup math) — useful as a reference checklist for any separated new-construction contract review, Enterprise Zone or otherwise.

Common questions

Q: Does an Enterprise Zone designation change how a contractor's charges are taxed?
A: No, not for the contractor — the same separated new-construction rules apply as with any other job. The designation only affects the property owner's ability to claim a state sales tax refund on materials, and only if the job is billed as a separated contract.

Q: Is a contractor's charge for using its own equipment on a new-construction job taxable?
A: No, as long as the job is new construction (not repair/remodeling) and the contractor doesn't transfer possession/control of the equipment to the customer.

Q: Is markup on materials always taxable?
A: Only if labor and materials are marked up separately. If materials and labor are combined into one subtotal before the markup is applied, the markup itself isn't separately taxed.

Q: What happens to the owner's Enterprise Zone refund if the contract is lump-sum instead of separated?
A: The owner loses the ability to claim that refund, because a lump-sum contract makes the contractor (or subcontractors) solely liable for the material tax as the purchaser/consumer.

Q: Can I rely on this letter for my own Enterprise Zone construction project?
A: No. This opinion is based on the facts presented, and different but similar facts may result in different answers; 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 applies the Comptroller's general separated-new-construction-contract framework (equipment charges, rental pass-throughs, markup mechanics) alongside the Texas Enterprise Zone materials-refund program referenced by the facts.

Subject

New Construction Contract With Enterprise Zone/Project

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9801200L

Original ruling text

January 23, 1998

Dear**:

Thank you for your letter dated December 3, 1997, concerning contracts for new
construction work in an Enterprise Zone. Your questions/statements are restated
below followed by our response and/or comments.

Your first statement is: "Any equipment belonging to our firm used for this
project is not taxable." Response: Tax is due on any equipment that you
purchase to do this job. You are not entitled to any exemptions. However,
because you are performing a new construction separated contract job, you
should not charge you customer tax on the charges for the equipment that you
use. Only the charge for the agreed price of the material that you incorporate
into the job is taxable. You and your subcontractors should issue resale
certificates to your suppliers when you purchase construction materials for the
job.

In all of our discussions, we have been addressing charges that you make to ABC
for the construction of the new building. When you bill ABC for equipment that
you use in performing the job, that charge is not taxable because you are doing
a non taxable new construction job. The charge would be taxable if you were
doing a real property repair and remodeling job. The transaction is not a
rental because you do not give up possession and control of the equipment to
your customer, ABC. When you buy the equipment, you should pay tax on it.

Your second statement is: "Any equipment rented from a rental company will not
be subject to a second sales tax." Response: Correct. You should pay tax to
the lessor on equipment that you acquire by way of lease for your use on this
job. When you pass your cost for the rental to your customer, ABC, you should
not collect tax on that charge because the work you are doing is new
construction. If the work were real property repair and remodeling, then the
total charge would be taxable including any pass through rental charges or
other expenses. Again, you are not renting the equipment to ABC.

Your third statement is: "Any equipment such as a crane, backhoe or loader
along with an operator is not taxable either as it is considered service."
Response: When your charge to your customer includes a charge for an operator
and equipment per hour, day or other time period, neither the charge for the
equipment or operator is not taxable provided you are doing new construction
work. If you are performing a taxable real property repair and remodeling job,
the charge for both the operator and equipment is taxable. It is not a rental
charge, and you may not acquire the equipment under a resale certificate.

Your forth statement is: "The question has again risen in regards to the
profit being taxable. Is the profit applied to the labor portion taxable as
well as the profit applied to the material portion, or is just the profit
applied to the material portion taxed? See attached letter from ** with
ABC dated 11/7/97 which quotes Tom Soto from the Austin office and lists the
breakdown - is this a correct breakout?
Response: Neither the labor nor the markup on labor for a new construction job
is taxable. The markup on material may or may not be considered part of the
agreed price of material depending on how it is billed. If you mark up the
material and labor separately, then the markup is taxable as part of the agreed
price of the material. If you add up the material and labor and then mark up
the sum of both the material and labor, then the markup is not taxable. In the
example you provide, the non taxable items (A) are subtotaled and the 5.5%
markup (B) is applied to those items to arrive a (C) the non-taxable total.
Then the materials are subtotaled as (D) taxable materials. The 5.5% markup fee
is applied as (E) to arrive at (F) the materials plus markup. Tax is due on
(F) the total of materials and markup.

However, if A and D were subtotaled and the 5.5% markup applied to the
subtotal, then the sales tax would apply only to D and not to the markup on the
combined material and labor.

As far as XYZ Builders is concerned, there is no special treatment for this job
because it is in an enterprise zone. You are not required to do anything
different from any other separated new construction contracts. The information
above applies to any separated new construction job that is not with an exempt
entitiy. Your customer, ABC, because they have received designation as an
enterprise project will be able to get a refund of some of the state sales tax
that they pay on the materials used in the building and other assets they
purchase for use in the enterprise zone, based on the number of jobs they
create in the zone. ABC would lose the ability to get a refund of the tax on
the building if it were constructed under a lump sum contract, because under
the law, XYZ Builders or the subcontractors would be solely liable for the tax
as the purchaser and consumer of the materials.

This opinion is based on the facts presented. Different facts though similar,
may result in different answers.

If you have any questions or need more information, you may call me toll free
at 1-800-531-5441, extension 3-4675. The direct line is 512/463-3465. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Tom Soto
Tax Policy Division