| (i) The lump-sum contractor should pay tax to suppliers on all materials at the time of purchase, unless the contractor maintains a valid tax-free inventory or holds a direct pay permit. (ii) When the local sales taxes collected by the supplier are less than the 2.0% local tax cap, additional local use taxes are due based on the location where the goods are first stored or used. Local use tax is not due if the supplier collected a local sales tax for the same type of taxing jurisdiction. (iii) When a lump-sum contractor has items shipped to the jobsite from outside of Texas, the contractor is responsible for accruing local taxes based on the location of the jobsite. (iv) The lump-sum contractor must accrue local use tax based on the purchase price of the taxable item. The local use tax is due in the reporting period in which the item was first stored, used, or otherwise consumed in a local taxing entity. (11) Enterprise projects and defense readjustment projects. In order for an enterprise project or a defense readjustment project to avail itself of certain sales tax refunds, the project must enter into a separated contract, and the charges for items that qualify for enterprise project or defense readjustment project refunds must be separately stated. A contractor who performs a separated contract must collect sales tax from the project on the sales price of the incorporated materials. See §3.329 of this title (relating to Enterprise Projects, Enterprise Zones, and Defense Readjustment Zones). (12) Manufacturing facilities. For a manufacturer to qualify for sales tax exemptions on manufacturing equipment that is installed under a contract to improve real property, the manufacturer must enter into a separated contract. Additionally, the contract must separately state the charge for the qualifying manufacturing equipment. See §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing). (c) Tax responsibilities of contractors who perform lump-sum and separated contracts for exempt organizations. (1) Exemption certificates and other required proof of exemption. A contractor must obtain properly completed exemption certificates to document exempt contracts. Written contracts or written purchase orders that are issued by governmental entities exempted under Tax Code, §151.309, are acceptable documentation of exempt contracts. (2) Contractor liability. (A) A contractor may claim an exemption under Tax Code, §151.311, on a purchase of a taxable item for use under a contract to improve realty for an organization that is exempt under Tax Code, §151.309 or §151.310. If the comptroller subsequently determines that the organization is not exempt, then the contractor is liable for all taxes, penalties, and interest that accrue upon such purchase. If the validity of a claimed exemption or the exempt status of the customer is unclear, then the contractor may not accept the exemption certificate in good faith and should request additional evidence of the exempt status of the contract. If the customer claims to be an exempt organization, then a letter of sales and use tax exemption from the comptroller that is addressed to the customer relieves the contractor from further inquiry regarding the exempt status of the customer. See §3.287 of this title (relating to Exemption Certificates). (B) A contract with a private party to improve real property owned by an exempt entity, other than a governmental entity described in Tax Code, §151.309, is not an exempt contract if the improvement to real property is for the primary use and benefit of the private party. However, a contractor in a non-exempt contract may purchase tax free tangible personal property that is used to improve real property owned by a governmental entity described in Tax Code, §151.309, if that tangible personal property is donated to the governmental entity and if the following conditions are satisfied: (i) the contract between the contractor and the private party is a separated contract. See subsection (b) of this section for a discussion of lump-sum and separated contracts; (ii) the contract provides that title to the materials used to perform the contract passes to the private party when the materials are delivered to the job site but before they are incorporated into the realty or used by either the contractor or the private party; and (iii) the contract provides that the private party intends to donate the materials to the governmental entity before the materials are incorporated into the realty or used by the contractor. The private party must provide the contractor with a letter of intent or other document from the governmental entity that states its intent to accept the property. (3) Materials that exempt customers provide. A contract may specify that the exempt customer will provide the materials and the contractor will provide the skill and labor that are necessary to perform the contract. Under this type of contract, the contractor will not incur tax liability on the materials. The exempt customer may issue exemption certificates to suppliers in lieu of tax when purchasing the materials. Materials that are incorporated into real property improvements that are not related to the exempt purpose of the customer exempt under Tax Code, §151.310(a)(1) or (2), are taxable. In this situation, the exempt customer must pay tax to suppliers when purchasing the materials. See also §3.322 of this title (relating to Exempt Organizations). (4) Exempt items. The following items are exempt from sales and use tax when purchased for use in the performance of an exempt contract: (A) tangible personal property that is incorporated into the realty; (B) consumable items that are necessary and essential to the contract and are completely consumed at the job site; and (C) taxable services that are performed at the job site and are: (i) expressly required by the exempt contract to be provided or purchased by the contractor; or (ii) integral to the performance of the exempt contract. (5) Contractor's exemption or resale certificate. A contractor who performs a lump-sum or separated contract may issue a properly completed exemption certificate to a supplier for the purchase of exempt items that are identified in paragraph (4) of this subsection. The certificate must be properly completed and identify the contractor as the purchaser, the exempt entity for whom the improvements are made, and the project for which the items are being purchased. See §3.287 of this title (relating to Exemption Certificates). A contractor may choose to issue a properly completed resale certificate when purchasing materials that will be incorporated into the customer's realty under a separated contract. (6) Equipment. All machinery and equipment, including repair and replacement parts and accessories, that a contractor uses to perform contracts for any exempt entity are taxable. A contractor who purchases, rents, or leases equipment for use on a contract to improve realty for an exempt entity must pay tax on that purchase, rental, or lease. (d) Development work. For the purposes of this subsection, development work means a contract with a private party to improve real property by building public infrastructure, such as roads or sewer lines, provided that the improvements are dedicated to and will be accepted by a governmental entity. To qualify as an exempt contract, the private party must dedicate the realty and the improvements to the governmental entity before the work begins, and the governmental entity must accept or conditionally accept the realty and the improvements. |
