If a Texas contractor builds a facility under a lump sum contract, the contractor is considered the consumer of all of the materials incorporated into the project. Therefore installed equipment, that would otherwise be exempt from sales and use tax when purchased by a manufacturer, is taxable to a contractor under a lump sum contract.

However, if the contract is a separated contract, where the agreed upon contract price for the materials incorporated into the work is separately stated from the agreed upon contract price for skill and labor, the contractor can issue a resale certificate for the materials and accept a manufacturing exemption certificate from the taxpayer for qualifying manufacturing equipment.

By utilizing this contract method in addition to other strategies, a taxpayer can significantly reduce the legal amount of sales and use taxes required. It could be advantageous to have a conversation with a Briggs & Veselka SALT professional when entering into contract conversations, because the contract structure could have an unexpected negative impact on your tax liabilities.