Texas Comptroller of Public Accounts    STAR System


HEARING NO. 35,473

IN RE: **************

TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: 01/01/92 THROUGH 12/31/94



Administrative Law Judge

Representing Tax Division

Representing Petitioner



This case was decided on the basis of the parties' written submissions. Notice 
has been taken of all Comptroller's records pertinent to this case. Section 
references are to Title 2 of the Texas Tax Code, and Rule references are to 
Title 34, Texas Administrative Code.


Petitioner "...is not in agreement with the audit as some of the projects 
listed on your outline as taxable are tax exempt." Petitioner made a payment in 
the amount of $**************"...for projects that are listed on your outline 
that are taxable. Total sales tax due is $************** plus $************** 
interest [sic]."


1. Petitioner is a general and mechanical contractor.

2. Petitioner was audited for sales and use tax compliance for the audit period 
January 1, 1992 through December 31, 1994. As a result of the audit, the 
Comptroller issued a Texas Notice of Tax Due dated September 1, 1995, in the 
amount of $************** consisting of tax and interest calculated through the 
date of the Notice. Penalty was waived. [FOOTNOTE: A Texas Sales and Use Tax 
Underpayment Notice was issued to Petitioner on December 21, 1995, indicating a 
liability of $**************, consisting of $************** in tax and 
$************** in interest.]
3. Adjustments were made by the auditor for purchases on which tax was not paid 
or accrued. The auditor determined that the deficiency resulted from purchases 
of parts and materials incorporated into new construction jobs on which sales 
tax was not paid or accrued.

4. The primary construction project at issue is a job for the construction of a 
CITY, Texas border station for the ************** ("The Project").

5. The Project was awarded under Section 8(a) of the Small Business Act (15 
U.S.C 637(a)) which authorizes the Small Business Administration ("SBA") to 
enter into certain construction contracts with other federal agencies and to 
then subcontract for performance of these contracts with firms that are 
eligible for programs participation (primarily minority owned businesses). 
Petitioner was the successful subcontractor for the Project. The bid was issued 
September 20, 1991 ("Solicitation, Offer and Award, Form 1442").

6. The SBA required Petitioner to submit a cost proposal breakdown between 
labor and materials for the Project. In the letter from Jose A. Arreola, 
Assistant District Director, SBA's Minority Enterprise Development, addressed 
to **************, employed by Petitioner, dated November 30, 1995, the 
following statements are made regarding Section 8(a) of the Small Business Act 
(15 U.S.C. 637(a)):

"Additional requirements are made in Subsection 124.314 paragraph (h) as 
follows: '(6) The Program Participant must certify in its bid or proposal that 
it will perform the required percentage of work with its own employees. Failure 
of the concern to provide such a statement will result in the firm being 
considered ineligible for award."

7. The subcontractor breakdown Petitioner submitted to the SBA contained the 
following statement:

"************** [Petitioner] will perform with its own forces the remainder of 
the work totaling $************** of which $************** is labor. This 
represents 16% direct construction labor to be provided by **************'s 
[Petitioner's] labor force."

8. Ms. **************, the contracting officer for the General Service's 
Administration, in a letter dated September 18, 1995, addressed to Petitioner's 
President, responded to Petitioner's request for a letter stating the 
government's tax exemption status on the Project. In the letter, Petitioner was 
advised that it was immune from taxation by state and local governments. 
Petitioner was further advised that "...the Federal Government is not obligated 
to pay any state or local real property taxes, nor any sales or other taxes 
imposed by state or local authorities upon the purchase of services or tangible 
personal property, when the incidence of the taxes is upon the Federal 
Government as purchaser." Petitioner was directed to accept the letter in lieu 
of a tax exemption certificate form and to retain it for future use.

9. Standard Form 1442, "Solicitation, Offer and Award" serves as the contract 
between the Subcontractor [Petitioner] and the SBA, as the Prime Contractor. 
Item 29 of Form 1442 provided the following:

"Your offer on this solicitation is hereby accepted as to the items listed. 
This award consummates the contract, which consists of (a) the Government 
solicitation and your offer, and (b) this contract award. No further 
contractual document is necessary."

10. Item No. 21 of Form 1442 describes the following items accepted:

Contractor's bid for work covered under Contractor's Lump Sum Base Bid (which 
includes the price of the Line Item Bid), Options 1,2,3, & 4 for a total amount 
of $**************, 5 of 5, Standard Form 1442, signature page, Volume I of 
III, Volume II of III and Volume III of IV, drawings listed in block 109 of SF 
1442, also Amendment No. 1 dated 10-11-91 and Amendment No. 2 dated 11-1-01, 

11. Item 28 of Form 1442 describes the following regarding the rights and 
obligations of the parties:

Contractor agrees to furnish and deliver all items or perform all work 
requirements identified on this form and any continuation sheets for the 
consideration stated in this contract. The rights and obligations of the 
parties to this contract shall be governed by (a) this contract award, (b) the 
solicitation, and (c) the clauses, representations, and specifications 
incorporated by reference in or attached to this contract."

12. The signature page of Standard Form 1442 records (1) the signature of 
**************, Petitioner's President, as subcontractor, bearing the date of 
October 22, 1991; (2) the signature of **************, SBA's Contracting 
Officer, as Prime Contractor, bearing the date of December 24, 1991; and (3) 
the signature of **************, the ************** Contracting Officer, 
bearing the date of December 31, 1991.

13. Page 4 of Standard Form 1442 records a lump sum base bid of 
$**************. In the same page, Options 1 through 5 are listed, which were 
not included on the lump-sum base bid. Each of the Options disclosed a lump-sum 
award, consisting of $**************; $**************; $**************; 
$**************; and $**************.

14. There is no reference to the incorporation of GSA Form 3506 in the Standard 
Form 1442 executed by Petitioner and the SBA.

15. The Construction Progress Report (GSA Form 184) submitted by Petitioner 
contains a Work Branch Breakdown which separates the value of work completed 
and the value of materials. No reference is made in the Standard Form 1442 to 
GSA Form 184.

Governing Authority:

Section 151.311 provides, in relevant part, the following:

151.311. Property Used for Improvement of Realty of a School District or 
Nonprofit Hospital

Tangible personal property purchased by a contractor for use in the performance 
of a contract for the improvement of realty for a school district or nonprofit 
hospital is exempted from the taxes imposed by this chapter to the extent of 
the value of the tangible personal property used or consumed or both in the 
performance of the contract. In this section "nonprofit hospital" means a 
hospital licensed under Chapter 241 or 577, Health and Safety Code, that is 
operated as a charitable or nonprofit establishment.

Comptroller's Rule 3.291(e)(3) provides the following:

Material incorporated into the property of the customer by separated 
contractors and subcontractors. A resale certificate may be issued to suppliers 
by separated contractors and subcontractors for those items incorporated into 
the property being improved. The contractor may then accept an exemption 
certificate in lieu of tax for those incorporated materials sold under 
separated contracts to organizations listed under the Tax Code 151.310. 
Contractors performing separated contracts for organizations listed under the 
Tax Code, 151.309, must have signed contracts with the government agency, 
official government purchase vouchers, or an exemption certificate signed by 
the government agency.

Comptroller's Rule 3.291(a)(6) defines a "separated contract" as the following:

Separated contract - A contract in which the agreed contract price is divided 
into a separately stated agreed contract price for incorporated materials and a 
separately stated agreed contract price for skill and labor. If prices of 
incorporated materials and labor are separately stated, the fact that the 
charges are added together and a sum total given is irrelevant. Cost-plus 
contracts are generally regarded as separated contracts.

Comptroller's Rule 3.291(a)(5) defines a lump-sum contract as the following:

Lump-sum contract - A contract in which the agreed contract price is one 
lump-sum amount and in which the charges for incorporated materials are not 
separate from the charges for skill and labor. Separated invoices issued to the 
customer will not change a lump-sum contract into a separated contract unless 
the terms of the contract require separated invoices.


Petitioner concedes that Section 151.311 of the Texas Tax Code and the related 
Comptroller Rules, as in effect for the period in question, would not exempt a 
contract, such as Petitioner's, from Texas sales and use tax on purchases of 
materials by a contractor under a lump-sum contract with a federal agency. 
Petitioner contends that Section 151.311 does not apply to the facts at hand 
because the contract between Petitioner and SBA for the Project is not a 
lump-sum contract but is instead a separated contract. Because the contract is 
a separated contract, Comptroller's Rule 3.291(e)(3) applies, and Petitioner is 
therefore not liable for sales tax on the purchase of materials and parts 
incorporated into the Project.

Petitioner relies on Comptroller's Rule 3.291(e)(3) which provides that a 
separated subcontractor may purchase materials to be incorporated into a 
project for an exempt entity pursuant to a resale certificate and may then 
accept an exemption certificate (or in the case of a federal government agency, 
a signed federal contract) from such entity in lieu of collecting Texas sales 
tax. Petitioner's case rests on its contention that the contract for the 
Project was a separated contract between Petitioner and the SBA because the 
contract price for materials and labor was separately stated.

The contract for the Project was awarded under Section 8(a) of the Small 
Business Act, under which Petitioner is considered the subcontractor, while the 
SBA is the prime contractor for the GSA. Petitioner posits that, although there 
are actually two contracts for consideration in this case, what is relevant is 
whether the subcontract between Petitioner and the SBA is lump-sum or 
separated, and not the status of the contract between the GSA and the SBA.

Petitioner argues that the status of the subcontract turns ultimately on the 
fact that the subcontract is a Section 8(a) subcontract. As such, Petitioner 
contends, Petitioner and the SBA were required to submit a bid on Form 1442. 
Petitioner is required to certify in its bid or proposal that it will perform 
the required percentage of work with its own employees or the party will not be 
eligible for the award of the contract. See CFR 124.314(b). Petitioner asserts 
that, in order to comply with this requirement, it was required to submit a 
breakdown between labor and materials for Petitioner's share of the Project.

Petitioner contends that the contract between SBA and GSA consists not only of 
GSA Form 1442 but also GSA Form 3506. Petitioner, however, does not explain how 
or why the GSA Form 3506 is part of the contract.

Petitioner argues that its contract with SBA incorporates the subcontractor 
breakdown as well as GSA Forms 142 and 3506. Petitioner argues that the 
subcontractor breakdown became part of the subcontract because of 8(a). 
Petitioner reasons that by statute it was required to provide a certification 
regarding the percentage of work to be performed by Petitioner's employees and 
the subcontractor breakdown as a condition precedent to its subcontract with 
SBA. The subcontract could not be awarded to Petitioner until the certification 
and breakdown were provided.

Petitioner also argues that Texas case law provides an alternative basis in 
support of the incorporation of the Subcontractor Breakdown into the 
subcontract. Petitioner refers to Tubb v. Bartlett, 862 S.W. 2d 740 (Tex. App. 
- El Paso, 1993, error denied) and Hardeman v. Parish, 730 S.W. 2d 813 (Tex. 
App. - El Paso 1987, writ ref'd n.r.e.) as authority for the proposition that 
separate instruments relating to the same transactions will be construed 
together even if the instruments do not expressly refer to each other. 
Petitioner draws from these authorities the conclusion that, since Forms 1442 
and 3506 and the subcontractor breakdown were clearly executed as part of the 
same transaction and at substantially the same time, they should be considered 
together for purposes of determining whether the subcontract is a lump-sum or 
separated contract.

Petitioner further argues that the subcontract is incomplete without reference 
to the subcontractor breakdown. It is only by reference to the subcontractor 
breakdown that it can be determined what part of the contract is to be 
performed by Petitioner. Finally, Petitioner turns to the invoicing procedures 
utilized by Petitioner in billing the GSA for further support of its assertion 
that the subcontract is a separated contract. The Construction Progress Reports 
disclosed in GSA Form 184 break down the total value of the contract completed 
to date between the cost of labor to date and the cost of materials 
incorporated into the Project to date. This form of invoicing was required 
under Section 90 of Form 3506 and is evidence of the parties' intent that the 
contract be a separated contract.


The Tax Division's response to Petitioner's argument that the subcontract is a 
separated contract under Comptroller's Rule 3.291(a)(6) consists of the 

"The Tax Division reiterates its position that the contested jobs by Petitioner 
are lump-sum contracts entered into after the law change of October 1, 1991 and 
so are taxable with regards to parts and materials. The documentation sent by 
Petitioner's representative does not change the fact that the lump-sum new 
construction contract Petitioner had with GSA after October 1, 1991, and before 
the law was changed back with modifications, holds Petitioner liable for taxes 
on parts and materials...."

"However, a review of the contract shows that it is in fact a lump-sum 
contract. Nothing in the contract that has been provided supports the assertion 
that it is a separated contract. Petitioner only has a contract which includes 
breakdowns of different phases of the construction job which comprises the 
complete job total. Moreover, the Comptroller has already ruled that even 
knowing the breakdown of the total sum does not make a separated contract out 
of a lump-sum contract. Comptroller's Decision No. 18,934 (1987).

The Tax Division makes no reference to any specific provision of the 
subcontract or to any of the documents relied on by Petitioner.


Petitioner's contention should be denied.

The parties are not disputing that if the subcontract is a lump-sum contract 
Petitioner is liable for taxes on materials incorporated into the Project. 
Section 151.311. What is disputed is whether the subcontract is actually a 
separated or lump-sum contract, because if it is a separated contract then 
Petitioner is not liable for the taxes as provided for under Comptroller's Rule 

Petitioner argues long and hard that the subcontract incorporates GSA Form 
3506, the Subcontractor Breakdown and the invoicing procedures of GSA Form 184. 
I, however, found no basis in fact or law that these documents were 
incorporated into the subcontract. First, item 29 of the subcontract describes 
what constitutes the contract. As noted in Finding of Fact No. 9, this 
provision quite clearly states that, "This award consists of (a) the Government 
solicitation and your offer, and (b) this contract award. No further 
contractual document is necessary." Second, there is not even a reference in 
any of the three referenced documents (GSA Forms 3506 and 184 and the 
Subcontractor Breakdown) to the subcontract. Third, no where else in the text 
of the subcontract is an explicit reference made to GSA Form 3506, the 
Subcontractor Breakdown, or Form 184. 

Contrary to Petitioner's representations, the subcontract does not state that 
the 8(a) requirements are incorporated as part of the text. At the very top of 
the first page of the Standard Form 1442 the following sentence is typed:


This same sentence is repeated in page 3 of the Standard Form 1442. These 
sentences do not necessarily mean that specific provisions or all provisions of 
Section 8 are incorporated into the contract where the four corners of the 
contract, and the documents incorporated by the subcontract, are explicitly 
described in items 21 and 29 of Standard Form 1442. (See Finding of Fact Nos. 9 
and 10.)

The conclusions I reached with respect to the characterization of the 
subcontract as a lump-sum contract are supported by a long line of 
Comptroller's Decisions. See Comptroller's Decision No. 24,368 (1990). "Intent 
of the parties cannot overcome the four corners of the contract and compromise 
the right and remedies of the state." Also see Decision Nos. 33,534 (1995) and 
33,697 (1995).

Absent an explicit statement in the subcontract incorporating the disputed 
documents, the determination of whether the subcontract is or is not a lump-sum 
contract must be made without reference to the documents. In that case, there 
is no question that the subcontract is a lump-sum contract.


The audit deficiency should be sustained in its entirety.

Signed this 20th day of November, 1996.

Administrative Law Judge


The above decision of the Administrative Law Judge, resulting in Petitioner's 
liability as set out in Attachment A, which is incorporated by reference, is 
approved and adopted in all respects. This decision becomes final twenty (20) 
days from the date of this Order, and the total sum of the tax, penalty and 
interest amounts is due and payable within twenty (20) days thereafter. If such 
sum is not paid within such time an additional penalty of ten percent of the 
taxes due will accrue and interest will continue to accrue.

If a rehearing is desired, a Motion for Rehearing must be filed with the clerk 
of the Administrative Law Judge within twenty (20) days from the date of this 
Order, and must state the grounds upon which the motion is based.

RENDERED and ISSUED this 20th day of November, 1996.


DATE: 11/20/1996