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
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
Administrative Law Judge
STEPHEN M. FOSTER
Representing Tax Division
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 $**************
FINDINGS OF FACT:
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
"************** [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.
Section 151.311 provides, in relevant part, the following:
151.311. Property Used for Improvement of Realty of a School District or
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
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.
TAX DIVISION'S ARGUMENTS:
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.
DISCUSSION AND CONCLUSIONS OF LAW:
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 IS A COMPETITIVE 8(a) PROCUREMENT."
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
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
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
ORDER OF THE COMPTROLLER
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.
COMPTROLLER OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
ACCESSION NUMBER: 9611019H
DOCUMENT TYPE: H
TAX TYPE: SALES