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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER OSTATE AND LOCAL SALES AND USE TAXES
RULE §3.319Prior Contracts

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

  (1) Bid--A written offer by a seller directed to a specific person making a binding commitment to perform a contract for specified work and labor or for supplying specified taxable items at a specified price. A general statement by a seller listing current prices is not a written bid.

  (2) Contract--A written agreement between two persons binding one party to perform specified work and labor or to supply specified taxable items to another party at a specified price. A purchase order issued by a purchaser may qualify as a contract only if signed and dated by the seller.

  (3) Enabling legislation--A bill passed into law by the Texas Legislature that authorizes an exemption for prior contracts or bids.

  (4) Prior contract or bid--A bid offered or a contract signed before any change in the tax rate or tax base. A purchase order issued by the purchaser prior to a rate change is not a prior contract unless signed and/or fulfilled by the seller prior to the rate change.

  (5) Third-party contract--A contract between the purchaser of the items for which exemption is claimed and a party other than the seller of the items for which exemption is claimed.

(b) Exemptions.

  (1) Tax rate increase. Taxable items purchased, leased, or rented for use in the performance of a third-party contract or bid signed on or before the date provided for prior contracts in the enabling legislation are exempted from the amount of the increase in the tax rate.

  (2) Tax base increase. Taxable items purchased, leased, or rented that are the subject of a contract or bid signed on or before the date provided for prior contracts in the enabling legislation are exempted from a change in the tax base.

(c) Exceptions.

  (1) Cancellation clauses. A cancellation clause in a contract will not cause the loss of a prior contract exemption.

  (2) Change orders. Change orders that constitute additions to the contract or increases in coverage or taxable items, labor or services added to the contract are not included in the prior contract exemption. The original part of the contract may still retain its prior contract exemption if the change orders can be separately identified.

  (3) Renewals or extensions. Any renewal or exercise of an option to extend the terms (either by action of either party to the contract or automatically) will be considered a new contract.

  (4) Price changes. A contract will not lose the prior contract exemption solely due to a change in price if:

    (A) the parties intend that the contract shall remain binding regardless of the change in price; and

    (B) the contract does not expressly provide that changes in price terminate the contract.

  (5) Tax pass-through clauses. Any contract whose terms state the customer will be liable for any tax rate increases or for the applicable tax rate will not qualify for the prior contract exemption, even though the contract was in effect prior to the tax rate change. Such phrases are intended to transfer the burden of the tax increase from the seller to the customer and violate the statutory qualifications for exemption. Note: this paragraph applies only to tax rate increases and not to new services added to the tax base.

  (6) Fixed-price/as-needed terms. Contracts that contain a fixed price that must be paid whether or not the service is performed, and specify the work to be performed by type and quantity, and contracts that state that "services or taxable items will be supplied as needed or upon request" will qualify as prior contracts if they otherwise meet the requirements of this section.

  (7) Bids vs. contracts. A bid submitted prior to a change in the tax rate or base and a contract signed after the change pursuant to that bid will qualify for the prior contract exemption if the terms of the contract are substantially similar to the original bid.

  (8) Transfer of contracts. With the exception of contracts that may be substantially changed or modified, a contract that is transferred by either party will retain its prior contract exemption so long as the transferee is bound by the original terms of the contract.

(d) Records. Persons claiming the prior contract exemption must maintain records which may be verified by audit. Failure to maintain adequate records subject to examination by the comptroller results in an automatic loss of the exemption. Written notice of prior contracts or bids should not be sent to the comptroller; however, the prior contracts or bids should be available for review upon request.

(e) Prior contracts/limitations. This section applies only when there is enabling legislation. The effective date and statute of limitations date on prior contracts will also be governed by the enabling legislation.

(f) Identification number. An identification number is required on prior contract exemption certificates furnished to sellers. The identification number should be the person's sales or use tax permit number, if the person issuing the certificate is required to hold a permit under the terms of the Tax Code. If a permit is not required, the person's federal employer's identification (FEI) number or social security number may be used. A suggested form for the exemption certificate is a part of this section.

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Source Note: The provisions of this §3.319 adopted to be effective August 5, 1987, 12 TexReg 2431; amended to be effective April 1, 1988, 13 TexReg 1340; amended to be effective November 6, 1990, 15 TexReg 6197; amended to be effective June 6, 1995, 20 TexReg 3839.

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