Texas Separated Materials Contracts Create Incentive Opportunities for Major Construction Projects

While high-profile programs like the Texas Jobs, Energy, Technology and Innovation (JETI) Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act attract plenty of attention, a lesser-known mechanism within Texas tax law offers a significant opportunity for both developers and municipalities: separated materials contracts. When structured correctly, these contracts can generate substantial local sales tax revenues for cities and other sales tax collecting jurisdictions while creating a meaningful financial incentive for developers—making them a powerful yet underutilized economic development tool.

What Are Separated Materials Contracts?

Under Texas law, certain construction arrangements allow the materials component of a project to be treated differently for sales tax purposes than the labor component. This structure can shift tax revenue to the jurisdiction where the project is located—rather than where a building materials supplier is based—unlocking a strategic advantage for communities seeking to support large-scale development.

Why This Matters

Texas is one of the few states that uses origin-based sourcing for sales tax, which means that without intentional structuring, millions in potential local revenue may flow to supplier locations instead of host communities. For significant projects—generally large, ground-up developments—the ability to redirect this revenue can be transformative.

Key advantages include:

• Local Revenue Generation: Cities can capture sales tax associated with major construction projects that would otherwise be sourced elsewhere.

• Competitive Incentives: Municipalities can leverage a portion of this new revenue to offer rebates that strengthen their position in competitive site selection processes.

• Enhanced Project ROI: Developers benefit from direct financial incentives tied to construction expenditures.

• Established Compliance Framework: Texas provides a well-defined regulatory environment for implementing these contracts, ensuring predictability when executed correctly.

Where the Opportunity Exists

Not all projects benefit equally. The structure tends to be most impactful for:

• Large new-construction developments (>$50 million)

• Industrial, data center, logistics, mixed-use, and multifamily projects

• Public-private partnerships and complex development ownership models

The key determinant is not ownership—it’s ensuring the underlying agreements are structured appropriately.

Critical Considerations for Success

Because the strategy requires coordinated efforts across developers, general contractors, subcontractors, and municipalities, precision in contract language, documentation, and processes is essential. Small errors can eliminate the benefit or create compliance exposure. Successful implementations typically require:

• Clearly drafted contract provisions

• Proper documentation and certification workflows

• Consistent treatment across all project participants

• Ongoing reporting and audit-ready recordkeeping

These are areas where expert support is not just valuable but often necessary.

How Ryan Supports This Strategy

Ryan’s Credits and Incentives team assists with:

• Structuring separated materials contracts to maximize benefits. Proper language can make or break the deal.

• Preparing compliance documentation and resale certificate workflows. Deep experience with this incentive separates Ryan from its peers.

• Negotiating municipal rebate agreements in addition to other incentive avenues to maximize benefit.

• Managing ongoing reporting obligations.

• Providing specific training for general contractors and subcontractors to ensure that all compliance documentation is provided. All stakeholders need to be on the same page to generate benefits for the company and community.

Our experience with these agreements—across dozens of Texas jurisdictions—enables us to deliver both compliance confidence and maximum financial impact.

Looking Ahead

As Texas communities pursue innovative ways to encourage development, separated materials contracts offer a powerful tool that complements state-level programs. With billions in projected construction, this mechanism will play an increasingly important role in shaping competitive incentive packages in the years ahead. This article is the second in a three-part series exploring Texas business incentives.

The next installments will cover:

• Texas Enterprise Zone Program updates for the new biennium

Stay tuned for upcoming releases.

For more information, contact Ryan’s Credits and Incentives team.

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.