In Private Letter Ruling No. 20240130142914, STAR Accession No. 202407026L (July 26, 2024), the Texas Comptroller illustrated the type of analysis used to determine whether a contract for the improvement of realty is an exempt contract for purposes of Texas sales tax (which we explain here).
The taxpayer in this private letter ruling was a real estate developer that intended to construct a library and community center (the “Project”) on a parcel of land that the taxpayer owned. Once constructed, the taxpayer would convey ownership of the Project and underlying land to a county of the State of Texas. The county would then operate the Project.
The Comptroller ruled that the construction of the Project was an exempt contract. Therefore, the developer could issue an exemption certificate to its contractor so that the contractor could purchase, tax free, tangible personal property to be incorporated into the realty, qualifying consumable items, and taxable services purchased for improvements to the Project under Texas Tax Code Section 151.311 and Texas Comptroller Rule 3.291(c)(4).
The Comptroller noted that an exempt contract includes “a contract with a nonexempt entity to improve real property for the primary use and benefit of an organization exempted under Tax Code, §151.309 . . . .”[1] A county of the state of Texas is an governmental entity exempted from sales or use tax under Texas Tax Code Section 151.309(5).
However, determining primary use and benefit is not as simple as showing that an improvement serves a specific public purpose of an exempt entity.[2] Instead, all of the facts and circumstances must be examined to determine whether a contract for an improvement to realty is for the primary use and benefit of an exempt entity that will own the improvement. Facts to be considered include:
- Whether the primary purpose of the improvements contemplated by the underlying agreement is to benefit the exempt entity.
- Whether the improvements are used for a business purpose.
- Whether the operation of the improvements actually serve a public function.
- Whether the exempt entity approves the design and construction of the improvements.
- Whether the exempt entity manages the operation of the new facilities.
- Whether title to the improvements remains with the taxable entity.
The Comptroller found that the primary purpose of the Project was to provide the county a new library and community center, which would fulfill a public function for the county by providing a community gathering space and an educational resource open to the public. Moreover, the county would approve the design and construction of the Project, obtain ownership of the parcel and Project improvements upon completion of construction, and operate the Project after completion as part of its municipal duties to provide services to its residents. For these reasons, the construction of the Project was an exempt contract.
[1] See 34 Tex. Admin. Code § 3.291(a)(5).
[2] Citing Comptroller’s Decision Nos. 44,896 and 47,235 (2009), and 31,770 (1999), each of which involves a for-profit entity constructing certain facilities at a government-owned airport.
