Texas Private Letter Ruling No. 202006008L
A city in Texas (the “City”) has asked the Comptroller for guidance as to whether a limited partnership (the “LP”) may make certain exempt purchases in connection with a city center (the “Center”) during the term of a lease of the Center executed between the City and LP. The City also asked guidance for situations in which the City is the party that enters into a contract with a vendor and LP reimburses the City.
Under the lease signed by City and LP, the City, as landlord, is required to reimburse LP for certain Capital Improvements Expenses (CIE’s). The lease defines “Capital Improvements” as “any work of a capital nature required to repair, restore or replace any equipment, facility or structure at the (Center) that has deteriorated or becomes dysfunctional beyond remedied by maintenance.” City has enumerated certain of these expenditures, which include purchases of tangible personal property, as well as the performance of certain improvements to realty.
City states that, to date, LP has made CIE purchases with reimbursement by City for its proportionate share pursuant to the lease. However, City also states “the purchases have not been specifically for construction materials; instead they have been to contractors for a lump- sum price covering both the performance of the service and the furnishing of the necessary incidental material.” City also states that CIEs “will also include tangible personal property that is not ‘physically incorporated into’the Center…… and will remain tangible personal property.”
The Comptroller found that CIEs may be either contracts for the improvement of real property or the purchase of tangible personal property. LP’ contracts for the improvement of real property are for the primary use and benefit of LP and are not exempt contracts, even when City reimburses LP. Purchases of tangible personal property by LP are taxable, even when City reimburses all or part of the purchase price. City’s contracts for the improvement of real property are exempt contracts. City’s purchases of tangible personal property are not taxable.
The Comptroller held that Tex. Tax Code §151.309 provides an exemption for taxable items sold to governmental entities including cities. A contractor or other service provider performing an improvement to realty for a city may issue an exemption certificate in lieu of tax for materials and services enumerated under Tex. Tax Code § 151.311. A contractor or service provider does not collect tax on these contracts. Further, 34 Tex. Admin. Code §§3.291(a)(5) and 3.357(d)(6) (Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance), provide that the exemptions under Section 151 also apply to a project, performed for a non-exempt entity, when the project is constructed for the “primary use and benefit” of an exempt entity.
Regarding LP contracts, the lease states that LP has full and exclusive control of the management and operation of the entire Center. LP “owns all revenues of any source generated by or from the premises or the management or operation thereof.” The lease establishes that the facility is for the primary use and benefit of LP and any improvements to the Center are not for the primary use and benefit of City. As such, the Comptroller found that 34 Tex. Admin. Code §§3.291(a)(5) and Rule 3.357(d)(6) does not apply.
The Comptroller noted that the LP does not stand as City’s agent in entering into real property improvement agreements. LP is a tenant and has no other business relationship with City, including that of agent in making purchases. As such contracts entered into by LP do not qualify under Tex. Tax Code § 151.311. Therefore, LP owes tax on contractor’s charges for separately stated incorporated materials for new construction performed under any separated contracts, as well as on all charges for nonresidential repair and remodeling.
Further the Comptroller found that as an entity exempted under Tex. Tax Code § 151.309, City may directly purchase tangible personal property tax-free. LP, however, is not an exempt entity, and must pay tax on its purchases, even when the purchases are partially or wholly reimbursed by City and regardless of use.
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