Can an engineering firm doing work for tax-exempt entities (like municipalities) buy surveying/CAD services, software, and testing materials tax-free, on the theory that those items end up transferred to the exempt client as part of the engineer's service?

Plain-English summary

A tax professional flagged what looked like a contradiction between two prior Comptroller letters (referenced as 9508l1367F07 and 9406l1313G06) — which stated that engineering firms cannot buy services, materials, or supplies tax-free regardless of whether the tangible personal property is transferred to the client as part of the service — and a Comptroller administrative hearing (No. 36,958), which said the sale of items to engineers is nontaxable in cases where the engineer transfers those items to its customers as part of its services. The requester's engineering client did work for exempt entities and purchased surveying services, CAD services, software, testing materials, and other taxable materials that ultimately get transferred to the client.

The Comptroller resolved the apparent tension by clarifying the actual test: the prior letter rulings are still correct. Tex. Tax Code § 151.151 (the resale certificate statute) allows a resale certificate only where the purchaser intends to sell, lease, or rent the item, OR transfer it as an integral part of a taxable service performed in the regular course of business. Engineering services themselves are nontaxable — so even though the engineer's CAD services, surveying services, software, and testing materials may eventually be transferred to the exempt client after the engineer uses them, that transfer doesn't happen "as an integral part of a taxable service," because there is no taxable service here to be integral to. The engineer must pay tax on those items when purchased.

Hearing #36,958 reached the same conclusion on similar facts: it rejected an argument that aerial photos and photo mylars sold to engineers were exempt because the engineers used them to provide mapping services for an exempt municipality — an engineering company must pay tax on items it uses to provide its own nontaxable engineering services, citing STAR Document 9109L1131G01. The hearing did carve out a genuine exception, though: an engineer CAN buy copies of blueprints tax-free for resale if it actually intends to resell those specific blueprint copies to its client (rather than use them to perform its own service), and similarly could have bought the aerial photos for resale to the exempt entity if it made no intervening use of them.

What this means for you

Engineering firms performing work for exempt entities (municipalities, etc.)

You cannot buy your working inputs — CAD services, surveying, software, testing materials — tax-free just because those items eventually end up in your exempt client's hands. If you use the item to perform your (nontaxable) engineering service before it's transferred, you owe tax on it. The resale exemption only applies to items you resell without any intervening use of your own.

Firms weighing whether to issue or accept a resale certificate on service inputs

The controlling test is whether the item is transferred as an integral part of a TAXABLE service — not merely whether it eventually reaches the end client. Since most professional services (like engineering) are themselves nontaxable, materials consumed in performing them generally don't qualify for resale treatment.

Accountants and tax professionals

This letter is a useful precedent-reconciliation reference: it shows the Comptroller squaring an administrative hearing decision with prior letter rulings by isolating the narrow "genuine resale with no intervening use" exception (e.g., reselling blueprint copies outright) from the much broader rule that materials consumed in performing a nontaxable professional service remain taxable to the purchaser.

Common questions

Q: If materials I buy end up being handed to my (exempt) client eventually, can I buy them tax-free?
A: Only if you're genuinely reselling that item with no intervening use of your own, or transferring it as an integral part of a service that is itself taxable. Simply using an item to perform a nontaxable service before it reaches the client does not qualify.

Q: Are engineering services themselves taxable in Texas?
A: No — this letter treats engineering services as nontaxable, which is precisely why materials and services the engineer consumes in performing that work can't be bought tax-free under a resale certificate tied to "integral part of a taxable service."

Q: Is there any way an engineer can buy an item tax-free for eventual client use?
A: Yes, if the engineer genuinely intends to resell that specific item (e.g., copies of blueprints) to the client without making any intervening use of it itself.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.151 (Resale Certificate — integral part of a taxable service)
• Comptroller Hearing No. 36,958 (engineers must pay tax on items used for nontaxable engineering services; narrow resale exception for genuine no-intervening-use resale)
• STAR Document 9109L1131G01 (cited precedent on engineering purchases for exempt-entity work)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006390L

Original ruling text

June 7, 2000

From: Gilbert Zamora

To: "**"

Subject: Engineering - Letter #9910839l

Dear **:

Thank you for your e-mail inquiry concerning the taxability of purchases by
engineering companies relating to jobs for exempt entities.

In your letter and the two letter of rules (9508l1367F07 and 9406l1313G06), it
is stated that engineering firms cannot purchase services, materials or
supplies tax-free. They indicate that it does not matter if the TPP is
transferred to the client as part of the service. However, I found that
hearing #36,958 states that the sale of items to engineers would only be
non-taxable in a case in which the engineers transfer these items to their
customers as part of their services. My taxpayer does engineering for exempt
entities and has purchased surveying services, CAD services, software, testing
materials and other taxable materials which are being transferred to the
client.

Could you please let me know if these correspondence contradict one another.
Thanks for your help.

Response: The letter rulings are still correct. Texas Tax Code Section 151.151

• Resale Certificate, provides as follows:

A purchaser may give a resale certificate for the acquisition of a taxable item
if the purchaser intends to sell, lease, or rent it in the regular course of
business or transfer it as an integral part of a taxable service performed in
the regular course of business.

The engineers are performing nontaxable services and must pay tax on their CAD
and surveying services, software and testing materials, even though these items
may be transferred to the exempt client after use by the engineer. The taxable
item(s) must be transferred as an integral part of a taxable service in order
to be exempted.

The ALJ in Hearing #36,958, in his Discussion and Conclusions of Law reached a
similar conclusion in stating:

Further, regarding Petitioner's argument that sales of aerial photos and photo
mylars to engineers were exempt if they were used by the engineers in providing
mapping services for an exempt entity, such as a municipality, the ALJ
disagrees with the argument. An engineering company is required to pay tax on
items used to provide non-taxable engineering services for municipalities. See
Microfiche No. 9109L1131GO1.

The relevant portion of Hearing #36,958 that you question is restated below:

A portion of the particular items Claimant listed were purchased by engineers
for the performance of their services for exempt entities. The sales of the
items to the engineers would only be non-taxable in a case in which the
engineers transfer these items to their customers as part of their services. If
the engineers had provided Claimant with a valid resale certificate then
Claimant would be relieved from the tax.

An engineer can purchase copies of blueprints for resale that it intends to
resell to its client. Similarly, the claimant in this hearing the Petitioner
could have purchased the aerial photos in question for resale to the exempt
entity, if it made no intervening use of the photos.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Tax Policy Division