Can an architecture firm get a Texas sales and use tax permit to buy computer equipment for a project, and avoid paying tax on that purchase by reselling the equipment to a tax-exempt government customer (a municipal airport)?

Plain-English summary

An architecture firm — normally a service provider, not a business that resells computer equipment — was under contract to provide design management services to a Texas municipal airport authority, with several employees working on-site. The firm planned to buy computer equipment for those employees to use on the project, but structured the purchase so that: (1) the firm would buy the equipment and invoice the airport for its cost, effectively reselling it; (2) the vendor would ship the equipment directly to the airport's warehouse, where it would be processed into the airport's own property inventory before the firm's employees ever used it; and (3) the equipment would remain airport property throughout, staying with the airport after the firm's employees left the project. The firm didn't yet have a sales and use tax permit and asked whether it could get one, and whether doing so would let it avoid sales tax on the purchase by issuing a resale certificate.

The Comptroller confirmed both: the architecture firm can obtain a sales and use tax permit specifically to purchase the computers for resale to the airport, and it can avoid sales and use tax liability on the purchase by transferring title and possession to the airport before the firm makes any use of the equipment itself. To document that the sale to the airport was exempt, the firm needed to obtain an exemption certificate from the airport authority (an exempt entity).

What this means for you

Architecture, engineering, and other service firms working on government contracts

You don't have to be "in the business" of reselling equipment to legally resell it tax-free to an exempt government customer. What matters is the mechanics: get a sales tax permit, buy the item under a resale certificate, and get the item into the exempt customer's ownership and possession before your own staff makes any use of it — plus obtain an exemption certificate from the exempt customer to document the sale.

Government contractors passing equipment costs through to an exempt agency

Structure the purchase and delivery carefully. Here, shipping equipment directly to the airport's warehouse for inventory processing — before the firm's employees ever touched it — was central to showing there was no intervening "use" by the firm that would have defeated the resale exemption.

Accountants and tax professionals

This is a clean illustration of the resale-certificate "no intervening use" principle: title and possession must pass to the exempt buyer before the seller uses the property, and the seller must document the exempt sale with an exemption certificate from the buyer — the reverse of the more familiar situation where a buyer gives a resale certificate to its own vendor.

Common questions

Q: Does a firm need to be a regular equipment reseller to use a resale certificate?
A: No. This architecture firm wasn't typically in the business of reselling equipment, but it could still obtain a sales tax permit and buy computers under a resale certificate for this specific pass-through sale to an exempt customer.

Q: What's the key requirement to avoid tax on the purchase?
A: Title and possession of the equipment must transfer to the exempt customer before the seller (here, the architecture firm) makes any use of it.

Q: What documentation is needed to support the exempt resale?
A: An exemption certificate from the exempt entity purchasing the equipment (here, the airport authority).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006417L

Original ruling text

June 12, 2000

From: Gilbert Zamora

To: "**"

Subject: Tax Ruling Request

Dear **:

Thank you for your e-mail inquiry. Your fact situation and question are
restated below followed by my response.

We are ARCHITECT COMPANY, a full service Architect located in CITY A. We are
not typically in the business of reselling computer equipment. We are
currently under contract to provide design management services to AIRPORT, a
Texas Municipality, and have several employees working on AIRPORT premises. We
are planning to purchase computer equipment that these employees will use on
the project under the following scenario:

1. ARCHITECT COMPANY will purchase the equipment from COMPUTER COMPANY and we
   will invoice and be reimbursed by AIRPORT for its cost, effectively reselling
   the equipment to CITY A.

2. COMPUTER COMPANY will ship the equipment directly to the AIRPORT Warehouse
   where it will be processed into CITY A property inventory before being made
   available for use by our employees.

3. ARCHITECT COMPANY employees will use the equipment on AIRPORT premises but
   it will be AIRPORT Property and will remain with AIRPORT after ARCHITECT
   COMPANY employees leave the project.

4. ARCHITECT COMPANY does not currently have a sales and use tax permit.

5. AIRPORT has indicated that ARCHITECT COMPANY should be able to acquire a
   sales and use tax permit and make this purchase avoiding payment of sales and
   use tax by issuing a resale certificate.

Our business manager has asked that I get a written ruling before we proceed,
therefore we request answers to the following questions regarding the above
scenario:

1. Can ARCHITECT COMPANY, as an Architect, get a sales and use tax permit?

2. If yes, can ARCHITECT COMPANY make the above described purchase avoiding
   liability for payment of sales and use tax?

Response: ARCHITECT COMPANY can obtain a sales and use tax permit in order to
purchase the computers to be resold to AIRPORT. ARCHITECT COMPANY can make the
described purchase and avoid sales and use tax liability by transferring title
and possession to AIRPORT prior to ARCHITECT COMPANY making a use of the
computers. ARCHITECT COMPANY must obtain an exemption certificate from the
CITY A International Airport Authority Board, an exempt entity, to document its
exempt sale.

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