When a private developer redevelops a city-owned historic building into an entertainment venue under a long-term ground lease, are the donated construction materials, consumables, design services, and historic-building renovation labor exempt from Texas sales tax?

Plain-English summary

A city decided to redevelop its Central Waterworks and Fire Station No. 1 sites — one listed on the National Register of Historic Places — into an entertainment venue integrated with an adjacent theater district. After an RFP process, the city agreed to lease the sites to a developer's affiliate for 40 years so the affiliate could build an aquarium exhibition, a themed restaurant, a ballroom, a café/lounge, and amusements including a train and Ferris wheel; the historic Central Waterworks would be remodeled into a shark tank, and the Fire Station remodeled to house the aquarium, restaurant, ballroom, café, and lounge.

The developer's contract with its general contractor was structured as a separated contract for sales tax purposes, breaking costs into (i) engineering/design/architectural/consulting services, (ii) new construction and renovation of the Central Waterworks, and (iii) renovation of the Fire Station — plus a separately stated amount for consumables. Title to materials and consumables would pass to the developer's affiliate at delivery to the jobsite, before incorporation into the realty or use, and the affiliate intended to donate those materials and consumables to the city before incorporation or use, backed by a letter of intent from the city agreeing to accept them. The contractor's own subcontracts mirrored this same separation and donation structure.

Following the same reasoning as two earlier letter rulings on similar donation deals (9806570L, June 9, 1998, and 9901207L, January 6, 1999), the Comptroller confirmed: the developer's affiliate may issue an exemption certificate to its contractor for donated materials/consumables (as long as the city accepts them before incorporation or use); separately stated engineering, design, architectural, and consulting charges are nontaxable regardless of whether they're donated to an exempt entity; and labor and other costs for renovating the historic Central Waterworks are also not taxable.

What this means for you

Developers redeveloping historic or city-owned properties

Three distinct exemption paths can stack on the same project: (1) properly structured donated materials/consumables, (2) professional design/engineering/architectural services (nontaxable on their own terms, donation or not), and (3) labor to renovate a National Register of Historic Places property. Each needs its own supporting facts — don't assume one exemption covers the whole job.

Cities partnering on redevelopment via long-term ground leases

As in the companion ruling on this same type of deal, your acceptance of donated materials — evidenced by a letter of intent before incorporation or use — is a required piece of the developer's exemption for those materials.

Accountants and tax professionals

This is the second (of at least two paired) letter rulings applying the same donation/separated-contract framework to different city redevelopment deals on the same day — note also the added historic-property renovation labor exemption, which doesn't appear in every version of this fact pattern.

Common questions

Q: Does the exemption cover the whole redevelopment project, or just certain pieces?
A: Just certain pieces, each qualifying on its own terms: donated materials/consumables (with proper title-transfer and city-acceptance documentation), separately stated design/engineering/consulting services, and labor to renovate the historically listed building.

Q: Do design and engineering charges have to be donated to be exempt?
A: No — separately stated engineering, design, architectural, and consulting charges are nontaxable regardless of whether they're donated to an exempt entity.

Q: Why is renovation labor on the Central Waterworks exempt but presumably not on ordinary new construction?
A: The ruling ties that specific labor exemption to the building's listing on the National Register of Historic Places, not to general new construction, which is treated separately in the contract's cost categories.

Q: Can another developer rely on this same structure?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts, contract separation, and any historic-property designation with a tax professional.

Citations and references

Prior letter rulings applying the same framework:

• Comptroller letter rulings 9806570L (June 9, 1998) and 9901207L (January 6, 1999)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200012947L

Original ruling text

December 15, 2000

Dear **:

Thank you for your letter requesting a written ruling on behalf of your
client, ** (the "Company"), regarding the applicability of Texas
sales and use taxes to the transaction described below. Your letter follows
our recent telephone conversation regarding this project. Your fact situation
and question are restated below followed by my response.

Fact Situation

During 1999, the City of ** (the "City") determined that the City
and its residents would receive substantial public benefit from the
redevelopment of the Central Waterworks and Fire Station No. 1 sites owned by
the City (the "City Sites") into an entertainment venue that would be
complementary to, and integrated with, the adjacent ** Theater
District. The City issued a Request for Proposals (the "RFP") for
Redevelopment of the Central Waterworks/Fire Station No. 1 sites on July 9,
1999, which noted the City's intent to lease the City Sites to the successful
developer for a period of up to 30 years, or longer if permitted by law. The
RFP set forth the requirement that the site redevelopment "be compatible,
synergistic, and integral with an expanding Theater District and downtown
redevelopment."

The City selected the proposal submitted by the Company, which involves a lease
of the City Sites to an affiliate of the Company (the "Company Affiliate") for
a period of 40 years and the development of an aquarium exhibition, themed full
service restaurant, a meeting and reception ballroom, a café and lounge, and
fountains and amusements, including a train and Ferris wheel. The Central
Waterworks, which is listed on the National Register of Historic Places, will
be remodeled to serve as a shark tank; and the Fire Station will be remodeled
to house the aquarium, restaurant, ballroom, café and lounge.

The Company Affiliate's contract with the contractor will be a separated
contract for sales tax purposes, and will contain a separated amount for
consumables and a further separation of the labor and other costs into the
following categories: (i) engineering, design, architectural, consulting and
other nontaxable services; (ii) new construction and renovation of the Central
Waterworks; and (iii) renovation of the Fire Station. The contract also will
provide the following:

(1) that title to the materials and consumables used to perform the contract
passes to the Company Affiliate at the time the materials are delivered to the
jobsite and before they are incorporated into the realty or used by either the
contractor or the Company Affiliate; and

(2) that the Company Affiliate intends to donate the materials and consumables
to the City before the materials and consumables are incorporated into the
realty or used by the contractor or the Company Affiliate.

The Company Affiliate also will provide the contractor with a letter of intent
or other document from the City stating its intent to accept the materials and
consumables. In addition, the contractor's subcontracts similarly will be
separated contracts for sales tax purposes and contain separation, title
transfer and donation provisions that are consistent with the provisions
described above.

Based on our telephone conversation and the rationale of letter rulings dated
June 9, 1998 and January 6, 1999 ( document numbers 9806570L and
9901207L), it is our understanding that the following costs will be exempt from
sales and use taxes: (i) materials incorporated into the City Sites; (ii)
consumables used to perform the contract; (iii) engineering, design,
architectural, consulting and other nontaxable services; and (iv) labor and
other costs related to new construction and renovation of the Central
Waterworks, which is on the National Register of Historic Places.

Ruling Request

We respectfully request that your office issue a written ruling confirming our
understanding of the Texas sales tax ramifications described above. Should you
determine that the Texas sales tax ramifications are different from those
described above, we request an opportunity to discuss this matter with you
prior to issuance of your written ruling.

Response: Based on the facts presented the Company Affiliate may issue an
exemption certificate to the contractor for materials and consumables that
Company Affiliate donates to the city before they are incorporated into the
realty or used by either the contractor or the Company Affiliate. The materials
and consumables must be accepted by the City prior to incorporation. The
letter of intent or other document from the City to the Company Affiliate,
stating its intent to accept the materials and consumables, meets the
requirements for this section.

I also concur that separately stated charges for engineering, design,
architectural and consulting that fall within the definition of the practice of
engineering or architecture are not taxable without regard to whether they are
donated to an exempt entity. Similarly, the labor to remodel and other costs
related to new construction and renovation of the Central Waterworks, which is
on the National Register of Historic Places, are not taxable.

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, you may e-mail our tax help section at .
You may also 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.

Sincerely,

Gilbert Zamora
Tax Policy Division