When two exempt political subdivisions jointly finance and own a new office building through a loan, cotenancy, or joint venture, do construction materials stay sales-tax exempt regardless of the ownership structure, who buys them, or a modest amount of private tenant use?

Plain-English summary

The Texas Association of Counties (an exempt 501(c)(4) organization that administers activities for two related entities) wrote on behalf of a Workers' Compensation Self Insurance Fund and a County Government Risk Management Pool -- both exempt political subdivisions of Texas. The Fund owned land and, with financial participation from the Pool, planned to build an office building there, mostly occupied by the Association's own staff (who administer both the Fund and the Pool), with any leftover space leased to private businesses on short-to-mid-term leases.

The two entities were considering three different ways to structure their joint participation: (1) a straightforward loan from the Pool to the Fund; (2) a cotenancy, where each holds an undivided percentage ownership interest in the building; or (3) forming a joint venture or partnership to build, hold, and operate the building for their joint benefit. The Comptroller answered three questions:

1. Does the financing/ownership structure matter for the exemption? No -- purchases of taxable construction items qualify for exemption under any of the three scenarios, and purchases made by a joint venture formed between two political subdivisions also qualify.

2. Does the exemption survive when a contractor, not the exempt entities, makes the purchases? Yes. Tex. Tax Code § 151.311 exempts materials a contractor or subcontractor incorporates into real property being built for exempt entities, and also exempts job-site supplies that are necessary to the job and completely consumed after one use. It does NOT exempt the contractor's own equipment, repair parts, or equipment rentals -- those stay taxable regardless of who the job is for.

3. Does having private tenants (up to about 33% of the building) undercut the exemption? No -- a modest amount of non-exempt private business use of the finished building doesn't affect the sales-tax-exempt status of the construction purchases.

What this means for you

Political subdivisions and public entities planning joint construction projects

You have real flexibility in how you structure joint ownership or financing (loan, cotenancy, or formal joint venture) without jeopardizing the sales tax exemption on construction materials -- and it doesn't matter whether you or your general contractor is the one actually purchasing the materials.

General contractors working for exempt government/political-subdivision clients

Materials you incorporate into the building and consumable job-site supplies can be purchased exempt on your exempt client's behalf under § 151.311 -- but don't extend that exemption to your own tools, equipment, repair parts, or equipment rentals, which remain taxable no matter who the client is.

Public buildings with some private tenant space

A modest private-tenant footprint (here, up to about a third of the building) in an otherwise exempt-entity-owned building doesn't taint the exemption on the construction purchases themselves.

Common questions

Q: Does it matter whether two exempt government entities use a loan, cotenancy, or joint venture to jointly build a project?
A: No -- per this letter, the exemption on construction purchases applies under any of these structures.

Q: Can a hired contractor make tax-exempt purchases on behalf of an exempt government client?
A: Yes, for materials incorporated into the realty and consumable job-site supplies used once, under § 151.311 -- but not for the contractor's own equipment, repair parts, or equipment rentals.

Q: Does some private/commercial tenant space in the finished building affect the exemption?
A: Not in this letter -- up to roughly a third of the building being leased to non-exempt private businesses didn't change the exempt status of the construction purchases.

Q: Does this letter bind the Comptroller for other joint government construction projects?
A: No -- this is an informal 2001 letter addressing one project's specific facts, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else.

Citations and references

Statutes:

• Tex. Tax Code § 151.311 (contractor purchases of materials/consumable supplies for exempt entities; contractor equipment excluded)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200109492L

Original ruling text

September 19, 2001

Dear Mr. **:

Thank you for your letter concerning the taxability of purchases by a joint
venture between two exempt entities.

The Texas Association of Counties (the "Association") is an exempt 501(c)(4)
corporation. The Worker's Compensation Self Insurance Fund (the "Fund") and
the Texas Association of Counties County Government Risk Management Pool (the
"Pool") are exempt political subdivisions of the State of Texas.

The Fund currently owns real property in ** County. The Fund, with
financial participation by the Pool, intends to construct a building on this
property. The office building will be occupied primarily by staff from the
Association, which under contractual provisions, administers the activities of
the Fund and the Pool. Office space not needed by the Fund, Pool, and
Association will be occupied by private businesses. This will be through short
to mid-term leases.

The participation in the building project by the Fund and the Pool may involve:
(1) a loan from the Pool to the Fund; (2) a contenancy arrangement where each
entity owns an undivided percentage interest in the office building; or (3) a
joint venture or partnership to be formed by the two entities to build, hold,
and operate the office building for the sole benefit of the two entities.
Under each of the scenarios, the Association would administer, manage, and
operate the building.

You ask the following questions:

1) Will purchases of taxable items for the construction of the subject real
property improvements be sales tax exempt purchases by political subdivision(s)
regardless of the form of financing and/or property ownership selected by the
Fund and the Pool? Additionally, if the Fund and the Pool form a joint
venture, will purchases by the joint venture be sales tax-exempt?

Response. The purchases in each of the scenarios qualify for exemption.
Purchases by a joint venture between two political subdivisions also qualify
for exemption.

2) If the answers to the questions in item 1 are "yes", is the tax-exempt
status maintained even if the purchases of the taxable items are made by a
general contractor (or subcontractor under the general contractor) hired by the
Fund and the Pool to construct the building?

Response. Yes. Section 151.311 of the Texas Tax Code exempts materials that a
contractor or subcontractor will incorporate into the realty for exempt
entities. It also exempts supplies used at the job site that are necessary to
the performance of the job and completely consumed if after being used once for
its intended purpose. Equipment and repair parts including equipment rentals by
the contractor do not qualify for exemption.

3) Does a non-exempt private business use of a small portion (up to 33%) of the
constructed office building owned by the Fund and the Pool and/or a joint
venture comprised of the Fund and the Pool affect the sales tax exempt status
for the purchase of taxable items used in the construction of the building?

Response. No.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division