When a real-property lease for a residential facility bundles in furniture, fixtures, and equipment as part of the rent, does the landlord have to charge sales tax on that bundled tangible personal property?

Plain-English summary

A corrections/residential-services company contracted with U.S. Immigration and Customs Enforcement (ICE) to provide residential shelter and related services to families in custody at a Texas facility. To get the land, buildings, furniture, fixtures, and equipment it needed, the company (Company A) leased everything from a separate developer/landlord (Company B) under a single lease and services agreement. The leased premises included the land plus constructed improvements — modular residential structures, offices, medical facilities, dining areas, classrooms, generators, a utility power system, and recreational areas — along with furniture, fixtures, and equipment like beds, televisions, and kitchen/dining equipment. The same contract also included a separate food services agreement, with a distinctly invoiced "Food Service Payment" for meals.

Company A (the tenant) asked the Comptroller to confirm two things: (1) that Company B (the landlord) shouldn't charge sales tax on the tangible personal property (furniture, fixtures, equipment) bundled into the real property lease, and (2) that Company B may not claim a resale exemption on its own purchases of that same tangible personal property.

The Comptroller confirmed the first point: under Rule 3.294(k)(1) — upheld in DuPont Photomasks, Inc. v. Strayhorn — when a real property lease bundles in tangible personal property like furniture as part of the agreement, no sales tax is due on the amount charged for that bundled property. Since the lease here covered land, structures, furniture, fixtures, and equipment as part of a single real property lease, the entire Facility Rental charge was ruled exempt, including whatever portion related to the tangible personal property.

On the second point — whether Company B may claim a resale exemption on its own purchases — the Comptroller declined to rule, explaining that a private letter ruling issued to Company A cannot determine Company B's own tax responsibilities as a different taxpayer.

The Comptroller also explicitly did not address several related questions the taxpayer chose to exclude from the request: whether Company B provides other taxable services under the agreement, the taxability of the separately invoiced Food Service Payment (which the ruling notes isn't "tangible personal property leased with real property" and would need its own separate analysis), or whether the structures provided qualify as real property versus retaining their character as tangible personal property.

What this means for you

Commercial landlords bundling furniture/equipment into real property leases

If your lease charges a single rental amount that includes furniture, fixtures, or equipment as part of the real property package (not separately priced or separately contracted), Rule 3.294(k)(1) supports treating the entire charge as exempt from sales tax — a potentially valuable structuring tool for facility leases like this one.

Government contractors leasing turnkey facilities

Bundling land, buildings, and furnishings into one real property lease (rather than separately contracting for furniture rental) can avoid sales tax on the tangible personal property component — but keep ancillary services (like food service here) separately invoiced and be aware they'll need their own taxability analysis.

Accountants and tax professionals

Note the ruling's careful scope-limiting: it only addresses the tenant's (Company A's) obligations regarding what it's charged, not the landlord's (Company B's) purchase-side resale-exemption question, its other service obligations, the food service charge, or the underlying real-vs-personal-property characterization of the structures — all deliberately carved out at the taxpayer's own request.

Common questions

Q: Does bundling furniture into a real property lease always avoid sales tax?
A: Rule 3.294(k)(1), as applied in this ruling, supports that result when the tangible personal property is included as part of a real property lease agreement (not separately priced/contracted) — the rule was upheld by a Texas appellate court in DuPont Photomasks, Inc. v. Strayhorn.

Q: Does this ruling tell the landlord whether it can claim a resale exemption on its own furniture purchases?
A: No. The Comptroller explicitly declined to address that question, since a private letter ruling issued to one taxpayer (the tenant here) can't determine a different taxpayer's (the landlord's) own tax responsibilities.

Q: Is the separately invoiced Food Service Payment covered by this ruling?
A: No. The ruling explicitly states the Food Service Payment isn't "tangible personal property leased with real property" under Rule 3.294(k), and its taxability would need to be determined separately.

Q: Can another government contractor or landlord rely on this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to this taxpayer and these facts, and cannot be relied upon by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.006 (sale for resale definition)
• Tex. Tax Code § 151.302 (sale for resale exemption)
• 34 Tex. Admin. Code Rule 3.294(k)(1) (tangible personal property leased with real property)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Prior authority discussed:

• DuPont Photomasks, Inc. v. Strayhorn, 219 S.W.3d 414, 421 (Tex. App.—Austin 2006, pet. denied) (upholding Rule 3.294(k))

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201511615L

Original ruling text

November 20, 2015

RE: Private Letter Ruling #143360028

Dear *****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter
Rulings and General Information Letters, in response to your request dated
November 24, 2014. Detrimental reliance relief is provided in accordance with
Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the comptroller’s interpretation of the definition of
“sale for resale” in Texas Tax Code Section 151.006 and the applicability of
sales and use tax to tangible personal property included with a lease of real
property as described by Rule 3.294, Rental and Lease of Tangible Personal
Property.

Rule 3.294(k) addresses tangible personal property that is included with a
lease of real property. As you describe, the rule was upheld in DuPont
Photomasks, Inc. v. Strayhorn, 219 S.W.3d 414, 421 (Tex. App.—Austin 2006,
pet. denied). We issue this private letter ruling to provide clear guidance on
the taxability of items provided with the lease of real property.

Relevant Facts Presented [ENDNOTE 1]

COMPANY A is a provider of various corrections services. The company designs,
builds, manages, and operates prisons, jails, and residential re-entry centers
for the Federal Bureau of Prisons, Immigration and Customs Enforcement, and the
U.S. Marshals Service.

COMPANY A entered into a contract with the U.S. Department of Homeland
Security, Immigration and Customs Enforcement (ICE) to provide residential
shelter and related services to families in its custody. The services are
provided at a facility located in CITY, Texas.

To procure the land, buildings, furniture, fixtures, and equipment required to
provide the residential services to ICE, COMPANY A entered into a lease and
services agreement with COMPANY B. The premises leased under the contract
include the land together with all improvements and fixtures. The premises are
located at CITY, Texas. The contract also includes a food services agreement
under which COMPANY B will provide meals to residents and staff at the facility.

COMPANY B is responsible for providing constructed improvements for use by
COMPANY A. COMPANY B is also responsible for routine maintenance and repair of
the improvements as well as the furniture, fixtures, and equipment it provides.

The constructed improvements provided by COMPANY B include modular buildings,
structures, and other improvements. Specifically, the improvements include:

• civil/site improvements including sidewalks, exterior lighting, and water and sewer systems;
• residential structures;
• support buildings including offices, medical facilities, dining areas, and classrooms;
• generators;
• a utility power system; and
• recreational areas including soccer fields and basketball courts.

Furniture, fixtures, and equipment to be provided by COMPANY B include beds,
televisions, kitchen equipment, dining equipment, and generators.

COMPANY A is responsible for payment of utilities at the facility or for
reimbursement to COMPANY B if applicable. COMPANY A is also responsible for
adopting security measures at the facility and securing the premises from its
surroundings.

The term of the lease and services agreement with COMPANY B is 48 months. The
agreement may be extended but not beyond December 31, 2020.

Rental payments are calculated based on an amount per bed multiplied by number
beds. This amount is multiplied by the number of days in a month. The number of
beds is fixed at 2,400 regardless of actual occupancy.

Rental payments include a Food Service Payment. This payment is calculated at
$32.40, multiplied by 2,400 beds, multiplied by the number of days in a month.
The food service payment is listed separately on invoices to COMPANY A.

The Food Services Agreement provides that COMPANY B will provide food service
to facility residents, COMPANY A facility staff, ICE staff, and other persons
at the facility. COMPANY B will invoice COMPANY A for meals provided to COMPANY
A and ICE staff. COMPANY B will invoice staff other than COMPANY A and ICE
staff directly. The agreement specifies that COMPANY B will collect applicable
sales and use taxes on charges for staff meals.

Requested Rulings

COMPANY A requests a ruling that COMPANY B should not collect sales and use tax
on tangible personal property included with the lease of land for the residential facility.

COMPANY A also requests a ruling that COMPANY B may not claim a sale for resale
exemption under Tax Code Section 151.302 for its purchases of tangible personal
property that is included with the lease of real property for the facility.

COMPANY A states it is not requesting a ruling in regards to whether COMPANY B
is providing taxable services under the agreement; the taxability of food
service provided under the agreement; or whether structures provided are real
property or have maintained their identity as tangible personal property.

Analysis and Ruling

Rule 3.294 specifically addresses the taxability of tangible personal property
leased with real property. Rule 3.294(k)(1) provides:

“If a contract for the lease or rental of real property includes the lease or
rental of tangible personal property (such as furniture) as part of the
agreement, no sales tax is due on the amount charged the tenant for the lease
or rental of the tangible personal property.”

The validity of this rule was upheld in DuPont Photomasks, Inc. v. Strayhorn,
219 S.W.3d 414, 421 (Tex. App.—Austin 2006, pet. denied).

The lease agreement between COMPANY A and COMPANY B is a lease of real
property. The agreement includes a lease of land, furniture, fixtures,
equipment, as well as structures that may retain their identity as tangible
personal property. The invoiced Facility Rental charge for the lease of the
real property, including any tangible personal property, is not subject to
sales and use tax under Rule 3.294(k)(1).

Regarding COMPANY B’s purchase of tangible personal property included in the
lease to COMPANY A, COMPANY A requests a ruling that COMPANY B may not claim a
sale for resale exemption. However, this ruling cannot address the responsibilities
of a taxpayer other than COMPANY A.

This ruling does not address the taxability of the separately stated charge for
the Food Service Payment. Food provided under the agreement is not tangible
personal property leased with real property and is not subject to Rule 3.294(k).
The taxability of this charge would be determined separately from the lease
of the real property provided for by the agreement.

If you have questions about this private letter ruling, please email us through
our website at https://www.window.state.tx.us/taxhelp/ and reference
Private Letter Ruling #143360028.

Sincerely,

Tax Policy Division

ENDNOTES:

1.The relevant facts are developed from the Addendum to Lease and Services
Agreement between COMPANY B and COMPANY A, effective September 23, 2014. The
Addendum received August 12, 2015, supersedes the original lease and
preliminary exhibits submitted November 24, 2014.