Can a private company that leases unimproved port authority land, and is required to build a container depot on it that becomes port property, issue a tax exemption certificate to its contractor for construction materials?

Plain-English summary

The Port of Houston Authority — a tax-exempt special district that promotes maritime commerce — owns unimproved land at one of its terminals and signed a 20-year ground lease with a private company. Under the lease, the company must build a shipping-container depot (for evaluating, servicing, storing, and repairing containers) on the land, submit its construction plans to the Port for review, follow the Port's security and access rules, and hand over ownership of everything it builds to the Port — either at the end of the lease or immediately if the Port terminates it early for default. The company asked whether it could give its construction contractor a tax exemption certificate so the contractor (and its suppliers) could buy building materials and services tax-free, even though the company itself is an ordinary taxable business, not a government entity.

Texas has a specific rule for exactly this situation: purchases used to improve real property can be exempt even under a contract between a private party and a contractor, if the arrangement counts as an "exempt contract" — meaning the primary use and benefit of the improvement flows to a tax-exempt entity that will own it. The Comptroller weighs the whole relationship using a multi-factor test: is the real purpose to benefit the exempt entity, does the improvement serve a genuine public function, does the exempt entity approve design and construction, does it control operations, and does title end up with the exempt entity rather than the private party?

Here, nearly every factor pointed to the Port: the depot expands the Port's container-handling capacity (a core part of its public mission to operate port facilities), the Port reviews and can reject the company's construction plans, the Port controls security, access, and can even take over the site if the company defaults, and every improvement built — earthworks, utilities, pavement, lighting, fire hydrants — becomes and remains the Port's property. The Comptroller found this lease functionally identical to a prior port-container-yard case reaching the same result, and ruled the construction contract is an "exempt contract." That lets the company issue an exemption certificate to its contractor, who can pass the exemption down the supply chain for materials incorporated into the depot, qualifying consumables, and specified jobsite services.

What this means for you

Companies leasing land from ports, transit authorities, or other government landlords

Building on leased government land doesn't automatically make your construction taxable just because you're a private, ordinary taxable business. If the government landlord controls design approval, security/operations, and ultimately owns everything you build (during the lease term or at its end), your construction contract can qualify as tax-exempt under the same "primary use and benefit" analysis applied to direct government construction.

Port authorities, districts, and other exempt landowners structuring ground leases

Leases that require tenant-built improvements to become and remain the authority's property, subject to the authority's design review and operational control, give tenants a real path to sales-tax-exempt construction — worth highlighting in lease negotiations if reducing project costs matters to your tenant.

Contractors and suppliers on port or public-infrastructure build-outs

Confirm whether your job is under an "exempt contract" before assuming standard taxability — the same six-factor test (purpose, business use, public function, design approval, operational control, ultimate title) applies whether the exempt beneficiary is a city, county, school district, or a special district like a port authority.

Common questions

Q: Does the tenant being an ordinary taxable business disqualify this from the exemption?
A: No — the exemption for construction contracts under § 151.311 is separate from the general governmental-entity exemption and turns on whether the improvement's primary use and benefit flows to the exempt entity, not the taxpayer status of the party signing the construction contract.

Q: What made the Port's control so significant to this ruling?
A: The Port's design-approval rights, control over security/access/operations, and automatic ownership of all improvements (even on early termination) collectively showed the depot was being built primarily for the Port's benefit, not the tenant's own independent business purpose.

Q: Does this ruling apply to my port, transit authority, or other government ground lease?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific lease terms. Similar ground-lease construction arrangements should be evaluated against the six-factor primary-use-and-benefit test with a Texas tax professional.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010, § 151.009 (sales tax imposition; taxable item; tangible personal property)
• Tex. Tax Code § 151.309(5) (Governmental Entities exemption)
• Tex. Tax Code § 151.311 (Taxable Items Incorporated Into or Used for Improvement of Realty of an Exempt Entity)
• 34 Tex. Admin. Code § 3.291(a)(5), (c)(4), (c)(5) (exempt contract; exemption certificates)
• 34 Tex. Admin. Code § 3.322(c)(5) (Exempt Organizations)
• Tex. Water Code § 60.005, § 60.101(a) (port district tax exemption; public purpose of port facilities)
• Tex. Special District Local Laws Code § 5007.002 (Port of Houston Authority creation)
• Comptroller's Decision Nos. 44,896, 47,235 (2009); No. 31,770 (1999)
• STAR Accession No. 201405903L (2014); No. 200108598L (2001); No. 202012011L (2020)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202312013L

Original ruling text

December 1, 2023

RE: Private Letter Ruling No. PLR20220920115231

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. We are responding to your request dated August 25, 2022, with additional documentation provide by email on August 14, 2023. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether ** (Taxpayer) may issue an exemption certificate to its contractor for taxable items used to construct a Depot/Container Yard for The Port of Houston Authority's ** Terminal.

Facts Presented

The Port of Houston Authority of Harris County, Texas (Port) is a special district that was created and established under Article 3, Section 52, of the Texas Constitution. The authority and purpose of the Port is described in Texas Special District Local Law Code, Title 5, Subtitle 5007, Subchapter A, Section 5007.002 (Creation of District; Valuation; Territory). Texas Water Code, Title 4, Chapter 60, Subchapter E, Section 60.101(a) (Acquisition and Maintenance of Port Facilities) states that the improvement and operation of port facilities is a public purpose. The Port is a navigation district promoting maritime commerce and economic development. The Port is exempt from all taxes and special assessments imposed by Texas or a political subdivision under Water Code Section 60.005 (Exemption from Taxation and Special Assessments). The Port is also exempt from Texas sales and use tax pursuant to Section 151.309(5) (Governmental Entities) and Rule 3.322(c)(5) (Exempt Organizations).

The Port entered into an Amended and Restated Lease Agreement (Lease) with ** (Taxpayer), effective April 11, 2022, with respect to * acres of unimproved land (Property) at the Port’s ** Terminal. The Port is the owner of the Property. Taxpayer, as tenant, is required under the Lease to contract for the construction of certain improvements on the Property. The improvements made by Taxpayer under the 20-year Lease are the property of the Port under Lease Section 7.04, and the Taxpayer is required by Lease Section 7.02 to submit the plans and specifications for the improvements to the Port for their review.

The permitted use of the Property, as stated in Section 5.01 of the Lease is for the:

Development and operation of a depot which will be used for the evaluation, servicing, storage, and necessary repair of containers and associated equipment as required by the various shipping lines, commercial brands and other customers.….

The Lease prohibits any uses not specified as a permitted use. See Lease Section 5.02. Additionally, Lease Section 8.08 states that the Landlord (i.e. The Port) controls the access and security requirements for the Property:

Tenant shall, at all times, comply with all Landlord and other applicable security laws, rules, and regulations, including, without limitation: (i) all access requirements; (ii) all applicable security requirements, including without limitation, the Maritime Transportation Security Act of 2002 (Pub. L. No. 107-295, 116 Stat. 2064), the SAFE Port Act of 2006 (Pub. L. No. 109-317, 120 Stat. 1884), and the regulations promulgated thereunder; (iii) the federal Transportation Worker Identification Credential ("TWIC") program, as applicable; and (iv) Landlord's Facility Security Plan ("FSP"), if required.

Article 18 of the Lease states that if Tenant (i.e. Taxpayer) defaults on the Lease the Landlord can terminate the Lease or terminate the Tenant’s right to possession of the Property without terminating the Lease.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Can Taxpayer issue an exemption certificate to its contractor so the contractor may purchase, tax free, tangible personal property incorporated into the realty, qualifying consumable items, and taxable services purchased for improvements to the Property?

Ruling: Yes. The Property improvements are exempt from Texas sales and use tax under Section 151.311 (Taxable Items Incorporated Into or Used for Improvement of Realty of an Exempt Entity) and Rule 3.291 (Contractors). Taxpayer may issue an exemption certificate to its contractor under Rule 3.291(c)(4) for materials incorporated into the real property, consumable items, and specified taxable services used to construct the improvements. Taxpayer’s contractors may subsequently issue exemption certificates to its suppliers under Rule 3.291(c)(5).

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). “Taxable items” include tangible personal property and taxable services. Section 151.010 (Taxable Item). Section 151.009 (Tangible Personal Property) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner.

Section 151.311 exempts from sales and use tax certain purchases used in the performance of a contract to improve realty for an exempt entity. This exemption can apply even when the contract is between a nonexempt entity (like Taxpayer) and a contractor, if the contract is an “exempt contract.” Comptroller’s Decision Nos. 44,896 and 47,235 (2009). Rule 3.291(a)(5) defines an “exempt contract” as “a contract with a nonexempt entity to improve real property for the primary use and benefit of an organization exempted under Tax Code, §151.309….”

Texas Water Code, Title 4, Chapter 60, Subchapter E, Section 60.101(a) provides the improvement and operation of port facilities is a public purpose. This includes purchasing, leasing, constructing, maintaining, or extending facilities that aid in the navigation and navigation-related commerce in the ports and on the waterways. Texas Water Code, Section 60.005 also provides that the property of a navigation district is public property used for essential public and governmental purposes. As the Port is not directly building the Project but has instead entered into the Lease with Taxpayer to build and manage the Project, an additional analysis is required to determine if the contract is exempt under Section 151.311 and Rule 3.291.

The primary use and benefit test requires more than a showing that the improvement may serve a specific public purpose of an exempt entity. See Comptroller’s Decision Nos. 44,896 and 47,235 (2009); and 31,770 (1999). In determining whether a contract for an improvement to realty is for the primary use and benefit of an exempt entity that will own the improvement, the Comptroller considers all the facts and circumstances. In situations where, as here, the nonexempt entity and a contractor execute construction contracts pursuant to some underlying agreement (i.e. the Lease), the agency has evaluated the underlying agreement to determine the primary and use benefit. See STAR Accession Nos. 201405903L (May 9, 2014) and 200108598L (Aug. 20, 2001). The facts and circumstances the agency may consider include:

• Whether the primary purpose of the improvements contemplated by the underlying agreement is to benefit the exempt entity;

• Whether the improvements are used for a business purpose;

• Whether the operation of the improvements actually serve a public function;

• Whether the exempt entity approves the design and construction of the improvements;

• Whether the exempt entity manages the operation of the new facilities; and

• Whether title to the improvements remains with the taxable entity.

The Lease answers almost all of these factors in the affirmative. The Project benefits the Port, an exempt entity, by expanding the available container storage and repair area and is necessary to further the Port’s public and business functions to operate or develop ports or waterways within the authority.

Additionally, Lease Section 7.02 requires Taxpayer to submit its plans and specifications to the Port for review, and the Port will provide Taxpayer with written details of any exception to Taxpayer’s plans. The Port also has control over significant aspects of the operation such as hours of operation, the level of service and fees, and the Port can take over operation if Taxpayer does not perform its obligations. See Lease Sections 5.02, 8.08 and Article 18.

Finally, Taxpayer will make improvements to the infrastructure, including improvements to the earthworks, underground utilities (water, electricity), stormwater drainage, concrete pavement structure, light poles, and fire hydrants. All these improvements will remain the Port’s property at the conclusion of the Lease or if the Lease is terminated prior to the ending date of the Lease.

In STAR Accession No. 202012011L (Dec. 29, 2020), a similar expansion of a port container yard was determined to be an exempt contract as the analysis of the lease determined that primary use and benefit was for an exempt entity. The facts in that contract are similar to Taxpayer’s facts in that a port owned the land under a container yard, clearly listed approved and prohibited uses of the yard, retained control over security and access to the site, and the port would retain ownership of the improvements.

The contract for the Project is an exempt contract under Section 151.311 and Rule 3.291 because the primary use and benefit of the Lease is for the Port. Taxpayer may issue an exemption certificate to its contractor that is constructing the improvements on the Property, claiming the exemption for an improvement to realty under an exempt contract as described in Rule 3.291(a)(5). The contractor may in turn issue exemption certificates to its suppliers for tangible personal property incorporated into the realty, qualifying consumable items, and for taxable services performed at the jobsite, that are expressly required by the construction contract and are integral to the performance of the contract and used to construct the Project under Section 151.311 and Rule 3.291(c)(5).

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20220920115231.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts