Can a private land developer building a new library and community center — which it will transfer to the county upon completion in a land-swap deal — issue a tax exemption certificate to its contractor for construction materials and services?

Plain-English summary

A private developer owns a parcel with an old mall building on it. Under a set of agreements, the developer will build a brand-new library and community center on that parcel for the county, subject to the county's design review and approval — and once finished, the developer transfers the whole Project (buildings and land) to the county. In exchange, the county transfers its old library site to the developer. The county will own and operate the finished library. The developer asked whether it could give its construction contractor a tax exemption certificate so the contractor (and its suppliers) could buy the building materials, consumables, and jobsite services tax-free, even though the developer itself isn't a tax-exempt entity.

Normally, only sales to specific exempt entities (like counties) skip sales tax. But Texas has a separate rule for construction: purchases used to improve real property can be exempt even when the contract is between a private, non-exempt party and a contractor, if the contract counts as an "exempt contract" — meaning the improvement's primary use and benefit flows to an exempt entity that will own it. The Comptroller looks at the whole arrangement, weighing things like: is the real purpose to benefit the exempt entity, does the improvement serve a genuine public function, does the exempt entity approve the design, will the exempt entity operate it, and does title end up with the exempt entity (not the private party)?

Here, every factor pointed toward the county: the library/community center serves a clear public function, the county reviews and approves construction, the county will take full ownership when it's done, and the county will operate it afterward as part of its public services. So even though the developer is a private, taxable business and technically owns the land during construction, the Comptroller found the contract's primary use and benefit belongs to the county — making it an exempt contract. That lets the developer issue an exemption certificate to its contractor, and the contractor can pass that exemption down to its own suppliers for materials incorporated into the building, qualifying consumables used up on the job, and specified jobsite services.

What this means for you

Developers and private parties building for government entities

You don't have to be a tax-exempt entity yourself to get construction materials purchased tax-free — what matters is whether the finished improvement's primary use and benefit goes to an exempt entity that will own and operate it. Land-swap or build-then-transfer deals like this one can still qualify as "exempt contracts" if the government entity is genuinely driving the design, approval, ownership, and operation of the project.

Contractors and suppliers on public-adjacent projects

If you're hired under a contract that qualifies as exempt, you can issue your own exemption certificates further down the supply chain — but the certificate must correctly identify you as purchaser, the exempt entity the improvements are for, and the specific project, per Rule 3.291(c)(5). Get this paperwork right, since the exemption travels down the chain only with proper documentation.

Accountants and tax professionals

The six-factor "primary use and benefit" test (purpose, business use, public function, design approval, operational control, and ultimate title) from STAR 201405903L and 200108598L is the practical checklist here — no single factor is dispositive, and the Comptroller weighs the whole arrangement. This is a strong template for analyzing any build-to-transfer or land-swap deal involving a private developer and a governmental entity.

Common questions

Q: Does the developer being a private, taxable business disqualify this from the exemption?
A: No — the exemption for construction contracts is separate from the general governmental-entity exemption. It turns on whether the contract's primary use and benefit runs to the exempt entity, not on the taxpayer status of the party signing the contract.

Q: What exactly can the contractor buy tax-free?
A: Tangible personal property incorporated into the real property, consumable items necessary and essential to the contract that are fully consumed at the job site, and taxable services performed at the jobsite that are expressly required by or integral to the contract.

Q: Does this ruling apply to my development or construction deal with a government entity?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts. Similar build-then-transfer or land-swap 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 (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)(1), (c)(4), (c)(5) (exempt contract; exemption certificates)
• Comptroller's Decision Nos. 44,896, 47,235 (2009); No. 31,770 (1999)
• STAR Accession No. 201405903L (May 9, 2014); No. 200108598L (Aug. 20, 2001)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202407026L

Original ruling text

July 26, 2024

RE: Private Letter Ruling No. PLR20240130142914

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated March 15, 2024 with additional information provided on May 10, 2024 and on June 5, 2024. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of the construction contract for a new library and community center project in ** County, Texas.

Facts Presented

The relevant facts are based on the Development Agreement and Exchange Agreement each dated Sept. 26, 2023, and the Construction Agreement provided June 5, 2024.

** (Taxpayer) is a developer who owns a parcel of land in CITY, Texas. Improvements on the parcel include a commercial mall with an empty retail store (Parcel). ** County (County) owns and operates a library and a community center on land it owns in the county.

The County wants to work with Taxpayer to replace the existing library with new, modern facilities. Under the agreements provided, Taxpayer will build a new library and community center (Project) on the Parcel and then transfer full ownership of the buildings and underlying land for the Project to the County. In return, the County will transfer ownership of the existing library and its land to Taxpayer.

During the development and construction of the Project, Taxpayer’s construction plans and specifications are subject review, comment, and approval by the County. The Construction Agreement is limited to renovating the building for the Project owned by the County and does not include any other improvements for Taxpayer. The County will operate the Project after construction is completed.

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 to be incorporated into the realty, qualifying consumable items, and taxable services purchased for improvements to the Project?

Ruling: Yes. Purchases of taxable items to construct improvements to the Project are exempt from Texas sales and use tax as provided in 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)(1). Under Rule 3.291(c)(5), Taxpayer’s contractor may subsequently issue exemption certificates to its suppliers for materials incorporated into the real property, consumable items, and specified taxable services used to construct the Project.

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 151.309 (Governmental Entities) provides a sales tax and use tax exemption for taxable items sold to or used by specified governmental entities including the County.

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. See also Rule 3.291(c)(4). The exemption applies to:

tangible personal property that is incorporated into realty;

consumable items that are necessary and essential to the contract and completely consumed at the job site; and

taxable services performed at the job site and that are expressly required by the contract or integral to the performance of the contract.

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) provides an example of 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….”

The primary use and benefit test requires more than 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). The Comptroller considers all the facts and circumstances when 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 has evaluated the underlying agreement to determine the primary use and primary benefit when a nonexempt entity (Taxpayer) and a contractor execute construction contracts pursuant to an underlying agreement. See STAR Accession Nos. 201405903L (May 9, 2014) and 200108598L (Aug. 20, 2001). The facts and circumstances the Comptroller 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.

Whether title to the improvements remains with the taxable entity.

An analysis of Taxpayer’s facts and circumstances established by the Development, Exchange, and Construction Agreements indicate the primary use and benefit of the Project is for an exempt entity, the County. The primary purpose of the Project is to provide the County a new, modern library and community center. The Project will fulfill a public function for the County by providing a community gathering space and an educational resource open to the public. The County will approve the design and construction of the Project, will obtain ownership of the Parcel and Project improvements upon completion of construction, and the County will operate the Project after completion as part of its municipal duties to provide services to its residents.

Therefore, the Construction Agreement to build the Project is an exempt contract under Rule 3.291(a)(5). Taxpayer may issue an exemption certificate to its contractor under Rule 3.291(c)(1) to document the exempt contract. Under Section 151.311 and Rule 3.291(c)(5), Taxpayer’s contractor may subsequently issue exemption certificates to its suppliers for purchases of the tangible personal property to be incorporated into the realty, qualifying consumable items, and the taxable services performed at the jobsite listed under Section 151.311 and Rule 3.291(c)(4). An exemption certificate must identify the contractor as the purchaser, the exempt entity for whom the improvements are made, and the project for which the items are being purchased. 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. PLR20240130142914.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.