Did Texas grant governmental sales-tax exemption to a state-authorized transportation association?

Plain-English summary

Based on the association's submission and exhibits, the Comptroller granted it exempt status as a governmental entity for Texas sales and use tax purposes.

The association could purchase, lease, or rent taxable items tax-free when used in its exempt function by giving suppliers a properly completed exemption certificate. It could also request refunds of sales tax previously paid on items purchased, leased, or rented for that function.

The attached request described a state-authorized association acting under Transportation Commission control to acquire rights-of-way and assist with planning and construction of a state highway. The Department's operative response did not choose among the request's several alternative legal theories.

Common questions

Was the association granted governmental exempt status? Yes.

What purchases qualified? Taxable items used in the association's exempt function.

Could it recover tax already paid? It could request a refund for qualifying purchases, leases, or rentals.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8811L0913C08

Original ruling text

November 7, 1988

Dear **:

Thank you for your letter regarding the applicability of an exemption from
Texas sales and use tax to the ASSOCIATION.

Based on the information in your letter and attached exhibits, the ASSOCIATION
is being issued exempt status as a governmental entity for Texas sales and use
tax purposes. A separate letter is being sent advising you of this.

As an exempt organization, the "Association" can purchase, lease, and rent all
taxable items for use in its exempt function tax free by issuing a properly
completed exemption certificate to its suppliers at the time of purchase. The
"Association" can request a refund of sales tax paid on taxable items it has
purchased, leased, or rented for its use in performing its exempt function.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our toll-free
number 1-800-252-5555. The regular number is 512463-4666. You may write to me
at Tax Correspondence.

Sincerely,

Jo Ann Dieck
Tax Correspondence

TELEPHONE **

October 25, 1988

BY OVERNIGHT COURIER

Ms. Joanne Dieck
Tax Correspondence

111 West 6th Street
Austin, Texas 78774

Re: **
Taxpayer No.

Dear Ms. Dieck:

As counsel for the ** (the "Association"), we respectfully request
that your office issue a written ruling regarding the applicability of an
exemption from Texas sales and use tax to the Association. A description of the
Association and its activities is set forth below.

Pursuant to the Texas Transportation Corporation Act (the "Act") (copy attached
as Exhibit A), the State Highway and Transportation Commission (the
"Commission") authorized the creation and organization of the Association to
"perform an essential governmental function by acting on behalf of the
commission (and thereby, the state) to secure and obtain rights-of-way for
urgently needed transportation systems and to assist in the planning and design
of such systems." Act 3(c). Also pursuant to the Act, the Association "will act
as an instrumentality of the state in promoting and developing public
transportation facilities and systems and will not act as the agent or
instrumentality of any private interests even though many private interests may
be benefited by the transportation corporations, as will the general public."
Act 3(e).

In particular, the Association is to act on behalf of the Commission in
connection with the design and completion of a highway system of at least 155
miles surrounding the

CITY, to be known as the ** (the "Highway"). The Association has
received donations of rights-of-way and cash; the cash donations are used to
purchase rights-of-way and perform the planning necessary for construction of
the Highway. As rights-of-way are acquired and planning completed for segments
of the Highway, the Commission will construct the particular Highway segment or
enter into a contract with the Association for such construction. If the
Commission enters into a contract with the Association for construction of the
Highway, funding will be provided by the Association's issuance of bonds.

From inception until dissolution, the Association and its activities are
totally subject to the Commission's authority and control. In this regard, the
Act requires that the Commission adopt a resolution specifically authorizing
the Association to act on its behalf and approving the Association's Articles
of Incorporation, prior to the Association's formation. Act 4 and 6. In
addition, the Act provides that the Commission is to approve the Association's
Bylaws and any amendments. Act 9. Further, the Commission appoints the
Association's board of directors and has the power to remove any director for
cause or at will. Act 8(a). Any income earned by the Association accrues to the
State. Act 18. Upon dissolution, the Act provides that all funds and properties
are to be turned over to the Commission. Act 18 and 21(c).

Attached as Exhibit B is a copy of Minute Order No. 82325, in which the
Commission approved the creation of the Association and the Association's
Articles of Incorporation and Bylaws, copies of which are attached to such
Order. In addition, the Commission (i) stated that the Association was to act
on its behalf in connection with the promotion and development of the Highway,
(ii) generally described the route of the Highway and (iii) designated such
Highway as a "State Highway."

The Internal Revenue Service has issued a ruling that (i) the Association's
income is derived from the exercise of an essential governmental function and
accrues to a state or political subdivision thereof; accordingly, pursuant to
section 115(1) of the Internal Revenue Code, such income is not subject to
federal income tax and (ii) contributions to the Association may be deductible
by the donors pursuant to section 170(c)(1) of the Internal Revenue Code as
contributions made to an entity that is subject to substantial governmental
control on its autonomy for the use of a governmental entity. A copy of such
ruling is attached as Exhibit C.

Section 16 of the Act grants the Association powers necessary to work directly
with landowners, local and state governmental agencies, and elected officials
in developing the Highway. Included are the powers to receive contributions of
land for rights-of-way and cash donations to be applied for the purchase of
rights-of-way or the design or construction of the project, to borrow money for
expenses associated with the regular operations of the Association or any
capital improvements undertaken by the Association, and to retain
administrative staffs, consultants and engineers necessary for the development
of the Highway.

In Minute Order No. 82325, the Commission reiterated the Association's powers
as provided by the Act and further required that the Association consult with
and obtain the approval of the Commission for any proposals concerning
environmental considerations, segment termini, alignment, typical sections,
schematics, right-of-way determination, landscaping, construction plans and
specifications, and any similar matters concerning development of the Highway
on an ongoing basis.

As the Association secures commitments for rights-of-way on behalf of the
Commission for usable segments of the Highway, the Commission approves such
usable segments for project planning, which includes route studies,
environmental reports, public meetings and hearings, schematics and
determination of right-of-way requirements and authorizes the Association to
act on the Commission's behalf in performing such tasks. In addition, the
Commission further authorizes the Association to act on its behalf in acquiring
the required rights-of-way and for preparation of construction plans,
specifications and estimates. Finally, as usable segments are approved for the
above-described activities, the Commission commits to either (i) commence
construction of the usable segment within a certain period of time after the
Association has completed its authorized tasks or (ii) authorize the
Association to finance construction of and construct the usable segment as
provided for in the Act, should the Commission not have sufficient funds to
construct that segment of the Highway.

Attached as Exhibit D are copies of Commission Minute Orders 82605, 83736,
83807, 85077 and 85865, in which the Commission set forth the authorizations
and procedures described above.

In summary, pursuant to the Act, the Commission has authorized the Association
to secure rights-of-way and perform virtually all pre-construction activities
relating to the Highway. In addition, the Commission has indicated that it will
hire the Association to finance and construct the Highway, should the
Commission have insufficient funds to perform such construction itself.

During its existence, the Association has purchased and leased equipment and
supplies, contracted with various consultants, designers and engineers and has
secured Highway construction plans on which it has incurred duplicating
charges.

We respectfully request that your office issue a written ruling regarding the
applicability of an exemption from Texas sales and use tax to the Association
and its activities. [FOOTNOTE: Previously, your office has ruled that the
Association is exempt from Texas franchise tax as a nonprofit corporation
organized solely to promote the public interest of the CITY, Texas area. A copy
of the ruling letter is attached as Exhibit E.] Set forth below is a discussion
of alternative bases for the Association's exemption from sales and use tax.

The Association is performing an essential governmental function by undertaking
various activities that otherwise would be performed by the Commission. In
undertaking such activities, the Association is subject to the Commission's
authority and control, and section 3(e) of the Act specifies that the
Association will act as an instrumentality of the State. Accordingly, the
Association should be deemed exempt from tax pursuant to Comptroller's Sales
and Use Tax Rule 34 TAC 3.322(b)(4). [FOOTNOTE: The Association is a
corporation. However, it is a nonmember and nonstock corporation, Act 5, all
the activities of which are for the benefit of the State. Consequently, its
corporate status should not deny it an exemption from tax.]

As an alternative basis for exemption, the Commission, pursuant to the Act, has
authorized the Association to act on its behalf in performing activities
related to the Highway. The Highway has been designated a "State Highway" and
the rights-of-way secured for such Highway are to be turned over to the
Commission. By Minute Orders, the Commission authorizes the Association to
proceed with specific activities related to the Highway on behalf of the
Commission. All Association activities are on behalf of and for the benefit of
the Commission. The Commission is empowered to receive the Association's
income, dissolve the Association, and, upon dissolution, receive all assets of
the Association. Accordingly, the Association should be deemed an authorized
agent of the Commission and, therefore, entitled to issue exemption
certificates to vendors in lieu of tax pursuant to Comptroller's Sales and Use
Tax Rule 34 TAC 3.322(f)(2) and (4). Such exemption should apply to all items
purchased by the Association, because all of its activities are on behalf of
the Commission.

As an additional alternative basis for exemption, the Association's purchases
also should be exempt from sales and use tax pursuant to section 151.311 of the
Texas Tax Code as property used for the improvement of realty of an exempt
organization. In this connection, all of the Association's activities are
related to the improvement of realty for the State through the construction of
the Highway. Accordingly, the Association should be deemed a contractor for
sales and use tax purposes. [FOOTNOTE: As noted above, the Commission, if it
has sufficient funds, can decide to construct the Highway without "hiring" the
Association for financing and construction purposes. For this reason, we submit
that the Comptroller should concur with an alternative basis for exemption.]
Since all of the Association's purchases are used for performance of a contract
for the improvement of real property of an exempt entity, all purchases should
be exempt from tax. See Comptroller's Decision No. 10,274 (1980).

We respectfully request that your office issue a ruling regarding the
applicability of an exemption from Texas sales and use tax to the Association.
Further, should your office rule that a particular exemption applies, but that
it would not apply to all purchases by the Association, please specify the
types of purchases that are not covered by the exemption.

Should you have any questions regarding the foregoing, please call either
** (**) or the undersigned (**).

Very truly yours,

cc: ** (Firm)