Was a scoreboard transferred to a school for ten years of advertising rights a taxable donation or a sale?

Plain-English summary

A manufacturer transferred an electronic sign or scoreboard to a school or university, retained advertising revenue rights for ten years, and passed title when the contract ended.

Texas treated the transaction as a sale because the advertising rights were consideration for the equipment. A sale to a qualifying exempt organization was nontaxable, but similar transfers to private schools, nonprofits, or other entities were taxable when the recipient did not actually qualify for exemption.

The letter cautioned that private schools and nonprofit organizations were not automatically exempt under Rule 3.322.

Common questions

Was the transfer a donation? No. The advertising rights made it a sale.

Was every transfer to a school exempt? No.

What controlled the exemption? Whether the recipient qualified as an exempt organization.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8904L0938B12

Original ruling text

April 21, 1989

Dear ***:

Thank you for your letter of March 21,1989, regarding taxability of electronic
scoreboards that may be donated to exempt organizations, private schools, or
other entities. I apologize for the delay to your response.

I am enclosing rules relating to exempt organizations and to exemption certificates
issued by these organizations. You will note in Rule 3.322 that private schools and
some non-profit organizations do not necessarily qualify for sales tax exemption.

I am also enclosing a copy of a recent hearings decision, issued by this agency,
which appears to encompass the circumstances stated in your letter. First, I will
briefly restate the issue:

Your company manufactures and sells electronic signs and scoreboards. These signs/
scoreboards may be donated to a school or university, in exchange for advertising
rights. Title will pass to the school or university when the ten year contract is
completed. It is during this ten year period when your company retains the rights
to the advertising revenues generated by this sign/scoreboard.

Your questions are:

1) Is this a sale of the sign/scoreboard?
2) If it is a sale, is the sale taxable?

The hearing referenced states that under the circumstances described, a sale has
occurred: consideration (in the form of advertising rights) is being received for
the sign/scoreboard. However, the sale in this hearing was to an exempt organization,
and therefore not taxable. If your company has similar transactions with private
schools, non-profit organizations, or other "taxable" entities, Texas sales or use
taxes would be due.

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

You may write Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence