Did a private janitorial contractor avoid Texas tax on equipment and supplies because it served federal facilities and its contract funded those purchases?

Plain-English summary

Janitorial and custodial services were taxable real-property services, but the service sale to the United States and its unincorporated agencies or instrumentalities was exempt.

That exemption did not make the federal government the purchaser of everything the contractor bought. Paper towels, tissue, trash liners, and wax transferred to the customer in performing the service could be bought for resale. Detergent, wax stripper, equipment, vehicles, and other items the contractor used rather than transferred were taxable to the contractor.

Contract funding allocated for equipment did not change the purchaser: the private contractor bought and used the equipment. The letter relied on United States v. New Mexico for the proposition that this vendor-level tax was not a direct tax on the federal government.

Common questions

Was the janitorial service charge to the federal government taxable? No.

Could transferred consumables be bought for resale? Yes, for the examples and conditions stated.

Was contractor equipment exempt because federal contract funds paid for it? No.

Did a vehicle allocation make the federal government the vehicle purchaser? No. The contractor used the vehicles to perform its service.

Citations and references

• 34 Tex. Admin. Code Rule 3.356(a)(1), (b), and (c)(1)
• 34 Tex. Admin. Code Rule 3.322(b)(1) and (c)(2)
• 34 Tex. Admin. Code Rule 3.285(a)
• 34 Tex. Admin. Code Rules 3.291(a)(2), (c)(4)(B) and 3.347(a)
• United States v. New Mexico (cited in the ruling without a reporter citation)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9002L0978E10

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

February 5, 1990

Dear **:

Thank you for your letter of January 18, 1990, concerning your Texas
sales tax responsibilities as a contract service provider providing janitorial
or custodial services at facilities owned by the United States Government.

This area of taxation is one that is commonly misunderstood. I hope that
my letter will eliminate any misunderstandings.

First, your sales tax responsibilities are set out in Rule 3.356 (Real
Property Services), not in Rule 3.291 (Contractors). The term "contractor",
for sales tax purposes, is limited to the definition in paragraph (a)(2) of
Rule 3.291. Section (a) of Rule 3.347 (Improvements to Realty) defines what
activities constitute a "contract for the improvement to realty".

Sections (a)(1) and (b) of Rule 3.356 define and tax janitorial or
custodial services as real property services. Real property services are
taxable services.

Second, the Texas Tax Code (the tax law) exempts taxable items (tangible
personal property and taxable services) sold to or purchased by the United
States, its unincorporated agencies and instrumentalities. This means that the
janitorial services you provide at the federal facilities are not taxable. See
sections (b)(1) and (c)(2) of Rule 3.322 Exempt Organizations.

Third, the sales tax is a transaction tax and each transaction is either
taxable or exempt under the sales tax law even though transactions may be
related. The sale of janitorial services to the federal government is a
transaction. Your purchases of equipment and supplies are separate
transactions, although they are related to providing the janitorial services.

Fourth, the sales tax law provides a resale exemption for the taxable
items that are resold in the form or condition in which they were purchased or
as an integral part of other taxable items. Thus, items such as paper towels,
tissue, trash can liners and wax may be purchased tax free under a resale
certificate when resold in the performance of janitorial services. See section
(a) of Rule 3.285 Resale Certificate; Sales for Resale and section (c)(1) of
Rule 3.356.

The sales tax law does not provide any exemptions for taxable items
purchased for use in providing real property services. Taxable items
(detergent, wax strippers, etc.) that are not transferred as a part of the
service are taxable to you at the time of purchase.

Fifth, even though your janitorial contract with the federal government
allocates funds for equipment purchases, the contract is for the purchase of
janitorial services, not equipment. You are the purchaser of the equipment,
not the federal government. The sales tax that you are required to pay is not a
tax levied directly against the federal government. The United States Supreme
Court has upheld taxes imposed in this manner on federal vendors. See a copy
of the enclosed court case, United States vs. New Mexico.

The contract does not likely require you to purchase equipment to resell
to the federal government. Again, the absence of such a requirement would not
allow you to issue a resale certificate.

Sixth, the motor vehicle sales tax law imposes a tax on the purchaser of
a motor vehicle. The tax is paid by the purchaser when the title to the motor
vehicle is transferred from the seller to the purchaser. The motor vehicle
sales tax law does not exempt motor vehicles sold to the federal government;
however, this is not the case. You use the motor vehicles in providing the
janitorial services.

Finally, the federal government is not paying sales taxes on its
purchases (janitorial services). The fact that the contracts contain a
provision for funds allocated for motor vehicles, equipment, or supplies you
use in the performance of the janitorial services does not make the federal
government the purchaser. Please note section (c)(4)(B) of Rule 3.291 regarding
taxable items used by persons contracting with the federal government to
improve real property belonging to the federal government.

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 additional information, you may call
call me toll free at 1-800-252-5555, ext 3-4683. The regular number is 512/
463-4600. You may write me at Tax Correspondence, Comptroller of Public
Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence