Were improvements made by a private lessor for a federal agency's leased office exempt from Texas sales tax?

Plain-English summary

A tax-exempt federal agency agreed to lease an office building for 10 years, with five years firm, only if the private lessor remodeled it to agency specifications.

The Comptroller found the improvements were for the federal government's primary use and benefit. The agency required them before accepting the property, would use them exclusively during the lease, and designed them for its needs; they would also depreciate considerably by lease end.

The lessor or subcontractor could issue resale certificates for materials and taxable services transferred to the agency or incorporated into the improved realty for it.

The lessor could accept federal purchase vouchers or an exemption certificate to document the agency's exempt status and was told to retain the ruling.

What this means for you

Private ownership did not defeat the exemption where the lease facts showed the exempt tenant was the primary user and beneficiary of purpose-built improvements.

Common questions

Did the federal agency own the building? No. It leased it from a private lessor.

Why did the improvements qualify? They were required, tailored to the agency, and solely used by it during the lease.

Could subcontractors buy incorporated inputs for resale? Yes.

How could the agency document exemption? With federal purchase vouchers or an exemption certificate.

Citations and references

The letter stated the primary-use-and-benefit rule but did not cite a specific statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9010L1053E02

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

BOB BULLOCK
Comptroller October 25, 1990

Dear *****:

Thank you for your letter of September 28, 1990, regarding
sales tax exemptions for improvements to realty leased to an
exempt entity. As I understand it, the ** a tax-
exempt federal government entity, has entered into a contract
to lease for 10 years (5 years firm) an office building in
*****.

The lease is conditioned on partial remodeling and modifica-
tion of the structure to the *****'s specifications.

Under Texas law, improvements to realty are exempt from tax if
made for the primary use and benefit of an exempt entity. It
appears that, in your situation, the improvements in question
are being made for the primary use and benefit of the federal
government, an exempt entity.

According to the lease you submitted, the ** specifi-
cally requires that certain improvements be made before it will
accept the property; the *** will have sole use of the
improvements for the length of the lease; and the improvements
have been designed specifically to meet its needs. When the
lease expires, the improvements will have depreciated consider-
ably.

Therefore, the lessor or a subcontractor may issue a resale
certificate in lieu of tax to purchase materials that will be
transferred to the ** and/or incorporated into the
realty being improved for the **. Also, the lessor
or a subcontractor may issue a resale certificate to purchase
taxable services that will be transferred to the *
and/or incorporated into the realty being improved for the
**.

In lieu of tax, the lessor may accept federal government pur-
chase vouchers or an exemption certificate from the *****
to document its exempt status. The lessor should also retain a
copy of this opinion in his records.

This opinion is based on the facts presented. Different facts,
though similar, might lead to different answers. If you have
further questions, feel free to write or call me at 1-800-531-
5441, ext. 3-3889.

Sincerely,
John Christian
Taxability Section
Legal Services Division