Were remodeling materials and labor exempt for a historic building owned by an exempt entity but primarily used by its for-profit subsidiary?

Plain-English summary

A tax-exempt organization owned a historic building and paid for remodeling and new construction. The building was used primarily by its wholly owned for-profit subsidiary and only occasionally for the exempt organization's training and meetings.

The Comptroller said improvements to real property were exempt only when made for the exempt entity's primary use and benefit. Because the for-profit subsidiary received the primary benefit, materials used in the remodeling were taxable even though the exempt owner paid for them.

Nonresidential repair, remodeling, or renovation was a taxable service. A contract mixing remodeling and new construction was taxable in full unless the new-construction charge was separately stated.

If the building was listed in the National Register of Historic Places, repair or remodeling labor could be exempt, but materials remained taxable. Listing only with the Texas Historical Commission exempted neither labor nor materials.

What this means for you

Exempt organizations

Ownership and payment did not control by themselves. The Comptroller looked to who primarily used and benefited from the improvement.

Historic-property contractors and tax professionals

Document the historic listing and separately state new construction when appropriate. National Register status affected labor only under this letter.

Common questions

Were remodeling materials exempt because an exempt entity owned and paid for the building? No.

Why not? The for-profit subsidiary was the primary user and beneficiary.

What did National Register listing exempt? Repair or remodeling labor, not materials.

Did Texas Historical Commission listing alone create an exemption? No.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(b) and (c)(4) (nonresidential remodeling and historic structures)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1153A07

Original ruling text

February 4, 1992

Dear *****:

Thank you for your letter of December 13, 1991, regarding the
taxability of materials used in remodeling and adding to a
historic structure owned by an exempt entity.

As I understand it, **, a sales tax exempt
organization, owns a historic structure. This structure is
primarily used to house a for-profit wholly owned subsidiary.
However, the building is used "from time to time" for training
and meetings as part of the exempt purpose of the *.
The entire cost of all remodeling and new construction work will
be paid for by ****. You specifically ask if the materials
associated with this remodeling will be exempt from sales tax.

Under Texas law, improvements to realty are exempt from tax if
made for the primary use and benefit of an exempt entity. It
appears in this situation that the wholly owned for-profit
subsidiary is the receiver of the primary use and benefit of the
remodeling work. Therefore, tax is due on the materials used to
remodel this building even though paid for by an exempt entity.

Repair, remodeling, or renovation of nonresidential real property
became a taxable service effective January 1, 1988. The total
charge for this service is subject to tax. A contract which
involves both remodeling and new construction will be taxed in
total (i.e. labor, materials, and consumables) unless the charge
for new construction is separately stated. Please refer to
Section (b) of Rule 3.357, Real Property Repair and Remodeling.

If the building owned by the ***** is listed in the
National Register of Historic Places, the labor to repair or
remodel the structure would qualify for exemption; however, no
exemption exists for materials used to remodel these historic
structures. Also, no exemption exist for labor or materials for
a structure that is listed only with the Texas Historical
Commission. Please refer to Section (c)(4) of Rule 3.357.

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

If you have any questions or need additional information, you may
call toll free 1-800-252-5555 or the regular Austin number is
512-463-4600. You may also write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division