If a 501(c)(3) nonprofit and a for-profit company form a 50/50 joint venture to build affordable housing, can the joint venture buy construction materials free of Texas sales tax?

Subject

Joint Venture Of Exempt Organization And For-Profit Entity — Exemption Certificate Limited To Nonprofit's Percentage Ownership Interest

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1273G03

Plain-English Summary

A taxpayer wrote to the Comptroller about a joint venture formed to develop affordable housing in Texas. The joint venture had two partners, each holding a 50% interest: a non-profit corporation and a for-profit organization. The non-profit partner was a 501(c)(3) organization, and the taxpayer noted that the IRS would treat the rental income from the project as "related income" to the non-profit's exempt purpose.

The plan was for the joint venture to build a multi-family apartment complex that would qualify for low income housing tax credits under Section 42 of the Internal Revenue Code. The completed property would ultimately be owned by a limited partnership, with the joint venture serving as the sole general partner. The joint venture intended to enter a separate construction contract with a contractor to build the project, and the taxpayer asked whether the joint venture or the non-profit corporation could purchase the building materials for the project free of Texas sales tax.

The Comptroller's answer: the joint venture may issue an exemption certificate for only 50% of the cost of the incorporated materials and consumable supplies used in the project — the percentage matching the non-profit partner's ownership share in the joint venture. The remaining 50% of those materials and supplies, matching the for-profit partner's share, remains subject to sales tax. The Comptroller specifically noted that this 50/50 split applies regardless of which entity — the joint venture or the non-profit organization — actually pays for the materials and consumables. In other words, who writes the check does not change the taxable/exempt split; the split is fixed by each partner's ownership percentage in the joint venture itself.

The letter closes by noting that this opinion was rendered based on the specific facts submitted, and that other facts, though similar, may yield different results.

What This Means For You

If your exempt organization is going into a joint venture with a for-profit partner: This letter indicates that the exemption available to the joint venture's purchases is prorated by ownership percentage — a 501(c)(3) partner owning 50% of the joint venture supports an exemption certificate for only 50% of the incorporated materials and consumable supplies, not the whole purchase. A joint venture is not automatically treated as "exempt" just because one of its partners is exempt.

Payment source does not matter: The ruling is explicit that it makes no difference whether the joint venture or the non-profit partner is the one actually paying for the materials — the exempt/taxable split still tracks the ownership percentages in the joint venture.

Facts matter — this is not a categorical rule: The Comptroller expressly cautioned that this opinion was based on the specific facts submitted (a 50/50 joint venture, a 501(c)(3) partner, IRS treatment of the rental income as related income, and a Section 42 low-income housing project), and that other, even similar, fact patterns could produce a different result. If your ownership split, exempt-purpose relationship, or project structure differs, don't assume the same 50% treatment applies.

No statute or rule is cited in this letter. The response does not reference a specific Texas Tax Code section or Comptroller rule to support the proration approach — it states the position directly. Anyone relying on this letter for a materially similar transaction should confirm current Comptroller guidance, since STAR letters bind only the taxpayer who received them (see the disclaimer below).

Q&A

Q: Can a joint venture between a 501(c)(3) nonprofit and a for-profit company buy all of its construction materials tax-free because one partner is exempt?
A: No, according to this letter. The joint venture may only issue an exemption certificate for the percentage of materials equal to the nonprofit partner's ownership interest — here, 50%, because the nonprofit held a 50% interest in the joint venture. The other 50% remains taxable.

Q: Does it matter whether the joint venture or the nonprofit itself pays for the materials?
A: No. The letter states this outcome is the case "regardless of whether the joint venture or the non-profit organization pays for the materials and consumables." The 50/50 split is tied to ownership interest, not to which entity writes the check.

Q: What kind of project was this ruling about?
A: A multi-family apartment complex intended to qualify for low income housing tax credits under Section 42 of the Internal Revenue Code, ultimately to be owned by a limited partnership in which the joint venture would be the sole general partner. The joint venture was to enter a separate construction contract with a contractor for the build.

Q: Would a joint venture with a different ownership split get a different exemption percentage?
A: Based on the reasoning in this letter, yes — the exemption certificate is tied to "the percentage of purchases equal to the percentage of the exempt organization's ownership interest," so a joint venture where the exempt partner held, say, 70% would support a different fraction. However, the Comptroller also cautioned that other facts, even similar ones, may yield different results, so this should not be treated as an automatic formula.

Original ruling text

December 1, 1993

Dear *:

Thank you for your recent letter which is restated in part with
response below. Our client is a joint venture formed for the purpose
of developing affordable housing in *****, Texas. There are two
joint venture partners, a non-profit corporation and a for-profit
organization, each owning 50% of the joint venture.

To further the purpose of the non-profit organization, the joint
venture is planning to construct a multi-family apartment complex in
**, Texas that will qualify to receive low income tax credits
pursuant to Section 42 of the Internal Revenue Code. The completed
multi-family property will be owned by a limited partnership, of which
our client will be the sole general partner. The joint venture will be
entering a separated construction contract with a contractor for the
construction of the project.

We are writing to inquire as to your offices' position concerning the
ability of either the joint venture or the non-profit corporation to
purchase the building materials to be incorporated into the project
free of state sales tax.

Note: In our phone conversation of November 23, 1993, you said that
the non-profit partner was designated by the IRC as a 501(c)(3)
organization and that the income to be derived from the rental of the
apartments would be considered as related income by the IRS.

Response: The joint venture may give an exemption certificate for 50%
of the cost of the incorporated materials and consumable supplies used
in the project. The remaining 50% of incorporated materials and
consumable supplies are subject to sales tax. This is the case
regardless of whether the joint venture or the non-profit organization
pays for the materials and consumables.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.

If you have questions or need more information, please call or write.
You may reach me by calling toll free, (800)-531-5441 (ext. 3-4680).
My direct line number is (512) 463-4680. The number for FAX
transmissions is (512) 475-0900. You may write to me in care of Tax
Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9311115L.4 and/or 9311115L