Can a security services contractor buy tax-free parts and materials to repair vehicles it uses solely to guard a tax-exempt nonprofit's property?

Subject

Motor Vehicle — Exclusively Purchased And Used To Perform Security Services For 501(C)(3) Exempt Org — Materials/Parts Used To Repair/Maintain Vehicles Are Not Exempt

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9401L1283A07

Plain-English Summary

A nonprofit tax-exempt 501(c)(3) organization hired a security services firm to patrol and secure roughly 214 acres of land it manages for 41 member institutions (all also tax-exempt). The security contractor used its own vehicles — marked with large logos, stationed on the property around the clock, and used solely for this contract — to perform the work. The vehicles left the property only for repairs, gasoline, and similar needs.

The contractor asked whether it could buy the materials and parts used to repair and maintain those vehicles tax-free, by giving vendors resale certificates, since the vehicles were used exclusively for a tax-exempt organization's exempt purposes.

The Comptroller said no. Tax-exempt organizations may buy items tax-free only when the organization itself is the purchaser and the items are used directly and exclusively in its exempt purpose. Here, the nonprofit was not the purchaser or consumer of the repair parts and materials — the security services contractor was. The nonprofit's exemption applies to the taxable security service it buys from the contractor (which it can purchase tax-free with a properly completed exemption certificate), not to the contractor's own supplies, materials, and equipment used to deliver that service. The security contractor therefore owes tax on the parts and materials it uses to maintain its vehicles.

What This Means For You

If you are a service contractor working for a tax-exempt organization: Your customer's exemption does not automatically extend to the supplies, parts, materials, or equipment you use to perform the service. You are the purchaser and consumer of those items, so you generally owe sales tax on them — you cannot use a resale certificate just because the end customer is tax-exempt.

If you are a tax-exempt organization buying a service: You can issue a properly completed exemption certificate to buy the taxable service itself (like security services) tax-free, since you are the actual purchaser of the service. But this does not exempt the vendor's own purchases of the materials and equipment it uses to provide that service to you.

If you are unsure whether an exemption "passes through" to a subcontractor or vendor: Ask who is the actual purchaser and consumer of the specific item in question. Exemption follows the purchaser of that item, not the ultimate beneficiary of the underlying activity.

Q&A

Q: Can a security contractor buy repair parts for its patrol vehicles tax-free because the vehicles serve a 501(c)(3) exempt organization?
A: No. The contractor, not the exempt organization, is the purchaser and consumer of the parts and materials, so the contractor owes tax on them regardless of who benefits from the vehicles' use.

Q: Can the tax-exempt organization avoid paying tax on the security services it buys?
A: Yes, but only on the service itself — the organization may issue a properly completed exemption certificate in lieu of tax on the security service it purchases from the contractor.

Q: Does it matter that the vehicles were used exclusively for the exempt organization's benefit and never left its property except for repairs and gas?
A: No. Exclusive use in furtherance of the exempt organization's purpose does not change who the actual purchaser of the repair parts is. The exemption is tied to the purchaser's identity for that specific transaction, not to how the underlying property is ultimately used.

Original ruling text

January 18, 1994

Dear **:

This is in response to your letter dated January 5, 1994, regarding
sales tax as it applies to the following circumstances.

FACTS: **, a nonprofit tax-exempt 501 (c)(3) organization has
contracted with a security services firm to patrol and secure the
approximately 214 acres of land ***** manages for 41-member
institutions (all of which are tax-exempt).

The security services contractor uses a number of vehicles in performing
the security services. The vehicles are-owned by the security services
contractor, however, they are used solely for the * contract.
The vehicles in question are clearly marked with large * logos.
They remain stationed on * property, providing security services
seven days per week, 24 hours per day. The security company has a
management office on site at the *. The vehicles do not leave
* campus except for repair work, gasoline and the like. In summary,
the vehicles are owned, operated and maintained by the security services
contractor exclusively for * and in furtherance of it's tax-exempt
functions.

QUESTION: Since these vehicles are used solely for tax-exempt services, can
the contractor claim exemption from sales tax on the materials used to
repair and maintain these vehicles by providing the vendors with resale
certificates?

RESPONSE: Organizations that have been granted exemption from paying
the limited sales and use tax may purchase tax-free items that are used
directly and exclusively in pursuit of the exempt purpose (as outlined in
the organization's articles of incorporation or by-laws) of the
organization. * is not the purchaser nor the consumer of the parts
and materials used to maintain the vehicles. * is purchasing a
taxable security service for which itmay issue a properly completed exemption
certificate in lieu of tax on that service.

The security service owes tax on supplies, materials and equipment it uses
to provide security services to ****.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have any questions or need
more information, please write or call me toll free at 1-800-531-5441,
extension 50330, or 512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9401001L.3 and/or 9402002L