Can subsidiaries of financial institutions owned by the FDIC or RTC buy taxable items tax-free using an exemption certificate?

Plain-English summary

A taxpayer asked the Comptroller's office whether subsidiaries of financial institutions owned by the RTC (Resolution Trust Corporation, the federal agency that took over failed savings institutions) could purchase taxable items tax-free using an exemption certificate. The Comptroller concluded they could.

Under Comptroller Rule 3.287, the RTC may purchase taxable items tax-free for use in operating the subsidiary businesses it owns. For 100%-owned subsidiaries, the Comptroller reasoned that the RTC effectively owns those businesses and can dispose of them as it sees fit — a position the letter notes has been upheld in two other states.

The letter also points to Tax Code Sec. 151.309, which exempts from sales and use tax a taxable item sold, leased, or rented to, or stored, used, or consumed by a corporation that is an agency or instrumentality of the United States and is wholly owned by the United States, or by another corporation wholly owned by the United States. The Comptroller read this language as also covering the wholly-owned subsidiary's purchases. In accordance with Rule 3.287, the exemption certificate used for these purchases must state that the purchases are being made by the RTC.

What this means for you

Financial institutions and their RTC/FDIC-owned subsidiaries

If a subsidiary of a failed financial institution is 100% owned by the RTC (or a similar federal receiver/conservator agency), it may be able to purchase taxable items tax-free by presenting an exemption certificate — provided the certificate states that the purchase is being made by the RTC, per Comptroller Rule 3.287.

Accountants and tax professionals

This letter illustrates two independent bases the Comptroller relied on for the exemption: (1) Comptroller Rule 3.287's treatment of RTC-owned subsidiaries as purchasing on behalf of the RTC, and (2) the governmental-entity exemption in Tax Code Sec. 151.309 for corporations that are wholly owned, directly or indirectly, by the United States. Both routes support tax-free purchases by these subsidiaries, provided the exemption certificate correctly identifies the RTC as the purchaser.

Common questions

Q: Can a subsidiary owned by the RTC purchase taxable items tax-free?
A: Yes, if the subsidiary is 100% owned by the RTC, it may purchase taxable items under an exemption certificate for use in operating the subsidiary business, per Comptroller Rule 3.287.

Q: What must the exemption certificate say?
A: In accordance with Comptroller Rule 3.287, the exemption certificate must state that the purchases are being made by the RTC.

Q: Is there a statutory basis for this exemption besides the Comptroller's rule?
A: Yes. Tax Code Sec. 151.309 exempts taxable items sold, leased, rented to, or stored, used, or consumed by a corporation that is an agency or instrumentality of the United States and is wholly owned by the United States or by another wholly-owned federal corporation; the Comptroller read this as also covering the subsidiary's purchases.

Citations and references

• Tex. Tax Code § 151.309 — exemption for governmental entities, including a corporation that is an agency or instrumentality of the United States and is wholly owned by the United States or by another wholly-owned federal corporation.
• 34 Tex. Admin. Code § 3.287 (Comptroller Rule 3.287) — governs exemption certificates for purchases by the RTC and its wholly-owned subsidiaries.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9411L1321G08

Original ruling text

November 9,1994

Dear**:

I have reviewed your request of October 27,1994, and have concluded that the
subsidiaries may purchase taxable items under an exemption certificate. In
accordance with Comptroller Rule 3.287, the RTC may purchase the items tax free
for use in operating the subsidiary businesses which it owns. In the case of
100% owned subsidiaries, I believe the RTC would the position that it owns the
businesses and can dispose of them as it sees fit. This position has been
upheld in two other states.

Furthermore, Sec.151.309 provides in part as follows:

A taxable item sold, leased, or rented to, or stored, used, or consumed by any
of the following governmental entities is exempted from the taxes imposed by
this chapter:

(3) a corporation that is an agency or instrumentality of the United States is
wholly owned by the United States or by another corporation wholly owned by the
United States:

I believe the underlined language also allows the subsidiary to purchase
taxable items under an exemption certificate.

In accordance with Comptroller Rule 3.287, the exemption certificate must state
that the purchases are being made by the RTC.

I hope this satisfactorily resolves your problem. Should you have any further
questions, regarding this matter, please contact me.

Sincerely,

Wade Anderson
Assistant for Tax Administration

NOTE: Previous Accession Number 9411697L