Can a non-profit water supply corporation use a sales tax exemption certificate on purchases for a project funded by the Texas Water Development Board's Economically Distressed Areas Program (EDAP)?

Subject

Water Supply Corporation — Defined As Political Subdivision By Water Code Section 15.001

Plain-English summary

A representative raised concerns that non-profit water supply corporations were being required to pay sales tax on purchases connected to projects funded through the Texas Water Development Board's Economically Distressed Areas Program (EDAP), which provides grants and loans for water and sewer service projects in distressed areas. Paying sales tax on materials and taxable items increased the cost of these projects.

The Comptroller's office explained that, as a general rule, receiving state or federal funding does not by itself make an entity exempt from sales tax -- the source of funding doesn't confer special tax status. However, Water Code Sec. 17.921(a) makes a special provision specifically for EDAP: it defines non-profit water supply corporations as "political subdivisions" for purposes of that program. Because of this specific statute, the Comptroller concluded that for the limited purpose of EDAP projects, water supply corporations should be treated as exempt from sales tax as political subdivisions and may issue exemption certificates for taxable items purchased in connection with those projects.

The exemption is narrow: it applies only to EDAP-funded purchases, so water supply corporations must keep records clearly showing which taxable items were bought with EDAP funds. For new construction, the letter suggests separating the price of materials and taxable services from other non-taxable charges in the construction contract so that exemption certificates can be given to contractors. The letter also confirms that if sales tax was already paid on an EDAP project purchase, the corporation can get a refund from the seller, who can then offset that refund against the "amount subject to tax" on the seller's next sales tax return.

What this means for you

Non-profit water supply corporations

If your organization is doing a project funded by the Texas Water Development Board's EDAP, you can treat yourself as a political subdivision for that project and provide exemption certificates to sellers/contractors for taxable materials and services -- but only for items purchased with EDAP funds, and only if you keep records tying those purchases to the EDAP project.

Contractors and sellers working on EDAP projects

Because the exemption is limited to EDAP-funded items, it helps to have the construction contract separate taxable materials/services from non-taxable charges, so exemption certificates can be issued cleanly for the EDAP-funded portion.

Water supply corporations that already paid tax on an EDAP purchase

You are not out of luck -- the letter confirms a refund is available. The refund must be requested from the seller of the taxable item, and the seller then offsets the refunded amount against the "amount subject to tax" on its next sales tax return.

Common questions

Q: Does receiving state or federal grant money automatically make a water supply corporation sales-tax exempt?
A: No. Per this letter, the general rule is that the source of funding does not confer a special tax-exempt status.

Q: Why are EDAP-funded water supply corporations different?
A: Because Water Code Sec. 17.921(a) specifically defines non-profit water supply corporations as "political subdivisions" for purposes of EDAP, giving them political-subdivision tax treatment for that limited purpose only.

Q: Can a water supply corporation get a refund if it already paid sales tax on an EDAP purchase?
A: Yes -- per this letter, the corporation requests the refund from the seller, and the seller offsets the refund against the "amount subject to tax" on its next sales tax return.

Citations and references

Statutes:

• Tex. Water Code § 17.921(a) (defines non-profit water supply corporations as "political subdivisions" for EDAP purposes)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1409E06

Original ruling text

May 15, 1996

Dear **:

Thank you and the representatives for the ** for meeting with me
and Mr. Sharp concerning the Economically Distressed Areas Program (EDAP).
You were particularly concerned that the non-profit water supply corporations
were being required to pay sales tax in connection with these projects.

You explained that the Texas Water Development Board provides financial
assistance to political subdivisions, including non-profit water supply
corporations, for the purpose of financing water and sewer service
projects for distressed areas. The Board provides funds to water supply
corporations in the form of grants and loans and you point out that if sales
tax is imposed on the purchase of materials and other taxable items in
connection with these projects, the cost of the projects would be considerably
increased.

It is the general law regarding taxes that the source of funding does not
confer a special status. Therefore, the fact that a non-profit water supply
corporation receives state and federal money does not of itself make the
corporation exempt for sales tax purposes. However, as regards the EDAP,
Sec. 17.921(a), Water Code made a special provision regarding these
corporations. Non-profit water supply corporations for purposes of the
EDAP are defined as "political subdivisions."

After a careful review of the statutes, Mr. Sharp has concluded that for the
very limited purpose of EDAP, water supply corporations should be considered
exempt from the sales tax as political subdivisions. As such, they may
provide sales tax exemption certificates for the purchases of taxable items
in connection with these projects.

Because this exemption is limited to EDAP, it is necessary that the water
supply corporations involved in these type projects keep records which
clearly show which taxable items were purchased with EDAP funds, as only
those items can be purchased under an exemption certificate. Also, I suggest
that if the project involves new construction, which it may well, that the
construction contract separate the price for materials and taxable services
from all other non-taxable charges so that exemption certificates may be
provided to the contractors.

You also asked if an existing project could obtain a refund on any sales paid
in connection with an EDAP project funded by the Water Development Board.
The answer is "yes," but the refund must be obtained from the seller of the
taxable item which may then offset its "amount subject to tax" on its next
sales tax return to reflect the refund.

I hope this satisfactorily answers your concerns. Should you have any further
questions, please feel free to write me at 111 E. 17th Street, Austin, Texas
78774, or call me at 463-4004.

Sincerely,

Wade Anderson
Director, Tax Policy