A for-profit company contracts with a Texas public school district to operate and manage one of its elementary schools, buying computers, software, books, and supplies for the school. Are those purchases exempt from Texas sales/use tax?

Plain-English summary

A for-profit company was entering into a services agreement with a Texas public school district to provide education, operation, and management of one of the district's elementary schools. The district would provide the building, meals, and transportation; the company would pay teacher salaries (though the teachers stayed district employees), and would handle curriculum, personnel functions, maintenance and operation, business administration, extracurricular programs, professional development, and the acquisition and selection of instructional materials, equipment, and supplies. In exchange, the company would receive a per-student amount based on per-pupil expenditures, less costs of district-wide services like food and transportation.

The company asked whether computers, supplies, and other items it purchased for educational purposes under the agreement — whether used in students' homes or on-site at the school — would be exempt because they'd be "used" by the school district or by an IRC Section 501(c)(3) organization.

The Comptroller's answer: not automatically exempt. The company itself is a taxable entity providing a nontaxable service to the exempt school district, and it owes tax on all taxable goods and services it uses to perform that service — even if some of those items (like the computers) end up used only by students or district employees. Simply having the goods benefit the school isn't enough.

However, the letter lays out two ways the company can still buy tax-free:

1. Resale approach (Day and Zimmerman v. Calvert): The company gives a resale certificate for goods considered resold to the school district. The contract must provide that title to the property transfers to the district upon delivery to the school site (or upon transfer of title from the vendor to the company), the company must not use the property before title transfers, the goods must remain district property at the end of the contract, the contract must have a separate charge for the property, and — when feasible — the goods should be marked "property of the school district."
2. Direct-purchase-and-reimbursement approach: Instead of a separate resale contract, the exempt school district itself purchases the computers, supplies, etc., and the company reimburses the district — handled the same way as the food and transportation charges already contemplated by the agreement.

What this means for you

Companies that manage or operate public schools under contract

If you're a for-profit entity contracting with a school district to run a school, don't assume your purchases of supplies, computers, or equipment are automatically tax-exempt just because the district (or its students) is the ultimate user. You are the taxable purchaser unless you structure the transaction as a true resale to the district — with title passing to the district, a separate charge for the property, and no use of the property by you before title transfers — or have the district make the purchases directly and reimburse you.

School districts contracting with private management companies

If your district wants its private management partner to buy tax-free on your behalf, the contract language matters. Make sure it specifies that title to purchased equipment and supplies transfers to the district (not the company) and, where feasible, that the property is marked as belonging to the district.

Accountants and tax professionals

This letter applies the resale-certificate framework from Day and Zimmerman v. Calvert to a public-school management contract. The core distinction is whether the taxable contractor is buying goods for its own use in performing a nontaxable service (taxable) versus reselling those goods to the exempt entity with title passing through (potentially tax-free).

Common questions

Q: Is a private company that manages a public school automatically exempt from tax on the supplies and equipment it buys for the school?
A: No. The company is a taxable entity performing a nontaxable service, and it owes tax on the taxable goods and services it uses to perform that service, even if the district or its students ultimately use the items.

Q: Does it matter whether the computers are used at the school building versus in students' homes?
A: No — the letter gives the same answer (taxable, absent the resale or reimbursement structure) whether the computers are physically located in students' homes or on-site at the school and used by the "Partnership School."

Q: How can the company buy these items tax-free?
A: By complying with the resale approach from Day and Zimmerman v. Calvert: giving a resale certificate, having the contract provide that title transfers to the district upon delivery or vendor transfer, not using the property before title transfers, keeping the goods as district property at contract end, charging separately for the property, and marking goods "property of the school district" when feasible.

Q: Is there a simpler alternative to the resale-certificate structure?
A: Yes — the exempt school district can purchase the computers, supplies, etc. directly and be reimbursed by the company, handled the same way as the district's food and transportation charges.

Q: Does this ruling cover the supplies purchased under the agreement the same way it covers the computers?
A: Yes. The letter's answers to the questions about supplies used by the school simply refer back to the response given for the computers question.

Q: Can another school-management company rely on this letter for its own contract?
A: No. The opinion is based on the facts presented, and if there are additional or different facts, the opinion may change. It applies only to the taxpayer it was issued to.

Citations and references

No specific statutes or rule numbers were cited in this letter. (The letter references the case Day and Zimmerman v. Calvert as the basis for its resale-certificate guidance.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606287L

Original ruling text

June 4, 1996

Dear *****:

Thank you for your letter of May 14, 1996, concerning
the taxability of materials, textbooks, library books, software supplies,
computers, and other equipment used to implement curriculum in a public school.

Your client, a for profit entity, will enter into a
services agreement with a Texas public school district to provide education,
operation, and management of one of the District's elementary schools. The
district provides the building, food for school-provided student meals, and
transportation. Your client pays teacher salaries (although the teachers
remain District employees) and provides curriculum, program of instruction, all
personnel functions, maintenance and operation of the school facilities,
business administration of the schools, extra- and co-curricular activities and
programs, professional development for all principals and instructional
personnel, the acquisition and selection of instructional materials, equipment,
and supplies.

Your client will receive a per student amount based
upon the per-pupil expenditures that the district receives less the cost of any
district wide services provided by the district (e.g., food and
transportation).

Question 1. Are the computers which are purchased by
the taxpayer and which are provided for educational purposes pursuant to the
Agreement and are physically located in the Partnership School's students homes
considered to be for "use" in Texas by the Partnership School, an IRC Section
501(c)(3) organization and therefore, exempt?

Response. The taxpayer is providing a nontaxable
service for the exempt school district. The taxpayer owes tax on all taxable
goods and services used to perform these services. Although some computer's
usage may be limited to students and District employees, they are still
purchased by a taxable entity in the performance of a contract for nontaxable
services that will benefit the taxable entity.

In order to buy these items tax free, the client
company should comply with the requirements stipulated in Day and Zimmerman vs.
Calvert . If qualifying your client may give a resale certificate for goods
considered resold to the non taxable entity. In particular, your client's
contract with the school district should provide that title will transfer to
the district upon delivery to the school site or upon transfer of title from
vendors to the client company. The point is that the property not be used by
the taxable entity until title has transferred to the governmental entity. The
goods should remain the property of the District at the end of the contract,
the contract must contain a separate charge for the property and, when
feasible, the goods must be marked "property of the school district".

Another method to arrive at the same result, without
entering into a separated contract, would be to allow the exempt entity to
purchase the computers, supplies, etc. and allow for reimbursement by the
client company. These could be handled in the same manner as the food and
transportation charges.

Question 2. Are the computers which are purchased by
the taxpayer and which are provided for educational purposes pursuant to the
Agreement and are physically located in, and used by, the Partnership School
considered to be for "use" in Texas by the Partnership School, an IRC Section
501(c)(3) organization and therefore, exempt?

Response. See Response 1.

Question 3. Are the supplies purchased by the taxpayer
and which are provided for educational purposes pursuant to the Agreement and
are physically located in, and used by, the Partnership School considered to be
for "use" in Texas by the Partnership School, an IRC Section 501(c)(3)
organization and therefore, exempt?

Response. See response 1.

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

You may call me toll free at 1-800-531-5441, ext.
5-0613. The direct line is 512/475-0613. You may also write to Tax Policy
Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division