When an exempt organization owns part of a joint venture that buys taxable items for a joint venture facility, how much of the purchase price can be bought tax-free with an exemption certificate?

Subject

Joint Venture — Exempt Organization With For — Profit Entity — Exemption Certificate May Be Issued For Percentage Of Purchases Equal To The Percentage Of The Exempt Organizations Ownership Interest

Plain-English summary

This letter answers three questions about a joint venture that includes one or more tax-exempt organizations, where the joint venture owns a "Joint Venture Facility" and buys taxable items for use there.

• Question 1: Can the Joint Venture itself issue an exemption certificate? Yes -- but only for the portion of the purchase price equal to the percentage ownership interest of the exempt organization(s) in the joint venture that owns the facility where the item will be used and consumed. In other words, the exemption is capped at the exempt owner's proportional share; the rest of the purchase remains taxable.
• Question 2: Can the Exempt Organization buy on the joint venture's behalf and issue the exemption certificate itself? Yes, same rule -- the exemption certificate can only cover that same percentage, matching the exempt organization's ownership interest in the joint venture.
• Question 3: Can "Taxpayer" (a non-exempt party) buy on the joint venture's behalf and issue an exemption certificate? No. The letter is direct that Taxpayer is not an exempt entity, so it cannot claim any exemption at all on these purchases. However, if Taxpayer holds a Texas sales tax permit, it may buy the taxable items tax-free for resale to the Joint Venture, and then accept an exemption certificate from the Joint Venture in lieu of collecting tax from it (again subject to the same ownership-percentage cap). If Taxpayer does not have a permit or does not use the resale route, it owes sales tax on its own purchases of the taxable items.

The Comptroller notes this opinion is based on the facts presented, and could change if there are additional or different facts.

What this means for you

Exempt organizations that co-own a joint venture with a for-profit partner

If your organization owns, say, 40% of a joint venture that operates a facility, you (or the joint venture) can only claim a sales tax exemption on 40% of the price of a taxable item bought for use at that facility -- not the whole purchase. The other 60% is taxable, reflecting the for-profit owner's share.

For-profit partners and other non-exempt purchasers

A non-exempt entity buying on behalf of the joint venture cannot issue an exemption certificate on its own account. Its options are to pay tax on its own purchases, or -- if it holds a sales tax permit -- buy the item tax-free for resale and then accept an exemption certificate from the Joint Venture covering the exempt owner's percentage share, remitting tax on the balance.

Accountants and tax professionals

Track ownership percentages carefully: the exemption certificate, however issued (by the Joint Venture or by the Exempt Organization on its behalf), can never exceed the exempt organization's percentage interest in the joint venture that owns the facility where the item is used. Watch for the resale-certificate mechanism as the only path for a non-exempt purchaser to avoid paying tax itself.

Common questions

Q: If a joint venture is 100% owned by an exempt organization, does that change the answer?
A: The letter addresses percentage ownership generally; the exemption certificate covers "that percentage of the purchase price... equal to the percentage ownership interest of Exempt Organization(s)," so a wholly-owned exempt joint venture would be exempt on the corresponding percentage of the purchase.

Q: Can the Exempt Organization issue the exemption certificate itself, or must the Joint Venture do it?
A: Either can, per this letter -- the Joint Venture can issue the certificate on its own purchases (Question 1), or the Exempt Organization can issue the certificate when it purchases on the Joint Venture's behalf (Question 2). The percentage cap is the same either way.

Q: Can a non-exempt partner (Taxpayer) claim any exemption on purchases for the joint venture?
A: No. The letter states Taxpayer is not an exempt entity. Taxpayer may instead buy tax-free for resale (if it holds a sales tax permit) and accept an exemption certificate from the Joint Venture in lieu of tax; otherwise Taxpayer owes tax on its purchases.

Q: Could this answer change under different facts?
A: Yes -- the letter states the opinion is rendered based on the facts presented, and the opinion may change if there are additional or different facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9607L1428A06

Original ruling text

July 24, 1996

Dear ***:

Thank you for your recent letter. Your facts are
included by reference. Your questions are restated with responses below.

(1) If the Joint Venture purchases a Taxable Item for
use at a Joint Venture Facility, may the Joint Venture issue an exemption
certificate and claim an exemption from Texas sales and use tax with respect to
that percentage of the purchase price of the Taxable Item equal to the
percentage ownership interest of Exempt Organization(s) in the Joint Venture
that owns the Joint Venture Facility at which the Taxable Item will be used and
consumed?

Response: Yes

(2) If the Exempt Organization Purchases a Taxable Item
on behalf of a Joint Venture for use at a Joint Venture Facility, may the
Exempt Organization issue an exemption certificate and claim an exemption from
Texas sales and use tax with respect to that percentage of the purchase price
of the Taxable Item equal to the percentage ownership interest of Exempt
Organization(s) in the Joint Venture that owns the Joint Venture Facility at
which the Taxable Item will be used and consumed?

Response: Yes

(3) If Taxpayer purchases a Taxable Item on behalf of a
Joint Venture for use at a Joint
Venture Facility, may Taxpayer issue an exemption
certificate and claim an exemption from Texas sales and use tax with respect to
that percentage of the purchase price of the Taxable Item equal to the
percentage ownership interest of Exempt Organization(s) in the Joint Venture
that owns the Joint Venture Facility at which the Taxable Item will be used and
consumed?

Response: No, Taxpayer is not an exempt entity. If
Taxpayer has a sales tax permit, it may buy taxable items tax-free for resale
to Joint Venture and accept an exemption certificate from Joint Venture in lieu
of tax. Otherwise, Taxpayer owes sales tax on its purchases of taxable items.

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

You may call me toll free at 1-800-531-5441, ext.
3-4680. The direct line is 512/463-4680. You may also write to Tax Policy,
Comptroller of Public Accounts. My Internet address is
[email protected].

Sincerely,

Al Van Allen
Tax Policy Division

NOTE: Previous Accession Number 9607497L