When a single lump-sum construction contract covers both a tax-exempt city-owned building and a private, taxable hotel, how does a Texas contractor split the sales tax exemption?

Plain-English summary

Two owners planned contiguous developments in a Texas city: a hotel (owned by a private company) with an adjoining conference center and exhibit hall (both to be owned by the city). All of it was to be built under a single lump-sum contract ($15,575,000), but with a separate schedule of values breaking out the cost of the hotel ($7,082,000), the conference center ($4,863,000), and the exhibit hall ($3,630,000), each including its own landscaping allowance.

The Comptroller held that the tax treatment follows the ownership of each piece, not the fact that it's one contract: the contractor owes sales tax on all purchases or rentals of tangible property and taxable services related to the privately-owned hotel. But because the conference center and exhibit hall will be owned by the city — a tax-exempt entity — the contractor may buy the incorporated materials, certain services, and consumable supplies for those two structures tax-free under Tax Code § 151.311, by giving suppliers an exemption certificate. The contractor's records need to clearly show which materials or services were purchased tax-free for the exempt portion.

What this means for you

Contractors building for a mix of exempt and non-exempt owners under one contract

A single lump-sum contract doesn't force you to tax everything or exempt everything — if the contract has a schedule of values that separately identifies the exempt entity's portion (here, the city-owned buildings) from the taxable portion (the private hotel), you can issue exemption certificates for materials, services, and consumables that go into the exempt portion, while still paying tax on everything for the taxable portion.

Accountants and tax professionals

Keep the schedule of values and the resulting exemption certificates well-documented — the ruling stresses that "the contractor's records should clearly reflect the use of any materials or services purchased tax free," since a mixed-ownership project is exactly the kind of arrangement an audit would scrutinize.

Common questions

Q: Does building for a government entity automatically make a whole mixed-use contract tax-exempt?
A: No. Only the portion actually owned by the exempt entity qualifies; the portion owned by a private party remains fully taxable, even under one lump-sum contract.

Q: What lets the contractor buy materials tax-free for the exempt portion?
A: Tax Code § 151.311, by issuing suppliers an exemption certificate for the qualified materials and services used on the exempt entity's building.

Q: Can another contractor rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Statutes:

• Tax Code § 151.311 (exemption for improvements to realty for exempt entities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710071L

Original ruling text

October 15, 1997

Dear***:

Thank you for your recent facsimile transaction which is restated in part and
supplemented with information from our telephone conversation of October 15,
1997 below.

Owners own contiguous tracts of land in the City of CITY A on which they intend
to construct a ABC Hotel with an adjoining Conference Center and an Exhibit
Hall. The City of CITY A will be the owner of the conference center and
exhibit hall and "SMITH" will be the owner of the hotel. The work shall be
performed under a single lump-sum contract ($15,575,000) with a separate
schedule of values for the hotel and landscaping allowance ($7,082,000),
conference center and landscaping allowance ($4,863,000), and exhibit hall and
landscaping allowance ($3,630,000).

Response: The contractor owes sales tax on all purchases or rentals of
tangible property and taxable services related to the hotel. The contractor
may buy tax free the incorporated materials, certain services, and consumable
supplies for completion of the conference center and exhibit hall to be owned
by the City of CITY A. Tax Code ¤151.311 deals specifically with such
purchases and is included as an addendum to this letter.

The contractor may give an exemption certificate to suppliers for qualified
materials and services purchases. The contractor's records should clearly
reflect the use of any materials or services purchased tax free.

This opinion is rendered 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. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division