A building manager remodels office space (moving/removing walls, adding doors/locks, electrical work, carpet/paint) for a taxable tenant that subleases the space to a Texas state agency (TDH). Who pays sales tax on the remodeling — the building manager, the taxable tenant, or the exempt state agency — and does it matter that the state agency requested the work and is the primary beneficiary?

Plain-English summary

A manager of a privately owned office building leases space to Tenant #1 (a taxable entity), which in turn subleases space to the Texas Department of Health (TDH), a state agency, under a two-year contract. Tenant #1 asked the building manager to remodel the TDH-subleased space — moving/removing/relocating walls, adding doors, frames, and locks, adding lights and electrical circuits, patching carpet, and painting — with the improvements expected to outlast both the sublease and the master lease term. The building manager asked whether it should charge TDH sales tax on this remodel, and also asked about smaller miscellaneous jobs performed directly at TDH's request (extra outlets, a door lock, painting, carpet shampooing).

The charge for remodeling nonresidential realty is generally taxable — but the letter walks through who actually bears the tax based on the billing chain and who is the "ultimate consumer":

• The building manager may issue the general contractor a resale certificate for the remodeling work, since the manager will in turn bill either Tenant #1 or TDH.
• If billing Tenant #1, the manager may accept a resale certificate from Tenant #1, since Tenant #1 will pass the charge on to TDH.
• If billing TDH directly, the manager may accept an exemption certificate from TDH, or a TDH/State of Texas purchase voucher, as sufficient proof of exemption — because TDH, as a Texas state agency, is exempt on its purchases of taxable items, and here TDH is treated as the ultimate consumer since it requested the work and will be the primary beneficiary of the remodeling (the improvements are for TDH's benefit, even though a private tenant is nominally in the middle of the lease chain).
• For smaller, miscellaneous repair/remodel jobs performed directly for TDH, payment via a TDH or State of Texas voucher is sufficient proof of exempt status (per Rule 3.322(f)(3)).

What this means for you

Building managers and general contractors doing tenant improvement work

When remodeling work flows through a private tenant to an exempt government sub-lessee, the exemption follows the ultimate consumer/primary beneficiary — not necessarily whoever signs the lease. Use resale certificates up the billing chain and accept the government exemption certificate or voucher at whichever point you actually bill the exempt agency.

Businesses that sublease to government agencies

If your government sub-tenant requested and will primarily benefit from improvements, you may be able to pass the remodel charge through tax-free using a resale certificate, ultimately relying on the agency's own exemption at the final billing point.

Accountants and tax professionals

This letter illustrates that Texas exempt-organization sales tax treatment tracks the ultimate consumer/primary beneficiary of an improvement, even through a multi-party lease/sublease chain — not simply whichever entity is named on the underlying real estate contract.

Common questions

Q: Do I have to charge sales tax on a remodel job when a private tenant subleases to an exempt government agency that requested the work?
A: If the government agency is the ultimate consumer and primary beneficiary of the remodeling, you can accept its exemption certificate or a state purchase voucher at the point you bill it directly, or pass the work through with resale certificates up the billing chain.

Q: What about smaller miscellaneous jobs (an outlet, a lock, painting) done directly for the government agency?
A: A State of Texas voucher used as payment is sufficient proof of the exempt status of those jobs.

Q: Can I rely on this letter for my own lease/sublease arrangement?
A: No — a Texas letter ruling can be the basis of a detrimental reliance claim only for the taxpayer it was issued to, and this determination is fact-specific to who requested the work and who primarily benefits.

Citations and references

• 34 Tex. Admin. Code Rule 3.322(f)(3) (exempt organizations — proof of exempt status for repair/remodel jobs paid by government voucher)

Subject

Governmental Entities/Exempt Org — Leases Realty To Non — Exempt Lessor Who Makes Improvements To Realty Prior To Occupancy — Two Prong Test To Determine Primary Use And Benefit

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9711338L

Original ruling text

November 13, 1997

Dear Ms. ****:

This is in response to your request for a ruling on whether or not a state
agency is liable for paying sales tax on a remodeling job. You manage a
privately owned office building that is currently leasing space to Tenant #1, a
taxable entity, who in turn subleases office space to the Texas Department of
Health (TDH) on a two-year contract.

Tenant #1 has requested that space that it subleases to TDH be remodeled. You
will enter into a remodel contract with a general contractor and bill Tenant #1
for the work. The work will involve moving walls, removing walls, relocating
walls, adding doors and frames and door locks, adding lights, adding additional
electrical circuits, patching the carpet, and painting.

You are asking if you should invoice TDH for the remodel tax on this work? The
life of these improvements will exceed the contract term of either Tenant #1 or
TDH. You are also asking if you should invoice TDH for sales tax when you
perform miscellaneous improvements at their request (i.e., add a couple of
electrical outlets, or add a door lock, or paint a wall, or shampoo their
carpet, etc.?

Response: The charge for remodeling nonresidential realty is taxable. You may
issue the general contractor a resale certificate for the remodeling work,
because you will be billing Tenant #1 or TDH for the work. If you bill Tenant #
1 for the remodel work, you may accept a resale certificate from Tenant #1,
because it will in turn charge TDH for the work. TDH as a Texas state agency is
exempt on its purchase of taxable items. If you bill TDH, you may accept an
exemption certificate from TDH, or a purchase voucher issued by TDH, as
sufficient proof of TDH's exempt. In this situation, TDH is considered the
ultimate consumer because it requested the work and will be the primary
beneficiary of the remodeling.

When you perform miscellaneous small repair or remodel jobs for TDH, payment by
a TDH or State of Texas voucher will be sufficient proof of the exempt status
of the job. See subsection (f)(3) of the enclosed Rule 3.322, concerning exempt
organizations.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division

cc: Mr. Ben Sherman, Texas Department of Health