When a city owns an airport but a private airline finances/contracts the construction, is that construction exempt from Texas sales tax -- and does it matter whether the space is public or restricted?

Plain-English summary

A private entity requested a ruling on four construction contracts at a city-owned airport: an automated people mover linking two terminals, bus stations at those terminals, a terminal relocation project, and a baggage sorting/handling expansion. The private entity would contract for and pay for the improvements, but the City would take title to the completed improvements (per a Special Facilities Lease Agreement) and lease them back to the private entity — with title vesting automatically in the City upon construction, acquisition, or installation.

The Comptroller ruled the improvements are exempt to the extent they involve construction, repair, or remodeling of facilities open and accessible to the public. The people mover, bus stations, terminal relocation, and baggage handling system are all integral to airport operations and designed to be used daily by the public in connection with air travel — so the City, the airport, and the public directly benefit, qualifying them for the Sec. 151.311 exemption for improvements to realty of an exempt entity used by the public. This holds even though the private entity is the one contracting and paying, because ownership vests in the City and the space serves the public.

But the Comptroller reiterated a prior denial for non-public areas of a passenger terminal — secured areas, maintenance, control, and cargo facilities that aren't open to the public. Construction there is not automatically exempt just because the land and eventual improvements belong to the City. To get the exemption for those areas, one of two paths must be followed:

1. The City itself contracts and pays for the construction (then leases the completed facility to the private entity, or has the private entity manage the leasing); or
2. The private entity donates the materials, equipment, and consumables to the City under a specific procedure in Rule 3.291(f) (development work) and Tex. Tax Code Sec. 151.155(e): the contract between the contractor and private party must be a separated contract; title to the materials must pass to the private party at delivery, before incorporation into the realty or use; and the contract must show the private party's intent to donate the property to the government before incorporation, backed by the government's own letter of intent to accept it.

This donation procedure applies to all tangible personal property — materials, equipment, and consumables — whether or not it ends up incorporated into the realty, and covers both public and non-public airport areas.

Separately, the letter notes that engineering, design, and consulting charges that fall within the practice of engineering or architecture are not taxable regardless of whether the work is donated or serves a public-access area.

What this means for you

Airport authorities, cities, and private airport tenants

Construction on airport land the City owns qualifies for the Sec. 151.311 public-use exemption automatically when the space is genuinely open to the public and used for airport operations, even if a private tenant is the one contracting and financing it. But restricted, non-public space doesn't get a free pass just because the City eventually owns it — you need either direct City contracting or a carefully structured donation arrangement meeting Rule 3.291(f)'s specific paperwork requirements (separated contract, pre-incorporation title transfer, documented donative intent, government acceptance letter).

Contractors on airport projects

If you're building non-public airport facilities for a private party that plans to donate the work to a government entity, make sure the contract is a separated contract, that title to materials passes to the private party before incorporation, and that you have a signed letter of intent from the governmental entity to accept the donation -- missing any of these elements can make the whole job taxable.

Engineers, architects, and design consultants

Your separately stated engineering/design/consulting charges on airport projects are not taxable regardless of the public-access or donation analysis that governs the rest of the construction contract.

Common questions

Q: Does City ownership of an airport automatically make all construction on it tax-exempt?
A: No, per this letter -- public-access areas qualify under Sec. 151.311, but non-public/restricted areas need either direct City contracting or a compliant donation arrangement under Rule 3.291(f).

Q: What has to be in the contract for a private-party donation to a government entity to qualify?
A: Per this letter (Rule 3.291(f)): a separated contract, title to materials passing to the private party before incorporation into realty, and a documented pre-incorporation intent to donate, backed by the government's own letter of intent to accept.

Q: Are engineering and design fees taxable on these projects?
A: No, per this letter — separately stated engineering, design, and consulting charges within the practice of engineering/architecture are not taxable, regardless of public-access or donation status.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.309 (governmental exemption, referenced as the airport authority's exempt status)
• Tex. Tax Code § 151.311 (exemption for improvements to realty of an exempt entity, used by the public)
• Tex. Tax Code § 151.155(e) (development work — property donated to and accepted by a governmental entity)
• 34 Tex. Admin. Code Rule 3.291(f) (Contractors — development-work donation requirements: separated contract, pre-incorporation title transfer, donative intent, government acceptance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9806570L

Original ruling text

June 9, 1998

Dear Ms. **:

This is to restate my April 1, 1998, response to your request for a ruling on
behalf of **. Your request involves four contracts for
improvements at the **. The Airport is owned by the
**. The restatement clarifies my response on page three regarding
taxable items that may be donated to an exempt entity.

The contracts ("Contracts") that are the subject of your ruling request provide
generally for the following construction of improvements to realty at the
Airport ("Improvements"):

1. An aboveground dual-lane automated people mover system ("APM") that, in its
   initial phase ("Phase I"), will link Airport Terminals B and C.

2. Bus stations at Terminals B and C ("Bus Stations") that will be used to load
   and unload passengers bussed between those terminals.

3. ** Terminal A Relocation ("Terminal A Relocation").

4. Baggage sorting and handling system and bag room expansion at Terminal C
   ("Baggage System").

** asserts that the improvements made for the City at the Airport
under the four contracts are:

(i) Improvements to realty;

(ii) For an organization exempt under TEX. TAX CODE ANN. 151.309 (Vernon Supp.
1997), and

(iii) For the primary use and benefit of the public.

Additionally, section 5.04 (a) of the Special Facilities Lease Agreement
between the City and ** : Title to Project. Plans and Contracts,
provides in part:

In consideration of the City's issuance of Bonds to finance the Costs of the
Project as provided herein, the City will acquire title to the Project at the
time of construction, acquisition or installation and from time to time during
construction, subject to the terms and provisions of this Agreement and the
leasehold estate of Lessee herein created and the rights of the Leasehold
Mortgagee, and such title will automatically vest in the City immediately upon
such construction, acquisition or installation without further notice or
action.

As such, ** is requesting that specified taxable items purchased
for use in the performance of these contracts should be exempt from Texas sales
and use taxes. You cite Tax Code Ann. 151.311 which exempts certain taxable
items incorporated into or used for the improvement of realty of an exempt
entity.

Response: According to information that you provided, ** will
contract and pay for the Improvements and all Improvements will be owned by the
City and leased back to **, with the exception of the Terminal A
Improvements which the City will lease to ** or **. The
Improvements will provide more efficient systems to handle the movement of
passengers and baggage at the Airport and will renovate, upgrade, or expand
Terminals A, B, and Terminal C.

We agree that the improvements under the APM, Bus Station, Terminal A
Relocation and the baggage handling system (i.e. the baggage carousel)
contracts are integral to the operation of the airport and all or part of the
improvements are designed to be used daily by the public at large in connection
with air travel. We believe from the facts presented by ** that
the Airport, the City, and the public will directly benefit by the presence
and operation of these improvements. Therefore, to the extent that these
contracts involve construction, repair, or remodeling of facilities open and
accessible to the public, they will qualify for exemption under Tax Code
151.311.

As we discussed, our office has previously denied an exemption from sales tax
for areas of a passenger terminal such as secured areas, maintenance, control
and cargo facilities which are not open to the public. We explained that we
would allow exemption for the construction of these areas under either of the
following two scenarios:

1. The City contracts and pays for the construction of the facilities and
   infrastructure. The City could then lease the facilities to the private entity
   or have the private entity manage the leasing of the facilities.

2. The private entity donates the materials, equipment, and consumables to the
   City. Materials and equipment incorporated into realty being improved (i.e.,
   the facilities and infrastructure) must be donated to and accepted by the City
   prior to incorporation. The agreement between the private entity and the City
   must meet the following requirements set out in subsection (f) of Rule 3.291-
   Contractors:

Development work. For the purposes of this subsection, development work means
improving real property for a private party that will ultimately be dedicated
to and accepted by a governmental entity. Sales tax is due on all tangible
personal property used to improve real property belonging to a private party
that has been dedicated to and will be accepted by a governmental entity
unless:

(1) the contract between the contractor and the private party is a separated
contract. See subsection (b) of this rule for a discussion of lump-sum and
separated contracts;

(2) the contract provides that title to the materials used to perform the
contract passes to the private party at the time the materials are delivered to
the jobsite and before they are incorporated into the realty or used by either
the contractor or the private party; and

(3) the contract provides that the private party intends to donate the property
to the governmental entity before it is incorporated into the realty or used by
the contractor. The private party must provide the contractor with a letter of
intent or other document from the governmental entity stating its intent to
accept the property.

This procedure applies to all tangible personal property, including machinery,
equipment, and consumable supplies (whether or not it is incorporated into the
realty), so long as the three conditions outlined above under the heading
"development work" are met. See Tex. Tax Code 151.155(e). The exemption for
tangible personal property donated to and accepted by an exempt entity applies
to property used in both public and nonpublic areas of the airport.

Please note that separately stated charges for engineering, design and
consulting that fall within the definition of the practice of engineering or
architecture are not taxable without regard to whether they are donated to and
exempt entity or are for an area that is open and accessible to the public.

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. My e-mail address is:
[email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division