If a 501(c)(3) nonprofit is the general partner (not the sole owner) of a limited partnership that hires a contractor to build affordable housing, how much of the construction materials can be bought tax-free?

Plain-English summary

A general contractor building an affordable housing project asked a structuring question that comes up often with nonprofit-sponsored development: the project's owner is a limited partnership, and the partnership's sole general partner is a 501(c)(3) nonprofit organized to provide affordable housing (which has applied for its own Texas exemption). Does the contractor owe sales tax on materials and taxable services for the project?

The Comptroller's approach: look through the partnership to the partners, rather than treating the limited partnership itself as either fully exempt or fully taxable. If the general partner genuinely has 501(c)(3) exempt status under Tax Code Section 151.310 with a stated purpose of providing affordable housing, that exempt status supports a proportional exemption tied to the general partner's ownership percentage in the partnership:

• The partnership may issue the contractor an exemption certificate covering the same percentage of incorporated materials and consumable supplies that the exempt general partner owns in the partnership.
• The contractor, in turn, may pass that same percentage-based exemption on to its own suppliers.
• Sales tax remains due on the remaining percentage -- i.e., the share attributable to the limited (non-exempt) partners.

The Comptroller pointed the contractor to Tax Code Section 151.311 (exempt-organization construction contracts) for the underlying framework.

What this means for you

General contractors building for nonprofit-affiliated partnerships

Don't assume a project is either fully exempt or fully taxable just because a 501(c)(3) is involved. If your exempt customer is a partner (rather than sole owner) in the entity that hired you, you need to know the exempt partner's ownership percentage to determine what fraction of materials can be purchased tax-free -- and you'll need documentation (an exemption certificate reflecting that percentage) from the partnership.

Nonprofits structuring affordable housing as a general-partner-of-an-LP arrangement

Your organization's exempt status doesn't automatically extend 100% to the partnership's purchases if you don't own 100% of it. Confirm your ownership percentage is clearly documented so the contractor can properly apportion the exemption.

Accountants and tax professionals

A concrete look-through methodology for exempt-nonprofit-as-partner structures: exemption percentage tracks ownership percentage, flowing from the partnership's exemption certificate to the contractor to the contractor's suppliers, with tax due proportionally on the balance.

Common questions

Q: Is a construction project fully tax-exempt if the developer's general partner is a 501(c)(3) nonprofit?
A: No, only proportionally -- tax-free treatment applies only to the percentage of materials/supplies matching the exempt general partner's ownership share in the partnership.

Q: How does the contractor document the exempt percentage?
A: The limited partnership issues the contractor an exemption certificate for that percentage, which the contractor can pass on to its suppliers for the same percentage.

Q: What happens to the rest of the materials and supplies?
A: Sales tax is due on the remaining percentage, attributable to the partnership's non-exempt (limited) partners.

Q: Can I rely on this letter for my own project?
A: No. It is based on the specific facts presented and can only be relied on by the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.310 (exemption for religious, charitable, educational organizations)
• Texas Tax Code Section 151.311 (exempt organization construction contracts)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9906539L

Original ruling text

June 23, 1999

Dear Mr. **:

Thank you for your recent letter which is restated in part with response below.

"We are a general contractor with a contract to build an affordable housing
project for a limited partnership. The sole general partner of this
partnership is a 501(c)(3) corporation with the purpose of providing affordable
housing. The general partner has applied for an exemption from sales tax.

As general contractor, do we have to pay sales tax for materials and taxable
services for this project?"

Response: We will not attempt to treat the partnership differently than we
would the individual partners. You state that the general partner has exempt
status under 510(c)(3) of the Internal Revenue Code with a stated purpose of
providing affordable housing. Such an entity would be exempt under Tax Code
Section 151.310. Accordingly, the limited partnership may issue your firm an
exemption certificate for the same percentage cost of incorporated materials
and consumable supplies that the general partner owns in the limited
partnership. Your firm may in turn issue an exemption to its suppliers of
incorporated materials and consumable supplies for that same percentage. Sales
tax is due on the remaining percentage of incorporated materials and consumable
supplies.

I am enclosing the text of Tax Code 151.311 for your reference.

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