Working on a city airport construction contract, is EVERYTHING a contractor buys tax-exempt just because the customer is a government agency, including a rented crane?

Plain-English summary

A contractor doing airport construction work for a city asked a natural but overly broad question: since the customer (a government agency) is tax-exempt, are all the contractor's own material purchases also exempt — just by handing suppliers an exemption certificate? And is a rented crane used to lift materials on the project also tax-free?

The Comptroller confirmed the city itself is exempt on its own purchases under Tax Code § 151.309, but the contractor's exemption is much narrower, governed by § 151.311. That section exempts tangible personal property (excluding machinery, equipment, accessories, and repair/replacement parts) purchased for use in performing a contract to improve realty belonging to a § 151.309/151.310-exempt entity — but only if the property is necessary and essential to the contract and completely consumed at the job site (used up or destroyed after a single intended use). A contractor may issue suppliers an exemption certificate for items that get incorporated into the city's property, or that are completely consumed at the jobsite in performing the contract.

Three important limits the letter spells out:

1. Not everything consumed at the job site qualifies. Office supplies — paper, pencils, note pads, coffee cups, paper clips — are consumed at the site but aren't actually used in improving the real property, so they're not exempt.
2. Even OSHA-mandated items don't automatically qualify. Disposable paper cups used by construction workers to drink water are not exempt under § 151.311, even though OSHA regulations require them at the job site — a regulatory mandate doesn't create a tax exemption.
3. Rented or leased equipment is entirely excluded. Section 151.311 does not exempt rented or leased items at all, so renting a crane to lift materials on this project is taxable to the contractor. Repair items and replacement parts for machinery or equipment are likewise specifically excluded.

What this means for you

Contractors on government (city, county, state) construction projects

Don't assume your customer's tax-exempt status flows through to everything you buy for the job. The § 151.311 exemption is narrow: necessary, essential, and completely consumed materials only — not equipment, not equipment rentals, not repair parts, and not general job-site consumables like office supplies or drinking cups.

Contractors renting equipment for exempt government contracts

Equipment rentals (cranes, lifts, etc.) are taxable to you regardless of the underlying contract's exempt status — § 151.311 categorically excludes rented/leased items from the exemption.

Accountants and tax professionals

This letter is a good checklist reference for the § 151.311 exemption's real boundaries: necessary + essential + completely consumed + actually used in improving the realty — each element independently limits what a contractor can buy tax-free on an otherwise-exempt government job.

Common questions

Q: Does a government agency's tax-exempt status make all of its contractor's purchases exempt too?
A: No — the contractor's own exemption under § 151.311 is much narrower, limited to necessary/essential materials completely consumed at the job site in performing the improvement.

Q: Is renting a crane for a government construction project tax-exempt?
A: No — § 151.311 does not exempt rented or leased items at all; equipment rentals are taxable regardless of the underlying contract's exempt status.

Q: Are office supplies or disposable drinking cups required by OSHA exempt as job-site consumables?
A: No — they're consumed at the job site but not actually used in improving the real property, so they fall outside the § 151.311 exemption even though OSHA may require them.

Q: Can any government contractor rely on this exact exemption scope?
A: Not directly. 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 materials and equipment with a tax professional.

Citations and references

Statutes:

• Tex. Tax Code § 151.309 (governmental entity exemption)
• Tex. Tax Code § 151.311 (contractor exemption for completely consumed materials)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200010756L

Original ruling text

October 3, 2000

From: Gilbert Zamora

To:

Subject: tax exemptions

Dear **:

Thank you for your e-mail inquiry requesting written confirmation on the
following fact situation and question. We are a contractor doing work for the
City of CITY A on the INTERNATIONAL AIRPORT. I believe our purchases of
materials etc. are tax exempt because we are doing work for a governmental
agency, is that correct?

If that is correct, is all that I have to do is provide our suppliers with a
copy of a tax exemption certificate stating that it is exempt because it is for
a governmental contract, is that correct?

Is there anything that would be taxable for the project? For example, if we
rent a crane to lift materials on the project, is that tax exempt?

Response: The City of CITY A, as a governmental entity, is exempt on its
purchases of taxable items under Section 151.309. Texas Tax Code Section
151.311 exempts the purchase of tangible personal property, other than
machinery or equipment, accessories, repair, and replacement parts, for use in
the performance of a contract for an improvement to realty for an organization
exempted under Section 151.309 or 151.310 of the Tax Code if the tangible
personal property is necessary and essential for the performance of the
contract and completely consumed at the job site. The tangible personal
property is completely consumed if after being used once for its intended
purpose it is used up or destroyed. You may issue your suppliers an exemption
certificate for items that incorporated into property belonging to the city and
for tangible personal property that is completely consumed at the jobsite.

Not all tangible personal property consumed at a job site is exempt. For
instance, office supplies (e.g., paper, pencils, note pads, coffee cups, paper
clips, etc.) are consumed at the job site, but not actually used in improving
real property. For the same reason, disposable paper cups used by construction
workers to drink water are not exempt under Section 151.311. The OSHA
regulations requiring disposable drinking cups at the job site does not exempt
the drinking cups.

Rented or leased items are not exempted by Section 151.311. Therefore, the
rental of a crane would be taxable to your company. Repair items and
replacement parts for machinery or equipment are specifically excluded from
exemption.

A complete set of rules, along with the text of the Tax Code, and a wealth of
other information are available through our website at
through the "Texas Taxes" window.

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, You may e-mail our tax help section at .
You may also 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.

Gilbert Zamora

Tax Policy Division

On Wed, 6 Sep 2000 14:31:15 -0700 ** wrote:

We are a contractor doing work for the City of CITY A on the INTERNATIONAL
AIRPORT. I believe our purchases of materials etc. are tax exempt because we
are doing work for a governmental agency, is that correct?

If that is correct, is all that I have to do is provide our suppliers with a
copy of a tax exemption certificate stating that it is exempt because it is for
a governmental contract, is that correct?

Is there anything that would be taxable for the project? For example, if we
rent a crane to lift materials on the project, is that tax exempt?

Please call me at ** or respond by email to .

Thank you,

Controller
COMPANY A