When a city airport board hires a manager and contractors to build and operate a terminal hotel, who can buy supplies, equipment, and construction materials tax-free, and under what conditions?

Plain-English summary

This letter answers three separate questions about a project to build and operate a Terminal Hotel for an international Airport Board, submitted on behalf of two cities that jointly govern the airport.

Question 1 — the Airport Board's own purchases of hotel tangible personal property. Confirmed not taxable: the Airport Board is exempt as a local government entity under Tax Code § 151.309(5).

Question 2 — a Manager's purchases of operating supplies on the Board's behalf. Also confirmed not taxable, through either of two paths. First, if the Manager is an authorized purchasing agent of the Airport Board, Rule 3.322(f)(2) lets the Manager buy tax-free by giving the vendor an exemption certificate that names the Airport Board (not the Manager) as purchaser, with the Manager signing as authorized agent. Second, and separately, when the Manager is performing non-taxable services for the Board, the Manager can buy consumable supplies tax-free for resale to the Board, but only if the arrangement satisfies the four-part test from Day & Zimmerman, Inc. v. Calvert: (1) title to the consumable materials transfers to the exempt Board at the time and point the Manager (non-taxable service provider) receives them; (2) the Manager doesn't use the materials at all before title passes to the Board; (3) where practical, the materials are labeled as the Board's property; and (4) the Manager separately states the charge for consumable supplies from all other charges on its invoice.

Question 3 — contractors and subcontractors building the Terminal Hotel. Confirmed they may issue exemption certificates in lieu of tax, because the Airport Board's § 151.309 exemption extends to construction contracts under § 151.311, covering: materials incorporated into the realty; consumable supplies that are necessary/essential to the contract and completely used up or destroyed at the job site; and taxable services the contract expressly requires or that are integral to performing it. But § 151.311 does not exempt tools, machinery, equipment (including repair/replacement parts), or any rented/leased items the contractor uses to perform the work — those remain taxable to the contractor regardless of the exempt project.

A fourth point, raised outside the numbered questions: the taxpayer also asked about an affiliated Airport Facility Financing Corporation (AFFC). The Comptroller found that an AFFC does not automatically qualify for the § 151.309 government exemption just by association with the airport board — it would need its own separate qualification under § 151.310 if it holds a federal 501(c)(3), (4), (8), (10), or (19) exemption, and that determination is handled by the Comptroller's Exempt Organizations Section, not the letter's author.

What this means for you

Government entities (like airport boards) hiring managers and contractors

Your own government exemption doesn't automatically pass through everyone working for you — an authorized purchasing agent can buy tax-free with a correctly completed exemption certificate naming you as purchaser, and a service provider can buy consumables tax-free for resale to you only if the Day & Zimmerman four-part test is met (title passes at receipt, no prior use, labeling, separately stated charges).

Contractors and subcontractors on exempt-entity construction projects

You can buy incorporated materials, necessary consumable supplies, and required taxable services tax-free using an exemption certificate for a government-exempt project — but your own tools, machinery, equipment, and any rented/leased items stay taxable to you regardless of the project's exempt status.

Related nonprofit or financing entities affiliated with an exempt government body

Don't assume affiliation with an exempt government entity gives you the same exemption. A financing corporation or similar affiliate must independently qualify — typically by holding its own federal 501(c) exemption and separately establishing Texas exempt status through the Comptroller's Exempt Organizations Section.

Accountants and tax professionals

This letter is a useful multi-part reference on how a government exemption flows (or doesn't) through a chain of purchasing agents, service providers, and contractors — and it preserves the specific Day & Zimmerman four-factor test verbatim, which is otherwise hard to find compactly stated.

Common questions

Q: Is an airport board's own purchase of hotel equipment taxable?
A: No — the Airport Board is exempt as a local government entity under Tax Code § 151.309(5).

Q: Can a manager buy supplies tax-free on the board's behalf?
A: Yes, either as an authorized purchasing agent using an exemption certificate naming the board as purchaser, or as a non-taxable service provider buying consumables tax-free for resale to the board if the Day & Zimmerman four-part test is satisfied.

Q: What is the Day & Zimmerman test?
A: Title to consumable materials must transfer to the exempt entity at receipt; the service provider can't use the materials before title passes; materials should be labeled as the exempt entity's property where practical; and the consumable-supplies charge must be separately stated from all other charges.

Q: Can construction contractors on the project buy everything tax-free?
A: No — they can buy incorporated materials, necessary consumable supplies, and contractually required taxable services tax-free under § 151.311, but tools, machinery, equipment, and rented/leased items remain taxable to the contractor.

Q: Does a related financing corporation automatically share the airport board's exemption?
A: No — an Airport Facility Financing Corporation must separately qualify under § 151.310 based on its own federal 501(c) status, determined by the Comptroller's Exempt Organizations Section.

Q: Can any government entity or contractor rely on this exact letter?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the parties it addresses (34 Tex. Admin. Code Rules 3.1, 3.10). Confirm your own purchasing and contract structure with a tax professional.

Citations and references

Statutes, rules, and cases:

• Tex. Tax Code § 151.309(5) (exemption for local government entities)
• Tex. Tax Code § 151.310 (exemption for certain federal 501(c) organizations)
• Tex. Tax Code § 151.311 (exemption for contractors on exempt-entity construction contracts)
• Comptroller Rule 3.322(f)(2) (exempt organizations — authorized agent purchases)
• Day & Zimmerman, Inc. v. Calvert (consumable-supplies resale test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200101597L

Original ruling text

January 3, 2001

Dear **:

Thank you for your December 20th letter concerning the taxability inquiry you
submitted on behalf of the cities of CITY A and CITY B. My responses are based
on the facts you presented in your December 20, 2000 letter.

Question (1): The Airport Board's purchases of the Hotel TPP will not be
subject to Texas sales tax.

Response: Correct. The ** International Airport Board (Airport
Board) is exempt from sales tax as a local government entity under Texas Tax
Code Section 151.309(5).

Question (2): The Manager's purchases of the Operating Supplies will not be
subject to Texas sales and use tax.

Response: Correct, there are two possible ways for exemption. Rule
3.322(f)(2) on exempt organizations states that the purchase, lease, or rental
of a taxable item to an exempt organization listed in subsections (c) and
(b)(4),(6),(7),(8), or (9) of this section is exempt from tax when the
organization or authorized agent pays for the taxable item and provides the
vendor an exemption certificate in lieu of tax. If the Manager is an
authorized purchasing agent of the Airport Board, the Manager may make tax-free
purchases for the Airport Board. The exemption certificate given to the seller
selling the operating supplies should be completed showing the purchaser as the
Airport Board and that the reason for exemption is that the purchase is made by
the authorized agent of the Airport Board. The authorized agent can then sign
the exemption certificate.

In addition, when the Manager is performing non-taxable services for the
Airport Board, the Manager may purchase taxable items for resale if they meet
the requirements of Day and Zimmerman v. Calvert. The requirements in the
contract with the Airport Board must correspond to those in Day and Zimmerman
v. Calvert. For the contract to conform to Day and Zimmerman v. Calvert, it
should include the following:

Title to the consumable materials will transfer to the exempt entity at the
time and point of receipt by the non-taxable service provider;

the non-taxable service provider may not make any use of the materials prior to
passage of title to the exempt entity;

where practical, the materials will be labeled as the property of the exempt
entity; and

the non-taxable service provider must separately state, from all other charges,
the charge for consumable supplies sold to the exempt entity.

Question (3): Contractors and subcontractors performing new construction of
the Terminal Hotel pursuant to lump-sum or separated contracts may issue
exemption certificates in lieu of payment of Texas sales and use tax on
purchases of Incorporated TPP, Consumable Supplies, and otherwise taxable
Construction Services.

Response: Correct. The Airport Board is an organization exempted under
Section 151.309, and therefore, the contractors and subcontractors are allowed
to give an exemption certificate for the purchase of taxable items exempted
under Section 151.311 of the Tax Code. The exemptions of taxable items in
Section 151.311 include:

Materials incorporated into the realty;

-- consumable supplies that are necessary and essential for the performance of
the contract and completely consumed (if after being used once for its intended
purpose it is used up or destroyed) at the job site; and

-- taxable services that the exempt contract either expressly requires the
contractor to provide or purchase or that are integral to the performance of
the contract.

Section 151.311 does not exempt tools, machinery and equipment including repair
and replacement parts, or any rented and leased items used by the contractor in
performance of the contract.

In addition to your questions, you forwarded a copy of the Articles of
Incorporation of CORPORATION. According to my research, an Airport Facility
Financing Corporation (AFFC) does not qualify for sales tax exemption under Tax
Code Section 151.309. If an AFFC has a 501(c)(3),(4),(8),(10), or (19) federal
exemption, it may qualify under Tax Code Section 151.310. However, the Exempt
Organizations Section in Tax Policy handles the determination of whether a
particular organization qualifies for sales tax exempt status and I defer that
issue of exempt status to them. Stefanie Medack, who is the supervisor of
Exempt Organizations, may be contacted by phone at extension 3-4622.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

cc: Stefanie Medack