In a toll-road operator's revenue-sharing deal with TxDOT, are the roadside gantries and toll-collection equipment exempt from Texas sales tax as improvements to a state agency's realty?

Plain-English summary

A private company operates two segments of Texas State Highway 130 as a toll road under a revenue-sharing Facility Concession Agreement (FCA) with the Texas Department of Transportation (TxDOT), a tax-exempt state agency. To collect tolls, the company built a system with two parts: (1) roadside "gantries" — steel structures spanning the roadway that hold cameras, toll-tag readers, lasers, lighting, and signage, all bolted and hard-wired into the gantry frame, with columns drilled 15 feet into concrete foundations; and (2) a control room and data center with servers, network equipment, and video walls that process and store toll transaction data. The company asked whether its ongoing purchases of these components qualify for three different exemptions: (1) the governmental-entity real-property-improvement exemption, (2) the resale exemption, and (3) the donation-to-exempt-entity exemption.

The Comptroller split the ruling three ways:

1. Governmental improvement-to-realty exemption: The gantry structures themselves are exempt, because they're embedded in and permanently affixed to the land (drilled foundations, bolted columns) and removing them would render them "only good for scrap" — that's enough to make them improvements to TxDOT's tax-exempt real property. But the toll-collection equipment attached to the gantries, plus everything in the control room and data center, is NOT exempt — it's readily removable without substantial damage (evidenced by the company's own plan to upgrade/replace network gear every five years and reuse salvaged parts for spares or training), so it stays tangible personal property, not realty.
2. Resale exemption: Not available. Even though TxDOT eventually gets title to the components, the company isn't being paid or reimbursed for them — the deal is a revenue-sharing/lease arrangement, not a sale or lease of the equipment itself, so there's no "sale for resale."
3. Donation exemption: Not available. The company is using the equipment to operate the toll system and share revenue, not merely donating it for TxDOT's retention, demonstration, or display — active use for a purpose other than those three disqualifies the donation exemption under Section 151.155(e).

What this means for you

Toll-road, infrastructure, and public-private-partnership (P3) operators

Don't assume everything installed on a government project is exempt just because the government entity is tax-exempt and eventually owns the equipment. The Comptroller draws a hard line between structural elements permanently affixed to the land (exempt) and the electronics/technology bolted onto or housed within those structures (taxable) — plan your tax budgeting component-by-component, not project-by-project.

Businesses in revenue-sharing or concession arrangements with the government

A revenue-sharing/lease structure, where you don't receive payment or reimbursement for equipment you buy and install, does NOT qualify as a "sale for resale" to the government entity — even though title eventually passes to them. The resale exemption requires an actual sale or lease of the specific property, not just eventual government ownership as a side effect of your contract structure.

Accountants and tax professionals

The ruling's list of "retains identity as tangible personal property" precedents (electronic message centers, TVs, CCTV systems, shelving, generators, items bolted to a foundation, ATMs) is a useful checklist for arguing equipment stays personal property despite some attachment to realty — the deciding factors are ease of removal without substantial damage and evidence of intended impermanence (like planned 5-year replacement cycles).

Common questions

Q: If a government agency eventually owns all the equipment, isn't that automatically a tax-exempt situation?
A: No — this ruling shows eventual government ownership alone doesn't create an exemption. The property must actually be incorporated into realty (for the improvement exemption), sold/leased for consideration (for the resale exemption), or purely donated for retention/display (for the donation exemption) — none of which described most of this equipment.

Q: What made the gantries exempt but not the cameras and readers bolted to them?
A: The gantry structure itself is embedded in a drilled concrete foundation and would be destroyed (only fit for scrap) if removed — a genuine permanent accession to the land. The equipment bolted to it, by contrast, is designed for periodic replacement/upgrade and can be removed without substantial damage.

Q: Can another toll-road or P3 operator rely on this ruling?
A: No. It's a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer — the specific contract structure (revenue-sharing vs. a true sale/lease) and installation method matter a great deal here.

Citations and references

Statutes, rules, and decisions:

• Tex. Tax Code § 151.311 (Taxable Items Incorporated into or used for Improvement of Realty of an Exempt Entity); § 151.309 (Governmental Entities)
• 34 Tex. Admin. Code Rule 3.347(a)(2), (b)(1) (Improvements to Realty — permanent affixation vs. readily removable)
• Tex. Tax Code § 151.302 (Sales for Resale); § 151.006 ("Sale for Resale")
• Tex. Tax Code § 151.155(e) (Exemption Certificate — donation to an exempt entity)
• Comptroller's Decision Nos. 21,401 (1987); 42,688 (2003); 11,332 (1981); 41,382, 41,401, 41,410 (2003); 43,721 (2004) (equipment retaining personal-property identity)
• STAR Accession Nos. 8804T0869B01 (Apr. 20, 1988); 9409L1321D04 (Sept. 9, 1994)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201807012L

Original ruling text

July 12, 2018

RE: Private Letter Ruling No. 20170101182

*, Taxpayer No. *

Dear Mr. **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [1] We are responding to your request dated July 24, 2017. You provided additional information via ftp files May 9, 2018, and made reference to the Texas Department of Transportation (TxDOT) contract which is available on their website. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance as to the taxability of certain equipment used to operate the SH-130 toll collection system.

Facts Presented

On March 22, 2007, *** (Taxpayer) and TxDOT entered into a Facility Concession Agreement (FCA). The contract is available at: https://www.txdot.gov/government/partnerships/current-cda/sh-130.html. The FCA is a revenue sharing agreement and lease agreement granting Taxpayer a concession to develop, design, construct, finance, operate, and maintain two segments of State Highway 130. Taxpayer operates these segments as a toll road. Under the terms of the FCA, Taxpayer has created a toll collection system (System).

The FCA provides that, after Taxpayer completes its initial construction obligations, Taxpayer is obligated to operate and maintain the toll road facility for the remainder of the term of the FCA as a public highway in accordance with the terms of the FCA. In certain circumstances, Taxpayer must perform additional construction work to rehabilitate, replace, or upgrade the toll road and its related facilities. Taxpayer made the initial purchases and will make ongoing periodic purchases of assets for the System. This response is applicable to the ongoing periodic purchases of assets for the System.

Description of the System

The System has two main components that communicate with each other: (1) gantries installed at the roadside that generally hold signage and toll collection equipment; and (2) computer servers, hardware, and software installed at administration buildings.

Gantries are structures whose columns are installed adjacent to each side of the roadbed, with a beam and catwalk that span the roadway approximately 18 feet above the roadway. The beam holds: (i) automated vehicle identification readers, which read toll tags; (ii) cameras, which take photographs of vehicles and their licenses; (iii) lasers, which determine that a vehicle is present and "tell" the camera when to take the photograph of the vehicle; (iv) lighting, which illuminates the plate region of the vehicle to enhance human readability and optical character recognition of the license plate; and (v) signage which provides information on toll rates and payment options. This equipment is attached to the gantries using mounting brackets and housings and is hard-wired into the gantries.

For a two-lane gantry, the equipment described above weighs approximately 4,400 pounds and the gantry structure weighs approximately 5,000 pounds. The gantry columns are installed into drill shaft foundations, which are steel cages surrounded by concrete cylinders that are three feet in diameter and drilled 15 feet into the earth; the drill shafts have two feet of exposure above the road level. Each column has eight bolts that are 2.5 feet long and used to attach the column to the drill shaft foundation. The beam and catwalk are bolted to the columns. These structures are the same as those used by TxDOT for highway signs that are installed above roadways.

Over time, the gantries’ bolts become so embedded that they cannot be unscrewed or easily removed and must be cut off to be removed. This damages the connections and the gantries are only good for scrap.

At each tolling gantry, there is an equipment cabinet and generator cabinet installed on a concrete foundation secured with anchor bolts tapped into the concrete foundation. The equipment cabinet houses multiple servers which control the communication and activation of the gantry equipment as well as store and transmit the collected transaction data through network switches which are connected to the control center via fiber optic networks. The gantries and the cabinets are connected with specialized cabling.

Pursuant to the FCA, Taxpayer also must construct a control room and data center in the existing administration buildings located on land owned by TxDOT adjacent to the toll roads.

The control room contains a work station and a video wall consisting of multiple large full color video displays. The room is equipped with raised flooring for cabling and also is equipped with cabling behind the walls for the video wall that displays video feeds from cameras on the roadway.

The data center includes the following systems that are used to operate the toll road:

• Advanced Traffic Management System (ATMS) servers and software that collect roadside traffic, speed, flow, and weather conditions;

• digital video recording system to store, manage, and play back all roadside closed circuit television footage; and

• subsystems consisting of application servers, database servers, and storage devices.

The data center also includes: (i) servers and software that collect, validate, adjust, process, reconcile, and report toll transactions to TxDOT's customer service center; and (ii) network infrastructure to support the functioning of the subsystems listed above.

The data center servers are installed in computer racks that are freestanding frames/structures. Each server is connected to power strips located inside each rack. Each power strip is connected to electrical receptacles installed under the raised floor. The receptacles are connected to mounted power distribution units connected to backup power supply systems and generators.

Cabling connects storage devices and servers of the different subsystems. The servers also are connected to roadside devices, other servers, and work stations by fiber channels using CATS and/or fiber optic cabling. Electrical power distribution and network cabling are installed and attached to cable trays under the raised flooring.

Taxpayer does not expect to remove or replace the electrical infrastructure for at least 15 years. However, the equipment and cabling are installed in such a manner to allow for easy maintenance and replacement if required. Network equipment, servers, storage devices, and network cabling are typically upgraded or replaced as needed or every five years. Failed or replaced components are either scrapped or retained as part of the System but repurposed for other uses such as training or spare parts.

The control room and data center are equipped with off-the-shelf hardware. The ATMS software is off-the-shelf but may be customized and reconfigured to support specific contractual and operational requirements. The toll collection software is specifically built for the toll project. The software is used to operate the toll road by monitoring and recording traffic flow to minimize the impact of incidents on the flow of traffic.

Per the FCA, the System components are part of the toll road “Premises” and “Facility,” as those terms are defined in the FCA, and title to all System components vests with TxDOT when Taxpayer purchases such components. See FCA, Exhibit 1 and Lease, Article I, Section 1.1. Moreover, as with all toll road operating assets subject to the FCA, TxDOT receives possession and continued ownership of all System assets upon termination of the FCA.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analyses.

Question One: Are Taxpayer’s purchases of the toll collection system components exempt under Section 151.311 (Taxable Items Incorporated into or used for Improvement of Realty of an Exempt Entity) as materials incorporated into realty for the primary use and benefit of an entity exempted under Section 151.309 (Governmental Entities)?

Ruling One: Taxpayer’s purchase of the gantries is exempt under Section 151.311. The remainder of the toll collection system components, including the toll collection equipment attached to the gantries, are not exempt under Section 151.311.

Analysis:

TxDOT is exempted from sales and use tax under the provisions of Section 151.309.

Section 151.311(a) states:

“[t]he purchase of tangible personal property 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 this code is exempt if the tangible personal property is incorporated into realty in the performance of the contract.”

Rule 3.347(a) (Improvements to Realty) defines a “contract for the improvement to realty.” The term includes a contract with the intended purpose to:

“(2) furnish and install property becoming a part of any building or other structure, project, development, or other permanent improvement on or to such real property, including tangible personal property, which after installation becomes real property by virtue of being embedded in or permanently affixed to the land or to a structure constituting realty and which property after installation is necessary to the intended usefulness of the building or other structure; . . ..”

Rule 3.347 also lists activities that are not a “contract for the improvement to realty,” including:

“(1) a contract for the sale and installation of tangible personal property; this includes a contract to furnish and install machinery, equipment, or other tangible property not essential to the building or structure, nor adapted or intended to become a part of the realty, but which incidentally may, on account of its nature, be temporarily attached to the realty without losing its identity as a particular piece of machinery, equipment, or property and, if attached, is readily removable without substantial damage to the unit or to the realty or without destroying the intended usefulness of the realty; . . ..”

Based on the facts presented, the gantries are installed so that they become embedded in and permanently affixed to the land. Further, removal of the gantries would damage them to render them “only good for scrap.” Therefore, under Rule 3.347(a)(2), the gantries meet the definition of improvements to realty.

The remainder of the toll collection system equipment is not intended to become a part of the realty. It is readily removable without substantial damage to the equipment or the realty. See Rule 3.347(b)(1). Taxpayer states that “network equipment, storage devices and network cabling are typically upgraded or replaced every five years ...” The equipment and cabling are installed in such a manner to allow for easy maintenance and replacement. This indicates that Taxpayer did not intend for the equipment to be permanently attached to the realty.

Further, Taxpayer stated that failed or replaced components may be retained as part of the toll collection system but repurposed for other uses such as training or spare parts. This, again, shows that the equipment is readily removable without substantial damage to the equipment or the realty.

Finally, the Comptroller has determined that items similar to those installed in the toll collection system retain their identity as tangible personal property after installation:

● an electronic message center (Comptroller’s Decision No. 21,401 (1987));

● televisions (Comptroller’s Decision No. 42,688 (2003));

● CCTV cameras, intercom systems, and alarm monitoring and control systems (STAR Accession No. 8804T0869B01 (Apr. 20, 1988));

● shelving (Comptroller’s Decision No. 11,332 (1981));

● a generator (Comptroller’s Decision Nos. 41,382, 41,401, 41,410 (2003));

● items bolted to a foundation (STAR Accession No. 9409L1321D04 (Sept. 9, 1994)); and

● ATM machines (Comptroller Decision No. 43,721 (2004)).

Question Two: Are Taxpayer’s purchases of the toll collection system components exempt under Section 151.302 (Sales for Resale) as purchases for resale?

Ruling Two: Taxpayer’s purchases of the toll collection system components do not meet the definition of “sale for resale” under Section 151.006 (“Sale for Resale”) and are not exempt from tax under Section 151.302.

Analysis:

Section 151.006 defines sales for resale. In relevant part, a sale for resale means a sale of tangible personal property to a purchaser who acquires the property for the purpose of leasing or reselling it to another person in the normal course of business. See Section 151.006(a)(1), (2).

Taxpayer does not lease or resell the components of the toll collection system to TxDOT. TxDOT does ultimately receive possession of and title to the toll collection system, but under the FCA Taxpayer is not entitled to reimbursement or payment from TxDOT for the toll collection system components.

Rather, the contract between Taxpayer and TxDOT is essentially a revenue sharing agreement, pursuant to which Taxpayer remits toll revenues to TxDOT. Section 5.1.2 of the FCA states that Taxpayer agrees to pay TxDOT a share of the toll revenues “as compensation to TxDOT in exchange for TxDOT’s grant to Taxpayer of the right to impose and receive tolls… and as rent for the use and operation of the Facility pursuant to the Lease.” Taxpayer also agrees to make Concession Payments to TxDOT in exchange for TxDOT’s grant to Taxpayer for the right to collect and impose tolls. See Section 5.1.1 of the FCA. TxDOT does not reimburse or pay Taxpayer for Taxpayer’s expenses.

Further, Section 3.7.4 of the FCA states that the terms of the agreement “. . . allow (Taxpayer) no more than a reasonable rate of return and compensation commensurate with risk.” This provision does not imply a sale or lease of the assets to TxDOT; rather, it is in alignment with revenue sharing. See FCA Section 5.1.2 and Exhibit 7.

Because Taxpayer receives neither payment nor reimbursement for the toll system components from TxDOT, no lease or resale has occurred and the resale exemption is unavailable.

Question Three: Are Taxpayer’s purchases of toll collection system components exempt under Section 151.155(e) (Exemption Certificate) as a donation to an entity exempted under Section 151.309?

Ruling Three: Taxpayer’s purchases are not exempt under Section 151.155(e) because Taxpayer uses the toll collection system components to operate the toll road segments.

Analysis:

Section 151.155(e) states the following:

(e) A purchaser of a taxable item who gives an exemption certificate is not liable for the tax imposed by this chapter if he donates the taxable item to an organization exempted under Section 151.309 or 151.310(a)(1) or (2) of this code; except that any use by the purchaser of the taxable item other than retention, demonstration, or display shall be subject to taxes imposed by this section.

As noted above, TxDOT is a Texas state agency and is exempt under Section 151.309. However, Taxpayer did not donate the components of the toll collection system to TxDOT. Per Section 151.155(e), if the purchaser uses the taxable item other than for retention, demonstration, or display, taxes are due on the purchase. Per the FCA, Taxpayer is obligated to provide and use the items to operate the toll collection system and will share in revenue with TxDOT from operation of the toll road. See FCA Sections 2.1.1 and 7.1.1. Taxpayer is contractually obligated to provide taxable items it will use to meet its obligations under the FCA.

Because Taxpayer will be using the items for purposes other than “retention, demonstration, or display,” Taxpayer’s use of the items renders them taxable. See Section 151.155(e).

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20170101182.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.