Did a private company operating a city-owned public transit system qualify as the city's tax-exempt agent for its purchases?

Plain-English summary

The Texas Comptroller's Policy Committee reviewed the management contract and said the private company operating the city's public transit system did not qualify for exemption as the city's agent.

The company therefore had to pay tax on its purchases of taxable goods. City ownership of the buses and capital assets, city funding of the operating deficit, and the company's role preserving employees' private-employer status did not produce a different answer under the reviewed contract.

The letter noted that a related administrative hearing was pending and said the taxpayer would be notified if the outcome changed the opinion. This record contains no later outcome.

What this means for you

Operating a government-owned facility under contract did not by itself make the private operator an exempt governmental agent. The actual management agreement controlled the agency analysis.

Common questions

Was the private transit operator the city's exempt agent? No.

Did it have to pay tax on taxable purchases? Yes.

Did city ownership and funding establish agency? Not under the contract reviewed.

Was a related hearing pending? Yes, but this record gives no later result.

Citations and references

• The letter cited no numbered statute or Comptroller rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8701L0790E01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller January 29, 1987

Dear *:

Thank you for responding to my request for additional information on the
operations of COMPANY ABC.

Members of our Policy Committee have reviewed the management contract
you provided and determined that COMPANY ABC does not qualify for ex-
emption as an agent of the City of *. The company must pay tax
on their purchases of taxable goods.

At the present time there is an administrative hearing pending on a
related issue. I will notify you if the outcome of this hearing
changes the opinion.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
AL Van Allen
Tax Policy Section
Tax Administration Division

December 18, 1986

Mr. Van Allen
Tax Processor
State Capitol
Austin, TX 73528

Dear Mr. Allen,

This is in response to the requests for information that you gave to
members of our staff concerning the tax exempt status of the COMPANY ABC.

1. COMPANY ABC operates the public transit system serving ** and is
   under contract to the City of **. The City owns the buses, and
   all capital assets. In addition, the City of **** funds the differ-
   ence between the passenger fares and the total operating expenses which
   is otherwise known as the operating deficit.

2. COMPANY ABC is a wholly owned subsidiary of CORP Z. The City of **
   has a contract with where for a fixed fee, CORP Z supplies two (2) manag-
   ers that direct the overall operation of the system. A copy of the con-
   tract between the City of * and CORP Z, is enclosed.

3. COMPANY ABC, a private employer, is the employer of the employees
   in order to preserve the collective bargaining rights of the transit
   workers. Under Texas law, cities are prohibited from entering into
   collective bargaining agreements with municipal transit workers.
   This conflicts with federal government provisions that require that
   as a precondition of receiving federal government transit funds, the
   employees must have their collective bargaining rights preserved.
   COMPANY ABC was set up so that from a purely technical standpoint,
   the employees have private employer status, and thus can enter into a
   union contract.

4. Legal claims, like all expenses of the transit system, are
   the responsibility of the City of ***.

We hope this information is sufficient to meet your needs in re-
affirming our tax exempt status. If you have any questions, please
contact me.

Sincerely,