Can a contractor building a day-care center on an Indian reservation use the tribe's sales-tax exemption to buy construction materials tax-free?

Plain-English summary

A contractor was building a new day-care center on an Indian reservation for a Texas tribe and asked whether it could use the tribe's own sales-tax exemption to buy construction materials tax-free. The Comptroller said no — a contractor cannot claim a tribe's exemption directly.

Instead, the Comptroller pointed to a workaround: if the construction contract meets the requirements of a "separated contract" under Rule 3.291(a)(6), the contractor can buy materials tax-free using a resale certificate. The contractor is then treated as reselling those incorporated materials to the tribe, and the tribe — which does have its own exemption — can issue a properly completed exemption certificate covering the agreed contract price for those materials.

The contractor still has to pay tax on everything else it buys, leases, or rents to perform the contract that isn't incorporated into the building. There's one more narrow exception: under Rule 3.291(a)(2) and (b)(2)(B), when specific circumstances are met, the contractor can also resell consumable materials to the tribe tax-free, with the tribe issuing its exemption certificate on those as well.

What this means for you

Contractors building on tribal land

You cannot simply use a tribe's sales-tax exemption yourself when buying materials for a construction job on the reservation, even though the tribe is the ultimate owner/beneficiary of the building. To get materials tax-free, your contract needs to be structured as a separated contract under Rule 3.291(a)(6), so you can buy materials with a resale certificate and pass the exemption through to the tribe on the incorporated materials. Everything else you purchase, lease, or rent for the job (that isn't incorporated into the realty) is still taxable to you, unless it falls under the narrow consumable-materials resale exception.

Tribal governments and tribal entities

Your own sales-tax exemption doesn't automatically extend to your contractors. To pass the benefit of your exemption through on a construction project, the underlying contract needs to be set up as a separated contract, and you need to issue your own exemption certificate to the contractor for the incorporated materials (and, in limited cases, consumable materials).

Accountants and tax professionals

This ruling turns on the separated-contract mechanism in Rule 3.291(a)(6): a contractor selling incorporated materials to an exempt entity (here, a tribe) can use a resale certificate on those materials, letting the exempt entity's own certificate do the exempting work rather than the contractor claiming the exemption directly. Rule 3.291(a)(2) and (b)(2)(B) provides a separate, narrower path for consumable materials under specific circumstances.

Common questions

Q: Can a contractor use a tribe's sales-tax exemption to buy construction materials?
A: No. The Comptroller ruled the contractor may not claim the tribe's exemption directly.

Q: How can the contractor still avoid paying tax on materials?
A: If the contract qualifies as a separated contract under Rule 3.291(a)(6), the contractor can issue a resale certificate when buying materials to be incorporated into the realty, then sell those materials to the tribe, which issues its own exemption certificate for that portion of the contract price.

Q: Does this exempt everything the contractor buys for the job?
A: No. The contractor must pay tax on all other taxable items purchased, leased, or rented to perform the contract. Consumable materials can sometimes be resold tax-free to the tribe when specific circumstances under Rule 3.291(a)(2) and (b)(2)(B) are met.

Q: Does this ruling apply to my situation?
A: This letter ruling is based on the specific facts presented to the Comptroller and can be relied on for detrimental-reliance purposes only by the taxpayer it was issued to. If your contract or facts differ, the analysis may change.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.291(a)(6) (separated contracts)
• 34 Tex. Admin. Code Rule 3.291(a)(2) and (b)(2)(B) (resale of consumable materials to exempt entities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301L1217E02

Original ruling text

January 25, 1993

Dear **:

I am writing in response to your letter received December 29, 1992, and
to provide a written record of the verbal answer provided in our
telephone conversation of December 30, 1992. You questioned whether the
contractor building a new on-reservation, day-care center for the *
Tribe of Texas may claim the tribe's exemption for the purchase of
materials used in the construction of this facility.

As explained in our telephone conversation, the contractor may not claim
the tribe's exemption. However, based upon your statement that the
contract meets the requirements of a separated contract under Rule
3.291(a)(6), the contractor may issue a resale certificate when purchasing
materials to be incorporated into the realty. The contractor is selling
the incorporated materials to the tribe, and the tribe may issue a properly
completed and valid exemption certificate in lieu of tax on the agreed
contract price of these incorporated materials.

The contractor must pay tax on all other taxable items purchased, leased,
or rented to perform the contract. However, when specific circumstances
are met, Rule 3.291(a)(2) and (b)(2)(B) allows the contractor to resell
the consumable materials to the tribe. In turn, the tribe may issue their
exemption certificate to the contractor when the requirements are met.

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

Sincerely,

Tax Administration Division