Does a contractor owe Texas sales tax on renting portable toilets for a construction job site when the job is a contract to improve real property for a tax-exempt entity like a public school?

Plain-English summary

A construction contractor asked the Comptroller's Tax Policy Division whether it owed sales tax on renting portable toilets for its job sites. The contractor was under contract to build a new school for one entity, and both of its current contracts required the contractor to provide portable toilets at the site.

The Comptroller answered that the contractor does owe tax on the rental of the portable toilets, even though the contracts required the toilets to be there. The reasoning: Texas Tax Code Sec. 151.311 exempts tangible personal property used in a contract to improve real property for an exempt entity only if the property is (1) actually incorporated into the realty, or (2) necessary and essential to performing the contract and completely consumed at the job site (meaning it's used up or destroyed after one use for its intended purpose). Property that is merely rented or leased for use in performing the contract is specifically excluded from this exemption — portable toilets, being rented, don't qualify.

However, the letter identifies one narrow exception: a prior contract exemption. Tangible personal property purchased for use in a contract to improve real property for a public school district, or for a nonprofit hospital licensed under Health and Safety Code Chapter 241 or Chapter 577, can be exempt if the contract to improve the real property was entered into before October 1, 1993. This prior contract exemption itself expires September 30, 1996. If the contractor's school contract met that pre-October 1993 timing, the firm could issue a properly completed prior contract exemption certificate for the portable toilet rental on that job. This prior contract exemption does not extend to contracts for private or parochial schools.

The letter closes with the Comptroller's standard caveat that the opinion is based on the facts submitted and other, similar facts may yield different results — and notes this letter carries a previous accession number, 9506305L.

What this means for you

Contractors renting equipment (like portable toilets) for exempt-entity job sites

Expect to pay sales tax on rentals of tangible personal property used at a construction site, even when your contract with an exempt customer (like a school district) requires you to provide that item. The Sec. 151.311 exemption does not reach rented or leased property — only property incorporated into the realty, or property that is necessary/essential and completely consumed on site.

Contractors with contracts to improve real property for public school districts or qualifying nonprofit hospitals

If your contract to improve the real property was entered into before October 1, 1993, you may be able to use the prior contract exemption for related purchases used in performing that contract, including (per this letter) rented portable toilets — but only through September 30, 1996, when that exemption expired. This is a time-limited, contract-specific exception, not a general rule.

Contractors working for private or parochial schools

Don't rely on the prior contract exemption — it explicitly does not apply to contracts to improve real property for private or parochial schools, only public school districts and certain licensed nonprofit hospitals.

Accountants and tax professionals

When advising contractors on job-site equipment, distinguish between property that is purchased/consumed versus rented or leased: rented equipment is taxable to the contractor even under contracts benefiting exempt entities, absent a qualifying prior contract exemption tied to a pre-October 1993 contract date.

Common questions

Q: Does a contractor owe sales tax on renting portable toilets for a school construction job, even if the contract requires the toilets to be provided?
A: Yes. The Comptroller held that a contractor owes tax on the rental of portable toilets used in performing a contract to improve real property for an exempt entity, even if the contract requires the contractor to have portable toilets at the job site.

Q: Why doesn't the Sec. 151.311 exemption cover rented portable toilets?
A: Sec. 151.311 only exempts tangible personal property actually incorporated into the realty, or property that is necessary and essential for the contract and completely consumed at the job site. Property that is rented or leased for use in performing the contract is specifically excluded from the exemption.

Q: What does "completely consumed" mean under this exemption?
A: Tangible personal property is completely consumed if, after being used once for its intended purpose, it is used up or destroyed.

Q: Is there any exception that could make the portable toilet rental exempt?
A: Yes, a prior contract exemption applies to tangible personal property purchased for use in performing a contract to improve real property for a public school district, or for a nonprofit hospital licensed under Health and Safety Code Chapter 241 or Chapter 577, if the contract was entered into before October 1, 1993. This exemption expired September 30, 1996.

Q: Does the prior contract exemption apply to private or parochial schools?
A: No. The letter states the prior contract exemption does not apply to a contract to improve real property for private schools or parochial schools.

Citations and references

Statutes:

• Tex. Tax Code § 151.311 (exemption for tangible personal property incorporated into realty or necessary/essential and completely consumed in performing a contract for an exempt entity; excludes rented or leased property)
• Health and Safety Code Chapter 241 and Chapter 577 (nonprofit hospital licensing, referenced for prior contract exemption eligibility)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9506L1360G13

Original ruling text

June 2, 1995

Dear **:

Thank you for your letter concerning the rental of portable toilets used at
your company's construction sites. Your company is currently under contract
to build a new school for ** and **** . Both contracts
call for your company to provide portable toilets. You want to know if sales
tax is owed on the rental of the portable toilets.

A contractor owes tax on the rental of portable toilets used in the performance
of contracts to improve real property for exempt entities even if the contract
requires the contractor to have portable toilets at the job site. Texas Tax
Code Sec. 151.311 only provides an exemption for tangible personal property
actually incorporated into the realty or for tangible personal property that is
necessary and essential for the performance of the contract and completely
consumed at the job site. Tangible personal property is completely consumed
if after being used once for its intended purpose it is used up or destroyed.
Tangible personal property that is rented or leased for use in the
performance of the contract is specifically excluded from the exemption.

However, there is a prior contract exemption available for tangible personal
property purchased for use in the performance of a contract to improve real
property for a public school district, or for a nonprofit hospital licensed
under Chapter 241 or Chapter 577 of the Health and Safety Code, provided the
contract to improve real property was entered into before October 1, 1993.
This prior contract exemption expires September 30, 1996. If the contract to
build a new school for ** was entered into before October 1, 1993,
your firm may give a properly completed prior contract exemption certificate
for the rental of portable toilets. The prior contract exemption does not
apply to a contract to improve real property for private schools or parochial
schools such as **** .

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 Administration, Comptroller of
Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9506305L