If I have a contract to improve realty for a tax-exempt entity (like a city), can I buy telecommunications/telephone services for the job site tax-free?

Subject

Exempt Contract — Improvement To Realty — Telecommunications/Telephone Services Used At Job Site

Plain-English summary

The Comptroller's Tax Policy Division answered a taxpayer's question about whether telecommunications (telephone) services used at a job site can be purchased tax-free when the taxpayer has a contract to improve realty for a tax-exempt entity.

The letter first flags that an older Comptroller letter (dated March 12, 1992) the taxpayer may have seen is outdated: it was written before the October 1, 1993 law change and doesn't reflect the current exemptions for contractors improving realty for exempt entities, which are now found in Texas Tax Code Sec. 151.311.

On the substance, the Comptroller said telecommunications services are not considered integral to the performance of a contract to improve realty. That would normally mean no exemption. But the letter clarifies that an exemption is still possible: a contractor/service provider with a contract to improve realty for an exempt entity can give a properly completed exemption certificate for telecommunications services used at the job site if the contract with the exempt entity expressly requires that telecommunications services be provided or purchased by the contractor for use at the job site. Using the example in the letter, if a contract to improve realty for "City A" requires telecommunications services at the job site, and the services being purchased are for use on or after October 1, 1993, the contractor may give an exemption certificate to the telecommunications provider.

The letter closes with the standard caveat that the opinion is based on the facts submitted and that other, similar facts could yield different results.

What this means for you

Contractors with contracts to improve realty for exempt entities (governments, schools, etc.)

You cannot automatically treat telecommunications/telephone services at your job site as exempt just because your overall contract qualifies for the improvement-to-realty exemption for exempt entities. Telecom services are not treated as "integral" to the improvement work. To buy them tax-free, your contract with the exempt entity must expressly require that you provide or purchase telecommunications services for use at the job site — and the services must be for use on or after October 1, 1993.

Businesses relying on older Comptroller guidance

If you were given or found a Comptroller letter from around 1992 (this letter references one dated March 12, 1992, microfiche document L1165E10) addressing this topic, be aware it predates the October 1, 1993 law change and does not reflect the current rules under Texas Tax Code Sec. 151.311. Check for more recent guidance before relying on old letters.

Telecommunications/telephone service providers

If a customer with a realty-improvement contract for an exempt entity presents you with an exemption certificate for job-site telecom services, the certificate is only valid if the customer's contract with the exempt entity expressly requires the customer to provide or purchase those services for the job site, and the services are for periods on or after October 1, 1993.

Common questions

Q: Are telecommunications services automatically exempt when used at a job site under a contract to improve realty for an exempt entity?
A: No. The Comptroller stated that telecommunications services are not considered integral to the performance of a contract to improve realty, so there's no automatic exemption.

Q: How can a contractor still buy telecom services tax-free for the job site?
A: The contract with the exempt entity must expressly require that telecommunications services be provided or purchased by the contractor/service provider for use at the job site, and the services purchased must be for use on or after October 1, 1993.

Q: Where are the current exemption rules found?
A: The letter points to Texas Tax Code Sec. 151.311, which covers the exemptions available to persons with contracts to improve realty for exempt entities, effective from the October 1, 1993 law change.

Q: Can I still rely on an older Comptroller letter from 1992 on this topic?
A: Not for current transactions. The letter specifically warns that a March 12, 1992 letter (microfiche document L1165E10) predates the October 1, 1993 law change and doesn't reflect current exemption rules.

Q: Can another taxpayer rely on this letter for their own transactions?
A: No. STAR letters generally may be relied on only by the taxpayer to whom they were issued, and this letter is expressly based on the specific facts submitted; the Comptroller notes other, similar facts may yield different results.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 151.311 (exemptions for property used in performance of contracts to improve realty for 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/9512L1381A01

Original ruling text

December 1, 1995

Dear **:

Thank you for your November 21, 1995 letter concerning
telecommunications services used by a person with a
contract to improve realty for an exempt entity. I
will be responding to your letter to Ann Norrell in
our Tax Assistance Section.

If you were sent a copy of the letter dated March 12,
1992 (microfiche document L1165E10), please be aware that
this letter was written prior to the October 1, 1993, law
change and the March 12, 1992 letter does not include current
information about the exemptions available for persons
with contracts to improve realty for exempt entities. The
current exemptions are found in enclosed Texas Tax Code
Sec.151.31 1.

We would not consider telecommunications services to be
integral to the performance of a contract to improve realty.
However, this does not mean there is no exemption possible.
In order for a contractor/service provider with a contract
to improve realty for an exempt entity to be able to give
a properly completed exemption certificate for the purchase
of telecommunications services used at the job site, the
contract with the exempt entity must expressly require that
telecommunications services are to be provided or purchased
by the contractor/service for use at the job site. You may
give an exemption certificate to the telecommunications
services provider if the contract to improve realty for
City A requires telecommunications services at the
job site and the telecommunications services that you are
purchasing are for services on or after October 1, 1993.

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

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

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9512704L