If our company manages a jail or prison under contract with a government agency, can we buy materials and utilities tax-free using a resale certificate?

Subject

Jail/Prison — Operated By Private Entity But Owned By Government Agencies — Purchases Of Equipment/Materials — Guidelines

Plain-English summary

A private company ("ABC") that manages prison facilities under contract with various tax-exempt governmental entities asked the Comptroller to confirm the procedures it should follow to buy materials tax-free on the government entities' behalf. The Comptroller confirmed the approach, with two adjustments:

1. Resale certificates: ABC can give its vendors/suppliers a "Sale for Resale" certificate stating the materials will be resold to (used by) the not-for-profit governmental entity, as long as ABC's contracts provide that title to the goods transfers to the governmental entity upon delivery to ABC or the prison site (or upon transfer of title from the vendor to ABC). This follows the requirement set out in Day and Zimmerman vs. Calvert -- the property must not be used by ABC before title passes to the governmental entity.
2. Marking incoming goods: Incoming materials and invoices should be stamped "Property of the not-for-profit (prison name)" to document that the goods belong to the governmental entity, not ABC.
3. Sales tax permit: Because ABC is purchasing items for resale, an officer of ABC must complete and file a Texas sales tax permit application.
4. No retroactive relief: This procedure applies only to future purchases -- no retroactive refunds are available for tax already paid.
5. Utilities: If the contract instead has the governmental entity purchase the electricity and gas directly (with ABC reimbursing the entity for the charges), the utilities can be purchased tax-free even though ABC is the one ultimately footing the bill.

What this means for you

Private companies managing government facilities

If you operate a jail, prison, or similar facility under contract with a tax-exempt government entity, you can pass through the entity's sales tax exemption on materials -- but only if your contract is drafted so that title to purchased goods transfers to the government entity (not retained by you), you obtain your own sales tax permit, and you properly document (stamp) incoming goods as government property. Simply managing a facility owned by the government is not, by itself, enough to buy materials tax-free.

Utility purchases

Structure the contract so the governmental entity is the direct purchaser of electricity and gas, with your company reimbursing the entity afterward. That arrangement lets the utility purchase remain tax-free.

Accountants and tax professionals

This letter is a practical compliance checklist rather than a new legal rule -- it applies the resale-certificate/title-transfer analysis from Day and Zimmerman vs. Calvert to a private prison-management contract. Confirm contract language on title transfer before relying on resale certificates in similar government-contractor arrangements.

Common questions

Q: Can a private prison management company buy materials tax-free just because it works for a government agency?
A: No. The company must issue a proper resale certificate, its contract must provide that title to the goods transfers to the governmental entity, and the company needs its own Texas sales tax permit.

Q: Do we need to mark or stamp the materials we receive?
A: Yes -- per this letter, incoming materials and invoices should be stamped as property of the not-for-profit/government entity (e.g., the prison).

Q: Can we get a refund for sales tax we already paid before setting this up?
A: No. The letter states no retroactive refunds are permitted; the procedure applies to future purchases only.

Q: How can we buy electricity and gas tax-free for the facility?
A: Have the governmental entity purchase the electricity and gas directly under the contract, with your company reimbursing the entity for the charges.

Citations and references

Case law:

• Day and Zimmerman vs. Calvert (cited for the requirement that title must transfer to the governmental entity before a private contractor can properly issue a resale certificate on its purchases)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1412C10

Original ruling text

May 7, 1996

Dear *****:

On May 6, 1996, you asked that I verify the procedures to be used by ABC
regarding purchases of items used to fulfill their contracts with various
exempt governmental entities in connection with the managing of prison
facilities.

1. As regards material purchases, ABC will file a "Sale for Resale"
   certificate for each vendor/supplier stating that the materials ordered
   will be resold to (are used by) the not-for-profit entity.

2. All incoming materials and invoices should be stamped "Property of
   the not-for-profit (prison name)."

3. A sales tax permit application needs to be completed by an officer
   of ABC and filed with the State of Texas.

4. No retroactive refunds will be permitted. This is for future purchases
   only.

Please note the suggested changes I have made to items 1 and 3.

You may recall, I referred you to Day and Zimmerman vs. Calvert regarding
the requirements you must meet to qualify to give a resale certificate for
goods purchased to fulfill your contracts. In particular, your contracts
with the governmental entities should provide that title will transfer to
them upon delivery to ABC or the prison site or upon transfer of title from
vendors to ABC. Your second provision is consistent with this and follows
the Day and Zimmerman case. The point is that the property not be used by
ABC until title has transferred to the governmental entity.

Regarding item number 3, a sales tax permit application needs to be filed
with our office because ABC will be purchasing items for resale in the future.

Finally, regarding utility purchases, as I mentioned earlier the contract
between ABC and the governmental entity could provide that the governmental
entity would purchase the electricity and ABC would reimburse the entity for
the charges. In this case, electricity and gas could be purchased tax free
even though ABC reimburses the governmental entity.

Should you have any further questions, please feel free to contact me.

Sincerely,

Wade Anderson
Director, Tax Policy

NOTE: Previous Accession Number 9605255L