Can a property management company buy materials and services tax-free on behalf of an exempt entity it manages property for, and from what date does that entity's tax exemption take effect?

Plain-English summary

A property management company managing a HUD low-income apartment project (operated under a university's trust) wanted to buy materials and taxable services tax-free while performing its management contract. The Comptroller's answer walked through two separate questions: whether the trust qualifies as an exempt entity, and whether the property manager can buy on its behalf tax-free.

On the first question, Rule 3.322(e)(1) required an IRS exemption letter — and importantly, the Comptroller treats the entity as exempt from the date the IRS granted the exemption, not the later date of the Comptroller letter or the taxpayer's request to this agency. That retroactive-to-IRS-date rule is the letter's main holding.

On the second question, a property management company can issue exemption certificates on the exempt entity's behalf, but only if there's a written management agreement designating the company as the entity's agent and authorizing it to make purchases on the entity's behalf — and the certificates must be issued in the form "[management company] as agent for [exempt entity]," with the agreement kept on file for audit. Separately, Rule 3.356(n)(3)(A) lets a property management company buy items or services for resale and either collect tax from, or accept an exemption certificate from, the property owner.

Currency note: STAR's own indexing for this letter carries an added note that the retroactive-exemption basis for refunds described here was discontinued effective September 1, 2009. The 1997 letter's guidance on agency purchases and exemption certificates may still describe the mechanics correctly, but anyone relying on the refund angle specifically should check current Comptroller guidance rather than this 1997 letter alone.

What this means for you

Property management companies serving exempt organizations

You can buy materials and services tax-free on the exempt owner's behalf, but only with a written agency agreement authorizing you to purchase for the owner, and your exemption certificates must be issued "as agent for" the exempt entity — keep the agreement on file for audit.

Nonprofits and exempt trusts awaiting IRS determination letters

Once the IRS grants your exemption, the Comptroller treats you as exempt from that IRS-granted date going forward for assessment purposes — not from when you later got a state exemption letter or asked the Comptroller about it. But see the currency note above regarding refunds specifically.

Accountants and tax professionals

This letter combines two rules that are easy to conflate: Rule 3.322(e)(1)'s exempt-status effective date, and Rule 3.356(n)(3)(A)'s property-management resale/exemption-certificate mechanics. Keep them straight, and flag the 2009 refund-basis change to clients relying on older retroactive-refund guidance.

Common questions

Q: From what date is an organization treated as tax-exempt once the IRS grants its exemption?
A: From the date the IRS applied the exemption — not the date of the Comptroller's letter or the date the taxpayer requested exempt status from the Comptroller (subject to the 2009 refund-basis change noted above).

Q: Can a property management company buy supplies tax-free for the exempt owner it manages property for?
A: Yes, if there's a written management agreement designating it as the owner's agent for purchases, and it issues exemption certificates "as agent for" the exempt entity, keeping the agreement on file for audit.

Q: Is this retroactive-exemption rule still fully in effect today?
A: STAR's own indexing flags that the refund basis described in this letter was discontinued effective September 1, 2009 — verify current policy before relying on the refund mechanics.

Q: Can I rely on this letter directly?
A: No. It's based on the facts presented in 1997 and binds the Comptroller only as to the taxpayer it was issued to; additional or different facts could change the result, and a 2009 policy change may also affect part of its guidance.

Citations and references

• 34 Tex. Admin. Code Rule 3.322(e)(1) (exempt-entity status effective from IRS exemption date)
• 34 Tex. Admin. Code Rule 3.287 (exemption certificate form and content)
• 34 Tex. Admin. Code Rule 3.356(n)(3)(A) (property management companies — resale purchases and exemption certificates)

Subject

Exempt Org — Retroactive Exemption From Sales Tax Allowed For Tax Assessments From Date Irs Exemption Is Granted To Exempt Org — (Discontinued For Refunds As Of 09/01/2009)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712078L

Original ruling text

December 4, 1997

Dear ***

Thank you for your letter of November 19, 1997, concerning the taxability of
purchases by a property manager that is performing services for an exempt
entity.

Your firm is a property management company that manages the APARTMENTS
Apartments in CITY A. The apartments are operated under a trust of UNIVERSITY
as a HUD low income residential property project. You would like to purchase
materials and taxable services tax free in the performance of the contract.

The first step is to determine whether the trust meets the qualifications as an
exempt entity. I have enclosed Rule 3.322 for your review. Subsection (e)(1)
discusses how to obtain exempt status. Please note the requirement concerning
the letter granting exemption from the Internal Revenue Service (IRS). We will
treat the entity exempt from the date that the IRS applied the exemption and
not the date of the letter or date of your request for exempt status from
this agency.

If your property management company acts on behalf of the exempt entity, you
may issue an exemption certificate on behalf of the exempt entity at the time
of purchase, if you have entered into a written management agreement with the
management company that designated the management company as its agent and
authorized the management company to make purchases on its behalf. The
management company must keep this documentation in its files in the event of
audit by this agency. The exemption certificates issued should be under the
name of the purchasing management company "as agent for" the exempt entity. I
have enclosed Rule 3.287 which includes a copy of an exemption certificate.

I have also enclosed Rule 3.356. Subsection (n) addresses property management
companies. Subsection (n)(3)(A) states that a property management company may
buy tangible personal property or taxable services for resale and collect tax
(or accept an exemption certificate in lieu of tax) from the property owner.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division