Is HVAC remodeling work on a leased Texas airport terminal exempt from sales tax, and does it matter who pays for it or whether the space is used by the public?

Plain-English summary

An airline leasing terminal space at a Texas airport asked about the taxability of replacing an antiquated HVAC system in its leased space, in two related scenarios.

Situation #1: The airline has a long-term lease with the airport authority. An affiliated airport facility financing corporation issued tax-exempt bonds to fund the improvements. The airline contracts directly with an HVAC contractor, with payments disbursed from the bond-financed construction fund, and the airport authority retains final approval power over all changes.

The Comptroller ruled that the financing corporation itself does not qualify for the governmental exemption under Tex. Tax Code Sec. 151.309 (though it might separately qualify under Sec. 151.310 if it has an appropriate federal tax exemption). But the HVAC work itself, in areas devoted to public use, qualifies for exemption under Sec. 151.311 as repair/remodeling that directly benefits the airport and the traveling public — because it's integral to airport operations and used daily by the public in connection with air travel. This holds true even though the airline (a nonexempt tenant) is the one contracting for and paying for the work. HVAC work benefiting areas not accessible to the public (private offices, tenant retail space) is not exempt unless a Sec. 151.309-exempt entity like the airport authority itself contracts and pays for it — tax is due on that portion, apportioned by a reasonable method such as square or cubic footage of the affected space.

Situation #2: Same facts, except the terminal is currently vacant (no tenant) and the airport authority contracts directly with the HVAC contractor. Here, because the airport authority itself is exempt under Sec. 151.309(5), the entire contract qualifies for exemption, and the authority can issue an exemption certificate to the contractor in lieu of paying tax.

What this means for you

Airport authorities and airport facility financing corporations

An airport authority's own Sec. 151.309(5) exemption doesn't automatically extend to an affiliated financing corporation — that entity needs its own qualifying basis (like a federal exemption under Sec. 151.310). But when the airport authority itself is the contracting party for facility improvements, the whole job is exempt.

Airlines and other airport tenants

Even as a nonexempt tenant, repair/remodeling work you contract and pay for in public-use terminal areas (areas the traveling public actually uses) can be exempt under Sec. 151.311. Work benefiting only your own private, non-public-access space stays taxable, and needs to be apportioned out if bundled into the same contract.

Accountants and tax professionals

This ruling illustrates that public-use exemption under Sec. 151.311 can attach based on how the space is actually used, independent of whether the contracting/paying party itself holds an exemption — a useful distinction from the straightforward "exempt entity buys, exempt entity gets exemption" pattern.

Common questions

Q: Does an airline get a sales tax exemption on facility work just because it's an airport tenant?
A: No — per this letter, the exemption for public-use-area work under Sec. 151.311 doesn't depend on the tenant's own tax status, but on whether the space is devoted to public use in connection with air travel.

Q: What about work in private, non-public-access tenant space?
A: That portion is taxable per this letter, unless a Sec. 151.309-exempt entity (like the airport authority) itself contracts and pays for it. Tax can be apportioned using a reasonable method like square or cubic footage.

Q: Does an airport financing corporation automatically share the airport authority's exemption?
A: No, per this letter — the financing corporation does not qualify under Sec. 151.309, though it might separately qualify under Sec. 151.310 with an appropriate federal exemption.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.309(5) (exemption for certain governmental entities, including airport authorities created under the Texas Municipal Airports Act)
• Tex. Tax Code § 151.310 (exemption for certain federally tax-exempt entities)
• Tex. Tax Code § 151.311 (exemption for repair/remodeling of property devoted to public use)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9807626L

Original ruling text

July 7, 1998

Dear Mr. **:

This is in response to your request for a ruling as to the taxability of the
following transactions. Your background information and circumstances are
restated below, followed by my response:

SITUATION #1

YOUR INFORMATION

1. Company "A" is an actively operating Airline, leasing terminal space in
   Texas, and holding a valid sales tax permit in the state of Texas.

2. Company "B" is an airport facility financing corporation pursuant to the
   Texas Municipal Airports Act that you believe is exempt from sales tax under
   Section 151.309(5) of the Texas Tax Code.

3. Company "C" is an airport authority created under the Texas Municipal
   Airports Act charged with the operations of the airport and is also exempt from
   sales tax under Section 151.309(5) of the Texas Tax Code.

4. Company "D" is a HVAC contractor with a valid sales tax permit in the state
   of Texas.

5. Company "B" and "C" are affiliated corporations.

CIRCUMSTANCES

Company "A" has a long term lease with Company "C" for airport terminal space.

Company "B", which is affiliated with Company "C", issued tax exempt public
special facility bonds with the resulting proceeds being available to Company
"A" as financing for facility improvements on the aforementioned leased airport
terminal.

Company "A" contracts with Company "D" to perform facility infrastructure
changes that will essentially replace the antiquated HVAC system currently in
place.

Company "C" has final approval power over all changes or improvements to the
leased property.

Payments for the contract will be disbursed from the construction fund held by
Company "B" under the financing arrangement between Companies "A" and "B".

Response: Company "B" as an Airport Facility Financing Corporation (AFFC) does
not qualify for sales tax exemption under Tax Code 151.309. If an AFFC has an
appropriate federal exemption, it may qualify for exemption under Tax Code
151.310.

We agree that the HVAC work, in areas devoted to public use, is integral to the
operation of the airport and by design will be used daily by the public at
large in connection with air travel. We believe from the facts presented that
the Airport and the public will directly benefit by the presence and operation
of these improvements. Therefore, the contract with Company "D" to replace the
airport's HVAC system will qualify for exemption under Tax Code 151.311, to
the extent it involves repair and remodeling of areas devoted to public use in
connection with air travel.

HVAC upgrading work benefiting areas not accessible to the general public
(i.e., private offices, office or retail space used by private tenants, etc.)
would not be exempted, unless contracted and paid for by Company C (Airport
Authority) or other entity exempted under Texas Tax Code 151.309. Sales tax
would be due on the remodeling/upgrading work attributable to the non-public
access areas. You may apportion the tax for these areas using any reasonable
method (i.e., square footage, cubic footage of heated and cooled areas, etc.).

SITUATION #2

Using the same set of facts as in Situation #1 except:

1. The terminal does not currently have a tenant (vacant);

2. The contract is between Company "C" and "D".

Response: Company "C" as an airport authority created under the Texas Municipal
Airports Act is exempt from sales taxes on its purchases as provided under
Texas Tax Code 151.309(5) of the Texas Tax Code. Therefore, if Company "C"
contracts directly with Company "D" for the improvements to the airport, the
contract will qualify for exemption from sales tax. Company "C" may issue an
exemption certificate to Company "D" in lieu of paying tax on the remodeling
charge.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please
call me toll-free at 1-800-531-5441, extension 3-4502. The direct line is
512/463-4502. You may also write to Tax Policy Division, Comptroller of Public
Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division