Is equipment or machinery that a contractor rents or leases to perform a realty-improvement job for a tax-exempt government or nonprofit entity itself exempt from Texas sales tax?

Plain-English summary

A contractor working on a government job had been told by the Comptroller's office (correctly) that its equipment rentals were taxable. But the contractor's customer separately contacted a different Comptroller staffer and was told the opposite — that the rentals were tax-exempt — citing Rule 3.291(c)(4) and (5). The contractor asked the Comptroller to sort out the conflicting answers.

The Comptroller confirmed the original (taxable) answer was correct, and that the second answer was based on outdated law. The cited rule sections had been superseded, effective October 1, 1993, by Tax Code § 151.311 ("Taxable Items Incorporated Into or Used for Improvement of Realty of an Exempt Entity"), which sets out the current, controlling framework:

• (a) Tangible personal property is exempt if it's purchased for use in a realty-improvement contract for a Section 151.309 or 151.310 exempt organization AND is physically incorporated into the realty.
• (b) Tangible personal property (other than machinery/equipment and its accessories/repair/replacement parts) is exempt if it's (1) necessary and essential for the contract and (2) completely consumed at the job site.
• (d) "Completely consumed" means used up or destroyed after one use for its intended purpose — and critically, rented or leased property cannot be completely consumed under this definition, since by nature it goes back to the owner rather than being used up.

Putting the pieces together: machinery and equipment — whether purchased, leased, or rented by the contractor — never qualifies for exemption under § 151.311, no matter how exempt the underlying entity or contract is. Equipment isn't incorporated into the realty (it's used to perform the work, then removed), and it can't be "completely consumed" in the statute's sense.

What this means for you

Contractors performing realty-improvement work for exempt entities (governments, nonprofits)

Don't assume your equipment costs share the exemption just because the underlying job or customer is tax-exempt. Materials that get built into the structure are exempt; genuinely consumable supplies used up on the job can be exempt; but machinery and equipment you purchase, lease, or rent to do the work is always taxable to you as the contractor.

Accountants and tax professionals

This letter is a useful corrective on a stale-rule trap: Rule 3.291(c)(4)-(5) was superseded back in 1993, but apparently was still being cited by at least one Comptroller staffer as of 1998. Always verify a cited rule is current, especially on older, frequently-revised topics like realty-improvement contracts for exempt entities.

Common questions

Q: Is equipment a contractor rents to do work for a tax-exempt government entity itself tax-exempt?
A: No, per this letter and Tax Code § 151.311 — machinery and equipment purchased, leased, or rented by the contractor never qualifies for this exemption.

Q: What kinds of materials DO qualify for the exemption on an exempt entity's realty-improvement contract?
A: Per § 151.311, materials physically incorporated into the realty, and separately, necessary/essential materials that are completely consumed (used up or destroyed after one use) at the job site.

Q: Can rented or leased property ever be "completely consumed" for this exemption?
A: No — per § 151.311(d) as quoted in this letter, rented/leased property cannot be completely consumed by definition.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.311 (taxable items incorporated into or used for improvement of realty of an exempt entity)
• 34 Tex. Admin. Code Rule 3.291(c)(4)-(5) (superseded effective 10/01/1993 — do not rely on this cite)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9809830L

Original ruling text

September 17, 1998

Dear **:

This is in response to your request for a ruling regarding the exemption status
for rental equipment used on a government job. I had previously relayed to you
that these rentals are taxable to the contractor. Your customer spoke to
someone else in this agency and was told that the rentals were not taxable and
was cited Rule 3.291 (c)(4) and (5).

The information given to you customer is incorrect. The sections of Rule 3.291
cited have been superseded, effective October 1, 1993, by the following
language found in Texas Tax Code 151.311 - Taxable Items Incorporated Into or
Used for Improvement of Realty of an Exempt Entity. This language states:

(a) The purchase of tangible personal property for use in the performance of a
contract for an improvement to realty for an organization exempted under
Section 151.309 or 151.310 of this code is exempt if the tangible personal
property is incorporated into realty in the performance of the contract.

(b) The purchase of tangible personal property, other than machinery or
equipment and its accessories and repair and replacement parts, for use in the
performance of a contract for an improvement to realty for an organization
exempted under Section 151.309 or 151.310 of this code is exempt if the
tangible personal property is:

(1) necessary and essential for the performance of the contract; and

(2) completely consumed at the job site.

(c) ...

(d) For purposes of this section, 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 cannot be completely consumed for purposes of this
section.

Emphasis added.

Machinery and equipment purchased, leased, or rented does not qualify for
exemption from sales tax, even if used on a contract to improve realty for an
exempt entity. I have also enclosed an excerpt from our Sales Tax Update
published in the fourth quarter of 1993 that addresses this change.

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