Our contracts with the Texas Department of Transportation require us to build and equip a fully-equipped lab, for the exclusive use of State Engineers, at our own privately-owned hot-mix plant facility. Are the materials to build and equip that lab subject to Texas sales tax, even though the lab sits on our own private property?

Plain-English summary

A highway construction contractor's contracts with the Texas Department of Transportation required it to furnish State Engineers assigned to the job with a fully equipped laboratory for their exclusive use, per contract specifications. The specific facility at issue was a permanent lab — with running water, electricity, and toilet facilities — built at the contractor's own fixed plant on Highway 6 in Waco, Texas, where the contractor produces hot mix asphalt for state highway jobs. The contractor asked whether the cost to build and equip this lab was subject to Texas sales tax, given that it's required by contract and reserved exclusively for State Engineers, even though it sits on the contractor's own private property.

The Comptroller's answer: materials to build and equip the laboratory may be purchased tax-free, by giving suppliers exemption certificates instead of paying sales tax. The reasoning: even though legal ownership of the underlying facility stays with the private contractor, the lab itself is considered to be for the primary use and benefit of the State of Texas — it exists specifically because the State's contract requires it and reserves it exclusively for State Engineers' use.

What this means for you

Highway and infrastructure contractors required to build facilities for state personnel

A facility you're contractually required to build for a state agency's exclusive use — even one located on your own private property and even one that's a permanent, complete-with-utilities structure — can qualify for tax-free material purchases if it's genuinely for the state's primary use and benefit. Keep your contract's specification language documenting the state's exclusive-use requirement, since that's what supports the exemption.

State agencies contracting for on-site personnel facilities on a contractor's private property

You don't need to own the land or the building yourself for a facility built for your exclusive use to qualify for a Texas sales tax construction-materials exemption — a strong exclusive-use contract requirement can be enough.

Accountants and tax professionals advising government contractors

This letter is a useful, if brief, illustration of the "primary use and benefit" exemption standard applied to a facility on privately owned land — the controlling facts were the contractual requirement to build the facility and its reservation for exclusive state use, not who holds title to the underlying property.

Common questions

Q: Can a contractor buy materials tax-free to build a facility required by a state contract, even if it's on the contractor's own private property?
A: Yes, according to this letter — if the facility is for the primary use and benefit of the state (here, a lab exclusively for State Engineers required by a TxDOT contract), materials can be purchased tax-free via exemption certificates.

Q: Does the state need to own the land or the building for this exemption to apply?
A: No — in this letter, the contractor owns the land and the permanent lab facility; what mattered was the state's exclusive-use requirement under the contract.

Q: Can I rely on this letter for my own government-contract facility construction?
A: No. This opinion is rendered based on the facts presented, and if there are additional or different facts, the opinion may change; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller applies the general "primary use and benefit of the State" exemption standard without quoting a statute or rule number in the response.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9811001L

Original ruling text

November 16, 1998

Dear Mr.**:

Thank you for your recent letter which is restated in part with response below.

Contracts with the Texas Department of Transportation for highway construction
require us to furnish the State Engineers on the job with a fully equipped lab
for their exclusive use. A copy of a contract and the specifications for the
lab are attached.

Our question is whether the costs to build and equip these labs are subject to
Texas Sales Tax since they are required by contract and are for the exclusive
use of State Engineers assigned to the job(s).

In our telephone conversation of November 16, 1998, you said that the
laboratory in question was for use at your fixed plant facility on Highway 6 in
Waco, Texas and was intended to be a permanent facility with running water,
electricity and toilet facilities. The plant is used to produce hot mix for use
on state jobs.

Response: Materials to build and equip the laboratory may be purchased tax
free by giving exemption certificates to suppliers in lieu of paying sales tax.
The laboratory will be considered to be for the primary use and benefit of the
State of Texas.

This opinion is rendered 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. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division