A 501(c)(3) nonprofit is accepting an assignment of a lump-sum general construction contract for a low-income housing project (financed through a partnership with for-profit limited partners who bought low-income housing tax credits), and will serve as the substituted general contractor using separated subcontracts. Can the nonprofit's subcontractors buy materials tax-free, can the nonprofit pass along exemption certificates to them, and who ultimately owes tax on the incorporated materials?

Plain-English summary

This STAR record actually combines two related documents: a general clarifying memo (written afterward, generalizing the ruling's holding across several variant scenarios) and the original taxpayer-specific letter (dated November 24, 1998) that established the ruling in the first place. Together they address how sales tax applies when a 501(c)(3) nonprofit serves as general contractor for a low-income housing project.

The fact pattern

A nonprofit organized for charitable, religious, educational, and scientific purposes — specifically to foster low-income housing consistent with Internal Revenue Code § 42(h)(5)(C) — is federally tax-exempt under IRC § 501(c)(3). Its low-income housing projects are typically financed through project partnerships where the nonprofit is the general partner and one or more for-profit entities are limited partners who contribute funds by purchasing the project's low-income housing tax credits (sometimes alongside tax-exempt bonds issued by the Texas Department of Housing and Community Affairs). As required by IRC § 42(h)(5)(C)(ii), the nonprofit isn't affiliated with or controlled by a for-profit organization.

In the specific case, the project partnership had already signed a lump-sum general construction contract, and the nonprofit was accepting an assignment of that contract to become the substituted general contractor — planning to enter into one or more separated subcontracts for the actual construction work.

The core answers

1. Can the nonprofit's subcontractors buy materials tax-free (with a resale certificate)? Yes. Because the subcontracts are separated contracts, the subcontractors are legally "retailers" selling the building materials TO the nonprofit — so they can claim a resale exemption when they buy those materials from their own suppliers.
2. Can the nonprofit give its subcontractors exemption certificates instead of paying tax on incorporated materials? Yes — because the nonprofit, as the lump-sum general contractor, is itself the consumer of all the materials, it may issue exemption certificates to its subcontractors, provided that constructing this low-income housing is part of the nonprofit's own tax-exempt purpose.
3. Who owes tax on the incorporated materials — the nonprofit or the project partnership? Neither is separately taxed on the lump-sum charge itself — the nonprofit, as consumer of the materials under the lump-sum, new-construction contract, is the one who pays tax on the materials when it (or its subcontractors on its behalf) purchases them.
4. Does the assignment's retroactive effective date matter for materials bought before the assignment was actually executed? Yes, it matters — tax IS owed on materials incorporated into the project before the assignment was actually executed, even if the assignment document is later dated effective as of the original contract's date.

Variations that do NOT change the outcome

The clarifying memo confirms several variations don't affect any of the above:

• Whether the nonprofit is also the general partner of the project partnership (as it was in this specific case) — doesn't matter.
• Whether the project partnership's general partner is a for-profit entity, or a different nonprofit than the one serving as general contractor — doesn't matter either way.
• Whether the general contractor is instead a governmental entity — doesn't change the outcome, provided the government entity is properly authorized (by statute, regulation, or otherwise) to act as a general contractor of low-income housing.
• Whether the contract between the general contractor and the project partnership is a "guaranteed maximum" contract rather than a plain lump sum — still treated the same, as long as the guaranteed-maximum contract meets Rule 3.291(a)(8)'s definition of a lump-sum contract (materials and labor/skill charges not separately stated).

What this means for you

Nonprofit developers of low-income or affordable housing

Structuring your construction contract as lump-sum (or a qualifying guaranteed-maximum contract under Rule 3.291(a)(8)) lets you act as the consumer of materials and pass tax-free purchasing down to your own subcontractors via exemption certificates — as long as the housing construction fits your exempt purpose. But watch assignment timing carefully: materials incorporated before your assignment actually takes effect remain taxable, regardless of how the assignment is later dated.

Subcontractors working under a nonprofit general contractor's separated subcontracts

You're treated as a retailer selling materials to the nonprofit, so you can use a resale certificate to buy your own materials tax-free — just make sure your subcontract is genuinely a separated contract (not itself a sub-lump-sum arrangement).

For-profit limited partners and governmental entities involved in similar low-income housing structures

This letter's outcome is robust to a wide range of structural variations (who's the general partner, whether the GC is governmental, guaranteed-maximum vs. plain lump-sum contracts) — the key drivers are the lump-sum/separated-contract distinction and the nonprofit's own exempt purpose, not the surrounding corporate structure.

Accountants and tax professionals advising affordable housing developers

This is a comprehensive reference for how Texas sales tax treats nonprofit general contractors on low-income housing: the lump-sum consumer rule, the resale-certificate chain through separated subcontracts, the exemption-certificate pass-through tied to exempt purpose, the guaranteed-maximum-contract equivalence under Rule 3.291(a)(8), and the assignment-timing trap for pre-assignment materials purchases.

Common questions

Q: Can a nonprofit general contractor's subcontractors buy construction materials tax-free?
A: Yes, when the subcontracts are separated contracts — the subcontractors are treated as retailers selling materials to the nonprofit and can use resale certificates.

Q: Can the nonprofit pass its own tax-exempt status down to its subcontractors?
A: Yes, by issuing exemption certificates to them in lieu of paying tax on incorporated materials, provided the housing construction is part of the nonprofit's exempt purpose.

Q: Does it matter if the nonprofit is also the general partner of the project partnership?
A: No — that dual role doesn't change the sales tax outcome.

Q: Does it matter if the general contractor is a governmental entity instead of a nonprofit?
A: No, as long as the governmental entity is properly authorized to act as a general contractor of low-income housing.

Q: Is a "guaranteed maximum" contract treated differently from a lump-sum contract?
A: No, as long as it meets Rule 3.291(a)(8)'s definition of a lump-sum contract (materials and labor not separately stated).

Q: Is tax owed on materials incorporated before an assignment of the contract actually takes effect, even if it's later dated retroactively?
A: Yes — the letter confirms tax is owing on materials acquired prior to the execution of the assignment.

Q: Can I rely on this letter for my own low-income housing construction structure?
A: No. This opinion is 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

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.291(a)(8) (contractors — guaranteed-maximum contracts treated as lump-sum contracts when materials and labor/skill charges are not separately stated)

The letter also references Internal Revenue Code §§ 501(c)(3) and 42(h)(5)(C)/(C)(ii) as the federal framework establishing the nonprofit's tax-exempt status and its required independence from for-profit control — these are federal income tax provisions, not Texas sales tax authority.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9811009L

Original ruling text

In STAR document , Bryant Lomax addressed the issue of sales tax and
low-income housing. This memo is intended to clarify that document.

Facts: A non-profit organization exempted under 501(c)(3) of the Internal
Revenue Code acts as a general contractor for the construction of low-income
housing projects financed through project partnerships with for-profit limited
partners.

The limited partners contributed funds to the project partnership by purchasing
the low-income housing credits allocated to the project. In STAR Document
9811009L, the project was also a beneficiary of tax-exempt bonds issued by the
Texas Department of Housing and Community Affairs, but that fact did not affect
the outcome of the sales tax issue. With the proceeds from the sale of the tax
credits, and the bond proceeds, if any, the partnership is developing and
constructing low-income housing. As required by 42(h)(5)(C)(ii) of the Internal
Revenue Code, the non-profit organization is not affiliated with or controlled by
a for-profit organization.

The project partnership entered into a lump-sum general contract for the
construction of a low-income housing project. As the lump-sum general contractor,
the non-profit organization enters into one or more separated subcontracts for the
construction of the low-income housing project. Note that, in STAR Document
9811009L, the non-profit organization was also the general partner of the project
partnership, but that fact did not affect the outcome of the sales tax issue.

Issues and Questions:

1. Will the non-profit organization's subcontractors be able to purchase materials
   to be incorporated into the low-income housing project tax free, assuming the
   subcontractors provide their suppliers with properly completed resale certificates?

Response: Yes, because the subcontracts are separated contracts, the
subcontractors are "retailers" selling the building materials to the non-profit
organization. Therefore, the subcontractors may claim a resale exemption when
purchasing building materials.

2. Will the non-profit organization be able to provide its subcontractors with
   valid exemption certificates in lieu of paying tax on materials incorporated into
   the low-income housing project?

Response: Because, as a lump-sum general contractor, the non-profit organization
is the consumer of all building materials used in the performance of its contract,
the non-profit organization may provide exemption certificates to its subcontractors
(provided the construction of low-income housing is part of the organization's
exempt purpose).

3. Will the non-profit organization be required to collect, or will the project
   partnership be required to pay tax on incorporated materials?

Response: No, the non-profit organization is the consumer of the materials
because the contract is a lump-sum, new construction contract.

4. Will any of the above responses change if the general partner of the project
   partnership is (a) a for-profit entity, or (b) a non-profit organization other
   than the organization that is the general contractor?

Response: (a) No, and (b) no. As mentioned above, the fact that, in STAR Document
9811009L, the non-profit organization was both the general contractor and the
general partner of the project partnership did not affect the outcome of the sales
tax issue.

5. Will any of the above responses change if the general contractor is a
   governmental entity?

Response: No, provided that the governmental entity is properly authorized by
statute, regulation or otherwise to act as a general contractor of low-income
housing.

6. Will any of the above responses change if the contract between the general
   contractor and the project partnership is a "guaranteed maximum" contract?

Response: No, provided that the "guaranteed maximum" contract meets the definition
of a lump sum contract in Rule 3.291(a)(8)("…guaranteed-maximum contracts are
considered lump-sum contracts when the charges for incorporated materials and the
charges for skill and all labor are not separately stated.").

November 24, 1998

Dear Mr. **:

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

Facts:

Taxpayer is a non-profit institution organized exclusively for charitable,
religious, educational and scientific purposes in general and specifically to
foster the development of low-income housing consistent with the provisions of
42(h)(5)(C) of the Internal Revenue Code and the temporary regulations
promulgated thereunder. As such, Taxpayer is exempt from federal income tax
under 501(c)(3) of the Internal Revenue Code.

The low-income housing projects fostered by the Taxpayer are generally financed
through project partnerships between Taxpayer, as the general partner, and one
or more for-profit limited partners. With respect to the project at issue, the
limited partner has contributed funds to the project partnership by purchasing
the low-income housing credits allocated to the project. The project at issue
is also a beneficiary of tax-exempt bonds issued by the Texas Department of
Housing and Community Affairs. With the bond proceeds and the proceeds from
the sale of the tax credits, the partnership is developing and constructing
low-income housing. As required by 42(h)(5)(C)(ii) of the internal revenue
code, the Taxpayer is not affiliated with or controlled by a for-profit
organization.

In the case at hand, the project partnership has entered into a lump-sum
general contract for the construction of a low-income housing project. The
Taxpayer is planning to accept an assignment of that contract and to serve as
the substituted general contractor for the project. As such, the Taxpayer
expects to enter into one or more separated subcontracts for the construction
of the low-income housing project.

Issues and Questions:

1. Will the Taxpayer's subcontractors be able to purchase materials to be
   incorporated into the low-income housing project tax free, assuming they
   provide their suppliers with properly completed resale certificates?

Response: Yes.

2. Will the Taxpayer be able to provide its subcontractors with valid
   exemption certificates in lieu of paying tax on materials incorporated into the
   low-income housing project?

Response: Yes.

3. Will the Taxpayer be required to collect, or will the project partnership
   be required to pay tax on incorporated materials?

Response: No.

4. If the assignment of the lump-sum general contract to the Taxpayer is dated
   effective as of the date of the contract, would sales tax be owing with respect
   to incorporated materials acquired prior to the execution of the assignment?

Response: Yes.

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

I hope this information is helpful. If you have other questions about the
state's sales tax law, or wish to discuss this in more detail, please contact
Al Van Allen. You may call Al toll free at 1-800-531-5441, ext. 3-4680. His
direct line is 512/463-4680. You may also email Al at
[email protected].

Sincerely,

Bryant Lomax
Manager
Tax Policy Division