If a school district pays for and owns an education/video system, but part of the equipment is physically located and controlled at a private company's off-site headend facility, does that off-site equipment still qualify for the school district's sales tax exemption? Could the company itself buy that equipment tax-free instead?

Plain-English summary

A company building a long-range education/video imaging system for an independent school district (a non-sales-tax entity) explained an unusual setup: the school district was paying for the entire system and the contract stated the whole system belongs to the district once built, but some of the system's components would not be located at the district — they'd sit at, and be controlled from, the company's own "headend" facility. The company would also receive a monthly maintenance fee once the system was operational.

The company asked two questions:

1. Is the off-site portion still tax-exempt if the district owns it but doesn't have direct physical control? Yes — the Comptroller confirmed that a school district is exempt from sales tax on purchases of taxable items for its own use (Rule 3.322(f)), and if the district purchased and holds title to equipment located off-site at the company's facility, that equipment may still be purchased tax-free by the school district.
2. Could the company instead buy and keep that same equipment tax-free itself, using it only for the district's transmission needs? No — the equipment may only be purchased tax-free by the school district. The company could make its own tax-free purchase of the equipment only if it intends to resell it before putting it to a taxable use, or to donate it to an exempt entity like the school district (per Rule 3.285(e)(5) on resale certificates and Rule 3.287(e)(5) on exemption certificates) — simply operating the equipment for the district's benefit doesn't qualify the company for its own tax exemption.

What this means for you

School districts and other exempt entities buying equipment housed off-site

Physical location and day-to-day control of purchased equipment don't determine tax-exempt status — title and who paid for it do. If your district purchases and holds title to equipment that a vendor houses and operates at its own facility, that equipment stays exempt.

Vendors/contractors operating exempt-entity equipment at their own facility

Don't assume that operating equipment for a school district's benefit lets you buy it tax-free yourself. Your own tax-free purchase only works if you're reselling the equipment before taxable use or donating it to the exempt entity — otherwise you owe tax on your own equipment purchases even when the end beneficiary is tax-exempt.

Accountants and tax professionals

This letter is a useful confirmation that title/ownership, not physical possession, drives the exempt-entity purchase exemption under Rule 3.322(f) — and a clear boundary on when a vendor's own purchase can piggyback on an exempt entity's status (resale-before-use or donation only, per Rules 3.285(e)(5) and 3.287(e)(5)).

Common questions

Q: Does equipment my school district purchased stay tax-exempt if it's physically located at a vendor's facility?
A: Yes, as long as the district holds title to it and paid for it — physical location and day-to-day control by the vendor don't change the exemption.

Q: Can the vendor operating that equipment buy it tax-free instead of the district?
A: Only if the vendor intends to resell the equipment before putting it to a taxable use, or donate it to the exempt entity — not merely because it's operating the equipment for the district's benefit.

Citations and references

Rules:

• 34 Tex. Admin. Code § 3.322(f) (Exempt Organizations)
• 34 Tex. Admin. Code § 3.285(e)(5) (Resale Certificates)
• 34 Tex. Admin. Code § 3.287(e)(5) (Exemption Certificates)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9909735L

Original ruling text

September 27, 1999

Subject: State Sales Tax Questions

Dear **:

This is in response to your request for a ruling on the following fact
situation and questions:

The company I belong to is building a long range education/video imaging system
for an independent school district (non sales tax entity). School district is
paying for construction. However, some of the systems components will not be
in the ISD's possession and will be located/controlled at our company headend
facility. The contract states that the entire system, when built, belongs to
the school district. The company will receive a monthly "maintenance" fee
after the system is operational as well.

If the contract states that the complete system belongs to the school district
and they paid for it, is the part located at the company's headend facility
still sales tax exempt even though the school district doesn't have direct
control over it?

Response: The school district is exempt from sales tax on the purchase of
taxable items for its own use. See subsection (f) of Rule 3.322 - Exempt
Organizations. If the school district purchased and has title to the equipment
located off-site at your company's location, the equipment may still be
purchased tax-free by the school district.

Would this same equipment located at the company's headend facility be sales
tax exempt if it (the company) wanted to purchase/keep the equipment, but only
use it for independent school district transmission use?

Response: The equipment may only be purchased tax-free by the school district.
The company may only make a tax-free purchase of the equipment if the company
intends to resell it prior to making a taxable use or to donate to an exempt
entity such as the school district. See subsection (e)(5) of Rule 3.285 -
Resale Certificates and subsection (e)(5) of Rule 3.287- Exemption
Certificates.

Sales tax rules are available on the Internet
.

You may download an application for a sales tax permit, which allows you to
issue resale certificates for taxable items that you will resell, at :

The State Tax Automated Research system may be accessed on the Internet at:

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:

Gilbert Zamora

Tax Policy