If a contractor is building out a state agency's exempt facility (like the Texas State Preservation Board's history museum theater), which of the contractor's own purchases are tax-exempt, and which stay taxable?

Plain-English summary

A contractor bidding on video, audio, film projection, special effects, control, and lighting systems for "The Spirit of Texas" multimedia theater — part of the new Texas State History Museum in Austin — noticed its bid documents said the Texas State Preservation Board (SPB) is "generally exempt from taxation" but that "certain purchases made by contractors ... are not subject to taxation," implying some transactions might still be taxable. The contractor asked the Comptroller to clarify exactly which purchases are exempt and what documentation it needs to keep.

The Comptroller confirmed the SPB is exempt under Tax Code § 151.309, and laid out the general policy for any contractor improving realty for an exempt entity (whether government under § 151.309, or religious/charitable/educational/qualifying 501(c) organizations under § 151.310):

• Materials incorporated into realty for the exempt entity are exempt from sales and use tax — in both lump-sum contracts and separated contracts.
• Consumable supplies that are necessary or essential to the job and completely used up or destroyed after one use at the job site are also exempt.
• Machinery and equipment are NOT exempt — the contractor owes tax on purchasing, leasing, or renting its own machinery/equipment, plus repair/replacement parts and accessories for it, regardless of the entity it's working for.
• Taxable services purchased for the job are exempt only if performed at the job site AND either expressly required by the contract or integral to performing it.

What this means for you

Contractors bidding on government or nonprofit construction/installation jobs

Don't assume a blanket exemption just because your client is a government agency or qualifying nonprofit. Materials that become part of the building, and true one-use consumables at the job site, are exempt — but your own tools, machinery, and equipment (and their repair parts) are taxed the same as on any other job. Keep documentation distinguishing these categories, since the exemption is bought-item-by-item, not contract-wide.

Accountants advising construction contractors on exempt-entity work

This letter is a clean, general statement of the Comptroller's policy (not limited to the museum project) — useful as a reference any time a client is bidding realty-improvement work for a § 151.309 or § 151.310 exempt organization.

Common questions

Q: If my client is a tax-exempt government agency, are all of my purchases for their project exempt?
A: No. Materials incorporated into the realty and true job-site consumables are exempt, but your own machinery/equipment (and its repair/replacement parts) stays taxable.

Q: Does the exemption apply differently to lump-sum vs. separated contracts?
A: No — the materials exemption applies in both lump-sum and separated contracts with the exempt entity.

Q: Are services I purchase for the job exempt?
A: Only if performed at the job site and either expressly required by the contract or integral to performing it.

Q: What other organizations besides government agencies qualify for this exemption?
A: Religious, charitable, or educational organizations, and organizations classified by the IRS as 501(c)(3), (4), (8), (10), or (19), under Tex. Tax Code § 151.310.

Q: Can another contractor rely on this letter for a different exempt-entity project?
A: Only the taxpayer who requested it can use it for detrimental reliance, though the described policy is general Comptroller guidance rather than facts unique to this one museum project.

Citations and references

Statutes:

• Tex. Tax Code § 151.309 — exemption for the federal government, Texas, and its political subdivisions (covers the Texas State Preservation Board)
• Tex. Tax Code § 151.310 — exemption for religious, charitable, educational organizations and qualifying 501(c)(3), (4), (8), (10), (19) organizations

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911851L

Original ruling text

November 1, 1999

** <**>

Subject: Taxability of Sale to Texas State Preservation Board

Dear **:

This is in response to your request for a ruling on the following fact

situation and questions:

We are currently working of a bid on a multimedia theater called "The Spirit of

Texas" which is part of the new Texas State History Museum in Austin, TX. The

portions of the project that we are bidding on include the video system, audio

system, film projection system, special effects, control system and lighting

system.

In Attachment B of the bid package #809-00-24 under Section 19 Taxes Due on

page 20, there is a paragraph regarding taxes. It states, "The SPB (State

Preservation Board) is an agency of the State of Texas and is generally exempt

from taxation under state and federal law, and certain purchases made by

contractors for incorporation and use on the project are not subject to

taxation. It shall be the Selected Vendor's responsibility to become familiar

with the rules regarding that exemption and to keep records documenting that

the items for which the Vendor claimed exemption met the exemption rules." It

further states "to the extent that taxes from which the State of Texas is not

exempt under may be imposed by reason of the transactions under the Contract

between the SPB and the Selected Vendor, not including franchise taxes or

income taxes, those taxes are included within the Bid Price and any approved

additions."

The wording seems to indicate that some transactions may be taxable. If the

SPB is an agency of the State of Texas, wouldn't all transactions be exempt

from sales tax? If not, what type of transactions would be taxable in this

case? Can you elaborate of what "exemption rules" we need to be familiar with

and what documentation records we would be required to keep?

Response: The SPB is exempted under Texas Tax Code Section 151.309. The

following is our current policy on purchase of materials, supplies and

equipment by contractors improving realty for exempt entities:

Tangible personal property incorporated into realty for an entity exempted

under Texas Tax Code 151.309 or 151.310 is exempt from sales and use tax. Some

examples of these organizations include: the federal government, Texas and

political subdivisions of Texas, religious, charitable or educational

organizations and organizations classified by the IRS as 501(c)(3),(4),(8),(10)

or (19). This exemption includes materials used in lump-sum and separated

contracts with the exempt entity.

In addition, tangible personal property that is necessary or essential to the

performance of a contract for such an exempt organization is exempt if the

property is completely consumed at the job site. Tangible personal property is

completely consumed if after being used once for its intended purpose, it is

used up or destroyed. Machinery and equipment are not exempted, and the

contractor owes tax on the purchase, lease or rental of machinery, equipment,

repair and replacement parts and accessories for the machinery or equipment.

Taxable services purchased for use in performing the contract will be exempt

from tax if the service is performed at the job site, and the service is either

expressly required under the contract or is integral to the performance of the

contract.

Sales tax rules are available on the Internet at:

Enter 34 for the Title Number, 1 for the Part Number and the last three digits

of the Rule number, i.e., 322 for Rule 3.322, after Rule)

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