# The Attorney General of Texas
December 5, 1979 MARK WHITE Attorney General

Honorable BobBullock Comptroller ofPublic Accounts LBJ State Office Building Austin, Texas 78744 Opinion No. MW-9 4 Re: Imposition of sales tax on improvement of realty belonging to anexempt entity. Dear Mr.Bullock: You have asked whether a lessee of realty belonging to an entity exempt under article 20.04(H), Taxation-General, may avail itself of the exemption in article 20.04(Y) in making improvements to the leasehold in a private commercial venture. You cited the following fact situations: L The City of Fort Worth has leased aportion of its municipally owned airport, Meacham Field, to aprivate party for the purpose ofoperating a commercial aviation center. One of the covenants in the longterm lease (30years plus options for additional periods) is that the private party will construct, at its own expense, on the leased property, two airplane hangars and various support facilities. The agreement provides that upon completion of construction, title to the improvements will vest in the City. During the period that the lease isineffect, the hangars and other facilities will be for the exclusive use ofthe private party. 2. Achurch inthe City ofHouston owns atract of land and the improvements thereon (abuilding). The church has leased the property on a long term lease to a private concern. The church has granted the lessee permission to remodel the building to suit its business needs. 3. A city has leased a tract of land to a private utility company. The longterm lease contains

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a purchase option available onexpiration. The utility company has constructed and isconstructing facilities to suit its business needs upon the leased property. In each fact situation the private party wishes to purchase all ofits construction materials tax-free. The exemption statute involved is article 20.04(Y) which wasadded bythe 1969Act. It appears asfollows:

(Yl Contracts with Exempt Organizations. There are exempted from the computation of the amount of taxes imposed by this Chapter, the receipts from the sale, lease or rental ofany tangible personal property to, or the storage, use or other consumption of tangible personal property by, any contractor for the performance of a contract for the improvement of realty for an exempt organization as defined in Section 20.04(H) of this Chapter or otherwise exempt from the taxes imposed by this Chapter to the extent of the value of the tangible personal property so used or consumed orboth inthe performance ofsuch contract. The key words in article 20.04(Y) are “the improvement of realty for an exempt organization.” The reasonable legislative intent would seem to be to furnish the tax exemption to a contractor only in cases where the realty was improved for the exempt entity, i.e., at the behest ofthe exempt entity and to inure to its substantgbenefit. Of course, in all such cases some degree ofbenefit will accrue to the private contractors, if nothing more than the contract price for his services, but the primary and substantial benefit must reasonably bethe improvement ofrealty for the exempt entity’s benefit, not for the lessee’s use and benefit, as appears to be the case in the three fact situations submitted. The inquiry turns onwhether the dominant purpose ofthe lease contracts was to make such improvements for the exempt entities cefor the private lessees. Under the doctrine of strict construction oftax exemptions we conclude that the lessees inquestion are not entitled to the tax exemption allowed byarticle 20.04(Y)inthe situations inquired about. See Davies v.Meyer, 541S.W.2d627(Tex. 1976). - SUMMARY Contracts with tax exempt entities for improvements by nonexempt persons or organizations of realty for the primary use and benefit of such nonexempt persons or organizations do not afford such contractors the exemption provided in article 20.04(Y), Taxation-General. 

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Attorney General ofTexas

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, Honorable BobBullock - Page Three (NW-94)

JOHN W.FAINTER, JR. First Assistant Attorney General TEDL.HARTLEY Executive Assistant Attorney General Prepared by BobLattimore Assistant Attorney General APPROVED: OPINIONCOMMITTEE C.Robert Heath, Chairman David B.Brooks BobGammage Susan Garrison Rick Gilpin BobLattimore Myra McDaniel William GReid Bruce Youngblood

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