The Attorney General of Texas 

December 5, 1979 

MARK WHITE 

Attorney General 

Honorable Bob Bullock 

Comptroller of Public Accounts 

LBJ State Office Building 

Austin, Texas 78744 

Opinion No. MW-9 4 

Re: Imposition of sales tax on 

improvement of realty belonging 

to an exempt 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 a portion of 

its municipally owned airport, Meacham Field, 

to a private party for the purpose of operating a 

commercial aviation center. One of the 

covenants in the longterm lease (30 years 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 is in effect, the 

hangars and other facilities will be for the 

exclusive use of the private party. 

2. A church in the City of Houston owns a tract of 

land and the improvements thereon ( a building). 

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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Honorable Bob Bullock - Page Two (m- 9 4 1 

a purchase option available on expiration. The utility company has 

constructed and is constructing facilities to suit its business needs 

upon the leased property. 

In each fact situation the private party wishes to purchase 

all of its construction materials tax-free. 

The exemption statute involved is article 20.04(Y) which was added by the 1969 Act. 

It appears as follows: 

(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 of any 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 or both in the performance of such 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 of the exempt entity and to inure to its substantgbenefit. Of 

course, in all such cases some degree of benefit will accrue to the private contractors, if 

nothing more than the contract price for his services, but the primary and substantial 

benefit must reasonably be the improvement of realty 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 on whether the dominant purpose of the lease contracts was 

to make such improvements for the exempt entities ce for the private lessees. Under the 

doctrine of strict construction of tax exemptions we conclude that the lessees in question 

are not entitled to the tax exemption allowed by article 20.04(Y) in the situations inquired 

about. See Davies v. Meyer, 541 S.W.2d 627 (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. 

&erYt;@ 

Attorney General of Texas 

P. 289 
. 

, 

Honorable Bob Bullock - Page Three (NW-94) 

JOHN W. FAINTER, JR. 

First Assistant Attorney General 

TED L. HARTLEY 

Executive Assistant Attorney General 

Prepared by Bob Lattimore 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

C. Robert Heath, Chairman 

David B. Brooks 

Bob Gammage 

Susan Garrison 

Rick Gilpin 

Bob Lattimore 

Myra McDaniel 

William G Reid 

Bruce Youngblood 

p. 290