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


                   Honorable Bob Bullock                             Opinion No.   MW-94
                   Comptroller of Public Accounts
                   LBJ State Office Building                         Re: Imposition of sales tax on
                   Austin, Texas 78744                               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
                                       utilitycompany.   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 non-
           exempt 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




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    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




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