Tax Responsibilities with Exempt Customers

Certain entities can receive tax exemptions, these include governmental entities, religious, educational, and public service organizations such as a non-profit organization providing athletic competitions for children or a company/department providing public safety in which they receive none or nominal compensation for their work. Federal and Texas government entities are automatically exempt from taxes. Nonprofit organizations must apply for exemption first before receiving and exempt status.

A contractor that performs a job on a tax exempt customer should obtain a completed exemption certificate. If the validity of the exemption is questionable the contractor should not accept the exemption certificate and should request additional evidence to show the exemption status of the organization. A sale is exempt if the contractor accepted the certificate in good faith and lacks knowledge that the exemption is invalid.

When an exemption certificate is accepted the contractor can issue an exemption certificate for an improvement to realty, qualifying taxable services and qualifying consumables such as:

• Items that are necessary and essential for the performance of the contract
• Items that are completely consumed at the job site.

Qualifying taxable services:

• The service is integral to the performance of the contract.
• The contract specifies that the service must be provided/purchased by the person performing the contract.

These exemptions apply regardless of whether the contract format is lump sum or separated.

Exempt Certifications:

A valid certificate will contain:

• Name and address of purchaser
• Item that is being purchased
• The reason why exempt
• Signature of purchaser
• Name and address of seller

Exempt Purposes:

It is important to know that the entity must be contracting the job for the primary purpose of the exempt entity. An example of this would be a hospital creating a fitness center for rehabilitation. An example of a taxable job by an exempt entity would be a hospital building office space to lease to the public.

Developmental Work:

Improving real property for another party that intends to donate these improvements to a governmental entity that will later take ownership of these improvements and maintain them can be exempt if these certain conditions are met:

• The developer irrevocably dedicated the realty to a government entity.
• The governmental entity agreed to accept the realty and improvements at a future date.
• The dedication and acceptance must take place before the work begins to be exempt, if the work has been started exemptions will not apply.

Exempt Customer Requesting a Refund:

If a tax-exempt customer paid sales tax in error, they are eligible for a refund. The customer will provide the seller a Texas Sales and Use Tax Exemption Certificate or the seller can submit a completed Assignment of Right to Refund request directly to the comptroller’s office. It is important to note that there is a four-year statute limitation on refund request and that an exempt organization cannot receive a refund for purchases made before the application for exemption was submitted.

Relates Links:

Texas Sales and Use Tax Resale Certificate/ Exemption Certificate, click here.

Assignment of Right to Refund form, click here.

Texas Applications for Tax Exemptions, click here.

Sales and Use Tax Exemptions in Agriculture, click here.