A non-profit school’s lease was not considered an exempt contract in Texas since the lease was not sufficiently long in relation to the life of the improvements to the realty to qualify as an exempt contract. The non-profit school entered into a contract with its landlord to finance the construction of a new campus. Under the contract, the landlord agreed to lease the campus to the taxpayer for a primary term of 25 years. Under the lease, the taxpayer has a “Termination Option” which allows the taxpayer to terminate the lease after year 20 of the primary term. The taxpayer may also terminate the lease at the end of each fiscal year, at the end of each school year, and at other specified points. In Texas, an “exempt contract” includes a contract with a non-exempt entity to improve real property for the primary use and benefit of an exempt organization. The Texas Comptroller developed a two-prong test to determine whether improvements to real property are for the primary use and benefit of an exempt entity. First, the lessee must qualify for exempt status. In this case, the taxpayer qualified as an exempt entity. Second, the term of the lease must be sufficiently long in relationship to the life of the improvements themselves. The campus’ expected useful life of 22 years is less than the lease’s 25-year term. However, the lease’s “Termination Option” allows the taxpayer to terminate the lease at the end of each fiscal year, at the end of each school year, or at the end of any special revenue fund or grant, if governmental funding for the charter school is discontinued. Accordingly, the lease is not sufficiently long to ensure that the taxpayer has the primary use and benefit of the improvements under the lease because since the taxpayer can terminate the lease during the useful life of the improvements. As a result, it is not an exempt contract and the taxpayer cannot issue exemption certificates in lieu of paying tax on purchases of tangible personal property and taxable services used or consumed in the performance of the contract. The cost of the sales tax on the construction contract can be assumed to be lower than the cost of not having an option to terminate a lease for 25 years. (Private Letter Ruling No. 2017010179, Texas Comptroller of Public Accounts, July 9, 2018)