REQUEST LETTER
01-004
Response March 9, 2001
Dear Mr. TAXPAYER REP:
I would like to request an
advisory opinion from your office in reference to the ability of FOUNDATION, which
has a 501(c)(3) status, to claim exemption from sales tax on a construction
project. This project is a $$$$$
million facility for education paid for with tax funds and private
contributions. Of this $$$$$ million,
$$$$$ million is School District bond money, $$$$$ million is County bond
money, $$$$$ million is a legislative appropriation, and the balance is private
donations. It is being built on
property owned by FOUNDATION and SCHOOL district.
Would you please provide an
advisory opinion as to whether the FOUNDATION, which is responsible for the
construction of the building, can use the sales tax exemption as described in
Utah Code 59-12-104.
Thank you very much for your
response to this request.
Respectfully
NAME
Executive Vice President
CMH/pd
RESPONSE LETTER
March
9, 2001
NAME:
RE: Advisory Opinion – Purchase of Construction Materials for Educational Building
Dear NAME
We have
received your request for an advisory opinion on whether construction materials
incorporated into a new building at FOUNDATION may be purchased tax-free. From your letter and a recent telephone
conversation with you, we understand that the FOUNDATION (the “Foundation”) is
a §501(c)(3) entity responsible for building the project with funds derived
from tax sources and private donations.
The Foundation will hire a general contractor to construct the building
and, once the project is complete, transfer its ownership of the building to
FOUNDATION. The Foundation will
construct the building on land owned by two parties, FOUNDATION and the COUNTY
School District. Once the project is
complete, the COUNTY School District will transfer its ownership interest in
the land to FOUNDATION. Given these
facts, two sections of the Utah Code should be discussed to determine whether
the construction materials may be purchased tax-free.
Utah Code Ann. §59-12-104(2). Section
59-12-104(2) provides that construction materials may be purchased tax-free by
the state, its institutions, and its political subdivisions under certain
limited conditions, as follows:
(a) construction materials purchased by or on behalf of institutions of the public education system as defined in Utah Constitution Article X, Section 2, provided the construction materials are clearly identified and segregated and installed or converted to real property which is owned by institutions of the public education system; and
(b) construction materials purchased by the state, its institutions, or its political subdivisions which are installed or converted to real property by employees of the state, its institutions, or its political subdivisions;
However, neither of these subsections provides an exemption under the circumstances you describe. First, subsection (a) only applies to purchases made on behalf of the “public education system.” The “public education system” is defined to include elementary and secondary schools, but not colleges and universities, which are part of the “higher education system.” Accordingly, any purchases made on behalf of FOUNDATION do not qualify under this subsection. Second, subsection (b) only applies if state employees convert the construction materials to real property. As a private general contractor will construct the building and convert the construction materials into realty, the exemption under subsection (b) is also unavailable.
Utah Code Ann. §59-12-104.1(2)(a). Section 59-12-104.1(2)(a) provides that “sales made to a religious or charitable institution are exempt from . . . [taxation] if the sale is made in the conduct of the institution’s or organization’s regular religious or charitable functions and activities.” Accordingly, the sale of construction materials will be exempt if: (1) the Foundation is a religious or charitable institution; (2) the sale is made to the Foundation; and (3) the sale is made in the conduct of the Foundation’s regular charitable functions or activities.
If, as you state, the Foundation is a §501(c)(3) entity, it qualifies as a charitable institution under Section 104.1. Also, we assume the Foundation’s regular charitable functions include raising funds and building educational facilities for FOUNDATION . Should these assumptions be correct, the first and third conditions listed above would be satisfied. As a result, whether the construction materials may be bought tax-free would depend upon the second condition being satisfied, i.e., whether the materials are sold to the Foundation.
When a contractor is hired to build a structure, he or she will generally purchase the construction materials incorporated into it. The contractor is considered to be the final consumer of the personal property before it becomes realty and, thus, the person to whom the sale of the construction materials was made. The party who contracted to have the structure built is considered to have bought real property only, not the materials incorporated into it. Accordingly, even if the party purchasing the building is exempt from taxation, the contractor must generally pay sales tax on his or her purchase of the construction materials.
However, there is an exception to this general rule provided in Section 104.1. Enclosed are copies of Tax Bulletin 2-96 and Utah Admin. Rule 865-19S-58(4), which state that sales of construction materials are considered made to a religious or charitable institution for purposes of the Section 104.1 exemption if:
(a) the religious or charitable institution makes payment for the materials directly to the vendor;
or
(b) the materials are purchased on behalf of the religious or charitable institution.
(i) Materials are purchased on behalf of the religious or charitable institution if the materials are clearly identified and segregated and installed or converted to real property owned by the religious or charitable institution.
While subsection (b) does not apply to your situation because the Foundation does not own the underlying realty, subsection (a) does. Subsection (a) allows the construction materials to be purchased tax-free if the Foundation directly pays the vendors for them. For the exemption to apply, a vendor should receive a Form TC-721 exemption certificate at the time of the sale, and the Foundation should retain evidence that it paid the vendor directly for the materials. Please be aware that should the contractor pay for the materials and the Foundation reimburse the contractor, the sale of the materials would not qualify for the exemption.
Please contact us if you have any other questions.
For the Commission,
Marc B. Johnson
Commissioner
MBJ/KC
01-004