96-149
Response November 6, 1996
Request
September 20, 1996
XXXXX
Tax Policy Analyst
Utah State Tax Commission
210 North 1950 West
Salt Lake City, UT 84134
Dear XXXXX
This letter is a request for an advisory opinion on
behalf of the XXXXX that the
transactions outlined below will not be subject to Utah sales and use taxes.
Facts
The XXXXX (the “Foundation”) is a charitable organization
under Section 501(c)(3) of the Internal Revenue Code. A copy of Certificate of Incorporation of the Foundation and the
exemption letter on the Foundation issued by the Internal Revenue Service is
enclosed.
The Foundation was organized to provide financial
support for a new center for cancer research, named the “XXXXX,” that has been
formed within the Health Science Center of the XXXXX. The XXXXX is part of the XXXXX and will be referred to as the
“Institute” in this letter.
The foundation was organized to support the
Institute's studies of the genetic and cellular process in connection with the
development of cancer and the efforts of the Institute to develop innovative
diagnostic and clinical tools to better attack this disease. The Foundation also has as its purpose to
facilitate and accelerate the transformation of discoveries in basic cancer
research into treatment of drugs that will benefit those who suffer from
cancer. A copy of the Support Agreement
Between XXXXX and XXXXX together with a draft First Amendment (the “Support
Agreement”) is enclosed.
To accomplish these purposes, the Foundation has
agreed in Section 1.2 of the Support Agreement to provide financial support for
the purposes of constructing, equipping and operating a research facility to
house the Institute (the “Building”).
The Building will be located on land owned by the University and at all
times will remain University property.
The Building is expected to cost $$$$$. The Foundation is expecting under the
Support Agreement to contribute slightly less than one-half of the cost of the
Building. The remaining contributions
will come from the University, the State of Utah and proceeds of tax exempt
bonds issued by the State of Utah. It
is expected that the Foundation may use up to approximately 8% of the floor
space of the Building for its activities.
In order for the Foundation to maximize the value of
its contribution toward the construction of the Building, the Foundation
proposes to make up approximately $$$$$ of its contribution to the University
in the form of building materials for the Building.
The University will enter into a contract with the
XXXXX pursuant to which XXXXX will act as project manager for the construction
of the Building. As project manager,
the XXXXX Company will enter into contracts with designers and contractors for
the design and construction of the Building.
Under the construction contracts, the University will specifically
reserve the right to provide construction materials to be used in the
construction process. Under these
contracts, the University will be credited for those materials.
The materials to be purchased by the Foundation will
be delivered by the vendors to the construction site where the materials will
be received, inspected and stored on behalf of the Foundation by
representatives of the XXXXX Company.
Vendors will send invoices for the materials to the XXXXX Company for
approval before sending them on to the Foundation, which will issue checks
directly to the vendors. The Foundation
will assign its ownership interest in those materials to the University. These materials will be used in the
construction of the Building. None of
the materials will be installed by the vendor selling those materials to the
Foundation.
Opinion Requested
Based on the foregoing, it is respectfully requested
that the following opinion be issued:
The Foundation's purchase of building materials for
the Building, the Foundation's assignments of ownership of those materials to the
University, the University's providing of those materials to those constructing
the Building, and the converting of those materials onto the Building in the
construction process will not subject the Foundation, the University, the XXXXX
Company or any of the contractors to Utah sales and use taxes.
Discussion
Section 59-12-104(9) of the Utah Code exempts
purchases of tangible personal property by a charitable institution in the
conduct of its charitable functions from Utah sales and use tax. The purchase of the building materials by
the Foundation is exempt from Utah sales taxes because it is a purchase by the
Foundation in connection with its charitable purpose to support the Institute.
The donors of tangible personal property, which is
given way, not the donees, are considered the users or consumers of the
property for purposes of Utah sales and use taxes. Utah State Tax commission Rule R865-19S-68. As a result, the University as the donee of
the materials given it by the Foundation would not be subject to sales or use
taxes.
Finally, the Utah Supreme Court has established that
the building contractor who uses building materials purchased by a government
subdivision or a tax-exempt organization in the construction of a building for
the government subdivision or a tax-exempt organization is not the owner of
those building materials for purposes of Utah sales and use taxes. See Thorup Brothers Construction, Inc. v.
State Tax Commission, 860 P.2d 324 (Utah 1993); Arco Electric v. State
Tax Commission, 860 P.2d 435 (Utah 1993); Brown Plumbing & Heating
Co. v. State Tax Commission, 861 P.2d 453 (Utah 1993)Under the principles
of these cases, the XXXXX Company and the contractors constructing the Building
are not the owners of the building materials given to the University by the
Foundation. Therefore neither the XXXXX
Company nor any of the other contractors are subject to sales tax on those
materials.
We therefore respectfully request that an advisory
opinion set forth above be issued. If
you have any questions, please contact me.
Very truly yours,
XXXXX
XXXXX
Advisory opinion - Application of sales tax to
purchases of construction materials
DearXXXXX,
We have
received your request for sales tax guidance pertaining to purchases of
construction materials that will be used to build the XXXXX facilities. We offer the following:
Purchases by the University.
In
section 59-12-104 (3) of the Utah Code, the legislature established a limited
sales tax exemption on purchases of construction materials by exempt
entities. Beginning January 1, 1996,
construction materials purchased by or on behalf of an entity of the public education
system are exempt if the materials are clearly identified to the contract and
installed on or converted to real property which is owned by the school. The exemption expressly limits this
exemption to schools with the public education system as defined by Article X,
Section 2 of the Utah State Constitution.
There, “public education system” is defined to include only elementary
and secondary schools. Public
universities and colleges are defined as part of the “higher education
system.” This exemption, then, applies
only to construction projects for elementary and secondary schools.
Your
letter and the accompanying materials indicate that the University reserves the
right to purchase construction materials.
These purchases are not exempt as purchases by or on behalf of an entity
in the public education system under section 59-12-104 (3) (a). As a state entity, the University may
purchase construction materials tax free under section
59-12-104 (3) (b) only if the materials are
converted to real property by its own employees.
Purchases by the Foundation.
Under
Utah Administrative Rule R865-19S-58, a qualified charitable organization may
purchase construction materials tax free 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
charitable institution and the materials are clearly identified and segregated
and installed or converted to real property owned by the charitable
institution. The purchases described in
your request do not appear to qualify for exemption under (b) above because
they are not converted to real property owned by the Foundation. However, the Foundation may purchase items
tax free directly from the vendor under (a) above, then donate them to the
project. See Utah
Administrative Rule R865-19S-68 (A).
To
claim an exemption as a charitable institution, the exempt entity must have an
exemption number issued by the Tax Commission.
If the Foundation has not already obtained its exemption number, it may
apply for a number using the enclosed form TC-160. The exemption number must be included on the exemption
certificates that the Foundation gives to the supplier.
Please
let us know if you need further assistance.
For
the Commission,
Joe
B. Pacheco,
Commissioner