(K) 2016-R-0149.pdf

Office of Legislative

Research

Research

Report September 2, 2016 2016-R-0149

Phone (860) 240-8400 http://www.cga.ct.gov/olr olr@cga.ct.gov

Connecticut General Assembly

Office of Legislative Research Stephanie A. D'Ambrose, Director

Room 5300 Legislative Office Building Hartford, CT 06106-1591

SALES TAX EXEMPTION FOR BUILDING

MATERIALS USED IN STATE CONSTRUCTION

PROJECTS

By: Rute Pinho, Principal Analyst

John Rappa, Chief Analyst

ISSUE

Explain the state sales and use tax exemption for building materials that contractors purchase for use in state construction projects. How does the

Department of Revenue Services (DRS) enforce this exemption? Do other states provide a comparable one?

SUMMARY

State law allows contractors to purchase building materials for use in construction contracts with state agencies and other exempt entities (e.g., municipalities and nonprofit organizations) without paying sales and use tax on them. The exemption applies to materials permanently installed or placed in a construction project, such as the bricks and mortar used to construct an office building. It does not apply to the equipment, tools, and supplies the contractor uses to fulfill the contract (e.g., scaffolding, tractors, pipe cutters, trowels, wrenches) (Conn. Agencies Regs. § 12-

426-18).

To receive the exemption, contractors must present to sellers a DRS certificate attesting that the materials will be used for an exempt entity’s project. The contractor must sign the certificate and declare under penalty of false statement that the exempted items will be permanently installed or placed in the exempt entity’s project. Sellers do not have to prove that a sale is exempt from the sales and use tax if the applicable certificate was properly completed and taken in good faith. According to Susan Sherman, DRS’s legislative program manager, DRS uses its audit process to verify that purchases for which contractors have claimed the exemption were eligible.

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We identified 15 other states with comparable sales and use tax exemptions for building materials used in state construction projects. Like Connecticut, these states distinguish between materials that become part of the project and materials used or consumed to complete it. In 10 of the states, the exemption applies only to building materials that are physically incorporated into the construction project

(e.g., lumber, windows, doors, and plumbing and electrical materials). In the remaining five states (Massachusetts, Missouri, New Jersey, Texas, and Vermont), it also applies to tools and supplies that are consumed in the construction but are not incorporated into the structure (e.g., nonreusable concrete forms, sandpaper, and garbage bags). In all of the states, the exemption also applies to construction contracts for other designated governmental entities; in most, it applies to charitable nonprofits as well.

SALES AND USE TAX EXEMPTION FOR AGENCY CONTRACTORS

Scope

Connecticut law exempts contractors (including subcontractors) from paying sales and use taxes on building materials they purchase for projects being performed under contract with state agencies and other exempt entities, including the U.S.

government, municipalities, nonprofit hospitals, and other nonprofit organizations

(Conn. Agencies Regs. § 12-426-18).

The contractor exemption applies only to materials and supplies permanently installed or placed in a project, such as the bricks and mortar used to construct an office building. It does not apply to the equipment, tools, and supplies the contractor uses or consumes in fulfilling a contract. Contractors are also exempt from paying sales and use taxes on services resold to state agencies or exempt entities under a construction contract. The exemption applies only to services that will become an integral and inseparable component of the building contract (e.g., plumbing and electrical services). It does not apply to services consumed by the contractor, such as those of a secretary hired to process and file project-related documents (CGS § 12-410(5)).

Obtaining the Exemption and Verifying Eligibility

To receive the exemption, contractors must present DRS’s CERT-141, Contractor’s

Exempt Purchase Certificate (see Figure 1) when purchasing building materials from a seller (DRS, Building Contractors’ Guide to Sales and Use Taxes, 2007).

http://cga.ct.gov/current/pub/chap_219.htm#sec_12-410

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The certificate is designed to ensure that contractors, and the goods they purchase, qualify for the sales and use tax exemption. CERT-141 requires contractors to identify the project, the contracting agency or entity, and the amount of materials and supplies purchased for the project. If a contractor cannot identify the exact amount of materials that will be installed or placed in the project, it must provide an estimate, but it is liable for taxes on any materials or supplies that are not ultimately installed or placed in the project.

The contractor must sign the certificate and declare under penalty of false statement that the exempted items will be permanently installed or placed in the project.

The penalty is a maximum $5,000 fine, up to five years in jail, or both.

The contractor must also acknowledge that it is liable for taxes and penalties if this condition is unmet. Lastly, it must keep, for at least six years, the certificate and any records supporting its use, including those showing where and how the exempted materials and supplies were used.

Sellers do not have to prove that a sale is exempt from the sales and use tax if the applicable certificate was properly completed and taken in good faith. But a seller’s good faith will be questioned if he or she knew, or should have known, facts suggesting that the sale did not qualify for the exemption (e.g., the seller knows the contractor intends to use the materials for a private construction project).

COMPARABLE EXEMPTIONS IN OTHER STATES

We identified 16 states, including Connecticut, that exempt the sale of building materials incorporated or used in state construction projects. Table 1 lists the states providing the exemption and briefly describes the applicable property and the exempt entities. As it shows, all of the states extend the exemption to other designated governmental entities; most extend it to charitable nonprofit organizations as well (i.e., those organized for charitable, religious, educational, Figure 1: DRS CERT-141

September 2, 2016 Page 4 of 11 2016-R-0156 scientific, literary, or other specified purposes). In Missouri, the exemption applies only to specified state agencies.

In 11 states, including Connecticut, the exemption applies only to building materials that are physically incorporated into the construction project. In the remaining five states (Massachusetts, Missouri, New Jersey, Texas, and Vermont), it also applies to supplies that are consumed in the construction but are not incorporated into the structure.

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Table 1: State Sales Tax Exemptions for Building Materials Used in State Construction Projects

State and Citation Applicable Property

Exempt Entities

State Agencies and Entities Other Entities

Alabama

Ala. Admin. Code

810-6-1-.46(3)

Ala. Admin. Code

810-6-3-.77

Tangible personal property to be incorporated into real property pursuant to a contract with a governmental entity

All Counties

Incorporated municipalities

Educational institutions (state, county, or municipal)

Industrial or economic development boards or authorities exempt from state sales and use tax

Other governmental agencies exempt from state sales and use tax

Colorado

Colo. Rev. Stat. Ann.

§ 39-26-708

1 Colo. Code Regs.

§ 201-5:SR-10

Building materials purchased by contractors for construction work on property owned by an exempt entity; includes only items that become a part of the structure

All U.S. government

Political subdivisions1

Schools (public and nonprofit)

Charitable nonprofits

1 Political subdivisions are governmental units, such as counties, municipalities, and school districts

Table 1 (continued)

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Exempt Entities

State Agencies and Entities

Other Entities

Connecticut

Conn. Agencies Regs. § 12-426-18

Materials and supplies to be installed or placed in projects being performed under contracts with exempt entities and will remain in the projects after their completion

All U.S. government

Political subdivisions

Acute care, for-profit hospital operating as a sole community hospital (i.e., Sharon Hospital)

Charitable nonprofits (and cemetery companies)

Connecticut Technology Park

Materials Innovation and Recycling Authority

Tourism districts

Solid waste-to-energy facilities

Municipal or regional resource recovery authorities

Metropolitan Transportation Authority or subsidiary in connection with New Haven commuter rail service

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State Agencies and Entities

Other Entities

Illinois

Ill. Admin. Code tit. 86, § 130.2075

Materials for incorporation into real property owned by exempt entities All Governmental bodies

Charitable nonprofits

Indiana

45 Ind. Admin. Code 2.2-5-24

Ind. Code Ann. § 6-2.5- 5-16

Tangible personal property to be incorporated into real property owned by a governmental entity and used predominantly to perform its governmental functions

All Political subdivisions

Iowa

Iowa Admin. Code r.

701-19.12(422,423)

Building materials, supplies, or equipment for use in the performance of a construction contract with an exempt entity; includes only items that are incorporated into real property

All Governmental bodies or political subdivisions

Private nonprofit educational institutions

Nonprofit private museums

Maine

Me. Rev. Stat. Ann. tit.

36, § 1760(61)

Tangible personal property that is to be physically incorporated in, and become a permanent part of, real property for sale to a government agency or organization exempt from sales and use tax

All U.S. government

Political subdivisions

Charitable nonprofits

Any other sales tax-exempt organizations

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State Agencies and Entities

Other Entities

Massachusetts

Mass. Gen. Laws Ann.

ch. 64H, § 6(f)

Building materials consumed during, used in, or incorporated into construction, reconstruction, alteration, remodeling, or repair of buildings or structures or other public works owned by exempt entities;

includes rental charges for vehicles, equipment, and machinery used on site

All U.S. government

Political subdivisions

Charitable nonprofits

Other specified organizations

Missouri

Mo. Code Regs. Ann.

tit. 12, § 10- 112.010(3)(D)

Tangible personal property and materials incorporated into or consumed in constructing, repairing, or remodeling real property for an exempt entity

Missouri Department of Transportation

Missouri Highways and Transportation Commission

Public higher education institutions

U.S. government

Political subdivisions

Charitable nonprofits

Public or private elementary and secondary schools

Private higher education institutions

Jackson County Sports Complex Authority

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State Agencies and Entities

Other Entities

Nebraska

316 Neb. Admin.

Code Ch. 1, 017

Buildings materials that are incorporated into the building or structure and which subsequently are owned by the exempt entity, provided the entity follows certain procedures

All U.S. government

Political subdivisions

Specified charitable nonprofits, including hospitals and educational institutions

Licensed child care agencies for full-time care and custody of children

Other specified organizations

New Jersey

N.J. Stat. Ann. § 54:32B-9

N.J. Admin. Code §§ 18:24-5.3 & 18:24-5.5

Materials and supplies for exclusive use in fulfilling a contract to improve or repair the real property of an exempt entity; includes supplies that will be entirely consumed on the project

All U.S. government

United Nations or any international organization of which the United States is a member

Charitable nonprofits

Various other organizations exempt from state sales tax

Certain qualified businesses or housing sponsors

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State Agencies and Entities

Other Entities

New York

N.Y. Comp. Codes R. & Regs. tit. 20, §§ 528.16, 528.17 & 541.3

Tangible personal property for use in erecting or improving an exempt entity’s real property that becomes an integral component of the property

All U.S. government

Political subdivisions

United Nations or any international organization of which the United States is a member

Certain charitable nonprofits

Various other entities exempt from state sales and use tax

Ohio

Ohio Admin. Code 5703-9-14

Ohio Rev. Code Ann.

§5739.02(B)(13)

Building and construction materials for incorporation into an exempt entity’s real property

All U.S. government

Political subdivisions

Religious or nonprofit organizations

Certain sports facilities

Horticulture or livestock businesses

Nonprofit hospitals

Tax-exempt properties in other states

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State Agencies and Entities

Other Entities

Rhode Island

44 R.I. Gen. Laws Ann.

§ 44-18-30(5)

R.I. Code R. 60-1-167:1

Materials and supplies essential to a construction contract with an exempt entity that are to be utilized in the project’s construction

All U.S. government

Political subdivisions of Rhode Island and other states

Charitable nonprofits

Texas

34 Tex. Admin. Code §§

3.291 & 3.357

Tangible personal property that is incorporated into real property under a construction contract with, or for the primary use or benefit of, an exempt entity and consumable items that are necessary and essential to the contract and are completely consumed at the job site

All U.S. government

Political subdivisions

Bordering states and governmental units if they exempt or do not impose a tax on similar items

Charitable and other specified nonprofits

Vermont

Vt. Stat. Ann. tit. 32, §9743

Building materials and supplies to be used (consumed or physically incorporated) in the construction, alteration, or repair of buildings or structures owned by exempt entities

All U.S. government

Political subdivisions

Charitable nonprofits

Agricultural organizations

Specified development organizations and facilities

Source: CCH State Tax Smart Charts; State statutes and regulations

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