October 19, 2010

 

 

 

                        Re:      Hospitals

 

 

Recently, the Department received your email with a question regarding sales tax.  Specifically, you asked whether a policy letter written by Darwin Clupper on February 28, 2000 regarding the taxation of building materials for new construction of nonprofit hospitals could be reversed.  In addition, you asked whether building materials are subject to sales tax when used as part of a repair made to a nonprofit hospital.

 

Iowa Code § 423.3(27) exempts from sales tax “[t]he sales price of tangible personal property sold, or of services furnished, to a nonprofit hospital licensed pursuant to chapter 135B to be used in the operation of the hospital.”  The statute specifically requires that the tangible personal property sold, or services furnished be used in the operation of the nonprofit hospital.  Department rule 701 IAC 18.59 addresses construction contracts and provides in pertinent part that:

 

…goods, wares, or merchandise (such as building materials, supplies, and equipment...) which is purchased by a hospital and used by a contractor in the fulfillment of a written contract with the hospital cannot be purchased exempt from Iowa tax.  The goods, wares, and merchandise used in the fulfillment of these construction contracts are not used in the “operation” of a hospital but in activities at least one step removed from that operation.

 

The policy letter issued in 2000 addresses a situation in which a construction contractor enters into a contract with a nonprofit hospital and purchases building materials for use in construction of the nonprofit hospital or a hospital purchases construction materials itself to claim the exemption.  The policy letter stated that the construction materials were not purchased for use in the operation of the hospital but were one step removed from the operation of the hospital.  See Policy Letter from Darwin Clupper, Construction Contractor, Hospitals, Doc. Ref. 00300037 (Feb. 28, 2000).  The Department believes this interpretation is correct.

 

A Declaratory Ruling issued by the Director in 1999 and affirmed by the Iowa State Board of Tax Review on June 5, 2000, provided that “materials and labor used in constructing a building or other fixture which will subsequently house a business are not used in the operation of that business but in an activity which differs from and occurs before the operation of a business.”  In the Matter of Weitz, Iowa Dep’t. of Revenue Declaratory Ruling No. 99-30-6-0125 (Nov. 29, 1999).  The Declaratory Ruling also stated that “[t]he construction materials and supplies purchased by the hospitals are not used or to be used in the operation of the hospital.  By the time the materials and supplies are used in the operation of a hospital, they have lost their identity as tangible personal property.”  Therefore, the Department’s position is that construction materials purchased for the fulfillment of a construction contract with a nonprofit hospital are not purchased for use in the operation of the nonprofit hospital, but are one step removed from the operation of the nonprofit hospital.  See 701 IAC 18.59. 

 

The sales price of tangible personal property sold, or of services furnished, to a nonprofit hospital for the repair of an existing and operating nonprofit hospital is exempt from sales tax under Iowa Code § 423.3(27).  Repairs to an existing and operating nonprofit hospital are used in the operation and proper conduct of the existing nonprofit hospital.  Therefore, building materials sold to a nonprofit hospital and used in the repair of the nonprofit hospital are exempt from sales tax.

 

I hope this information is of assistance to you.  Please be advised that this letter is an informal opinion and is only applicable to the factual situation referenced and to the statutes in existence at the time of issuance.  Because of this, the Department could, in the future, take a position contrary to that stated in the letter.  Any written advice or opinion rendered to members of the public by Department personnel that is not pursuant to a Petition for Declaratory Order under 701 IAC 7.25 is not binding upon the Department.  If you have any additional questions regarding this matter, please do not hesitate to contact me.

 

Sincerely,

 

Theresa Dvorak

Policy Section

Taxpayer Services and Policy Division

Iowa Department of Revenue

(515) 281-3194

theresa.dvorak@iowa.gov