Sent via email
February 9, 2016
Re: Ames Chamber of Commerce
Sales and Use Tax Informal Ruling Request – Status as Government Instrumentality
Dear :
The Iowa Department of Revenue (“Department”) has received your email in regards to the Ames Chamber of Commerce and whether it qualifies as a designated exempt entity for Iowa sales and use tax purposes in connection with an airport construction project involving the City of Ames. You seek a determination that purchases of building materials by contractors and subcontractors for use in the performance of a construction contract with the Chamber will be eligible for the favorable Iowa sales and use tax treatment provided by Iowa Code §§ 423.3(80) or 423.4(1).
Facts As You Provided:
The Chamber is a non-profit corporation organized under Chapter 504A of the Iowa Code (see opening paragraph of the Chamber’s Articles of Incorporation (“Articles”) attached as Exhibit 1). The Chamber qualifies for exemption from federal income tax under Internal Revenue Code (“IRC”) Sec. 501(c)(6) (see Article I, Section 4 of the Chamber’s Bylaws attached as Exhibit 2).
As stated in Article III of its Articles, the Chamber’s purpose is to “advance the general welfare and prosperity of the Ames area so that its citizens and all areas of its business community may prosper…with particular attention and emphasis given to the economic, civic, commercial, cultural, industrial, and educational interests of the area.” Article I, Section 3 of the Chamber’s Bylaws further states that its purpose includes strengthening the economic vitality and enhancing the quality of life in the Ames community.
Pursuant to Article IX, Section 1 of the Chamber’s Bylaws, no part of the Chamber’s funds shall inure or be distributed to its members. Upon its dissolution, all funds held by the Chamber are to be donated to one or more qualified charitable, educational, scientific, or philanthropic organizations as defined in IRC § 501(c)(3).
The Ames Economic Development Commission (“AEDC”) is the Chamber’s largest affiliated organization. Approximately 41% of AEDC’s budget is funded by contributions from public revenues, including the City of Ames (“City”) and Iowa State University (“ISU”).
On February 10, 2015, the City and ISU entered into an Agreement for Public Improvements at the Ames Municipal Airport (“Agreement,” attached as Exhibit 3). Under Section V of the Agreement, ISU is responsible for selecting a third party to arrange for the design and construction of the hangar. Approximately 45% of the funding for the airport project will come from the City, ISU, and other public sources, with the balance to come from Chamber fundraising efforts.
Under Sections V.1 and V.2 of the Agreement, the Chamber will be required to have all plans and specifications for the hangar approved in advance by the City. Furthermore, construction of the hangar must comply with all ordinances, policies, and regulations of the City. Pursuant to Section V.5 of the Agreement, once construction is complete, the Chamber will transfer ownership of the new hangar to the City.
Applicable Iowa Law As Stated in Your Letter:
Iowa Code section 423.3(80)(b) provides that contractors and subcontractors who use building materials, supplies, and equipment in the performance of a construction contract with a “designated exempt entity” may, under certain circumstances, purchase such items exempt from Iowa sales and use tax. Iowa Code section 423.3(80)(a) defines “designated exempt entity” to include “an entity which is designated in section 423.4, subsection 1 or 6.” Iowa Code section 423.4(1) includes within its list of designated entities “instrumentalities of state, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder.”
To claim the exemption under Iowa Code section 423.3(80)(b), a contractor or subcontractor must obtain a purchasing agent authorization letter and an exemption certificate from the designated exempt entity. These documents must be presented by the contractor or subcontractor to its vendors in order to claim an exemption from Iowa sales and use taxes when purchasing building materials, supplies, and equipment for use in the performance of the construction contract with the designated exempt entity.
In lieu of claiming the exemption under Iowa Code section 423.3(80)(b), Iowa Code section 423.4(1) provides that designated entities, including government instrumentalities, may apply for refunds of the sales or use tax paid upon the “sales price of all sales of goods, wares, or merchandise, or from services furnished to a contractor, used in the fulfillment of a written contract … if the property becomes an integral part of the project under contract and at the completion of the project becomes public property.” Under Iowa Code section 423.4(1)(a) and (b), a designated entity can file a refund claim based on information obtained from the contractors and subcontractors regarding the amount of Iowa sales and use tax paid on materials and services used in fulfillment of the contract, and must file any such claim within one year of project completion.
One of the primary factors considered in determining whether an organization is an instrumentality of government is whether the government can control the performance of the organization. See DeVries to Yarmouth Fire Dept., Policy Letter 0230071 (June 21, 2002) (citing United States v. Orleans, 425 U.S. 807, 814 (1976)). Other factors utilized by the Department for purposes of this determination are as follows: (1) whether the organization was created by the government; (2) whether the organization is wholly owned by the government; (3) whether the organization is operated for profit; (4) whether the organization is primarily engaged in the performance of some essential government function; and (5) whether the proposed tax would impose an economic burden on the government or its services to materially impair the usefulness or efficiency of the organization or to materially restrict the performance of its duties. See DeVries to SCORE, Policy Letter 0230040 (Mar. 13, 2002) (applying the factors identified in Unemployment Compensation Board of N.C. v. Wachovia Bank, 2 S.E.2d 592, 596 (N.C. 1939)).
Your Position as Stated in your Letter:
As respects the proposed hangar construction project, you believe the majority of the relevant factors support the conclusion that the Chamber is acting as a mere instrumentality for the City. In particular, under the Agreement, the Chamber must: (a) obtain advance City approval of the hangar plans and specifications; (b) adhere to all City requirements for plans, permits and approval; (c) follow the City’s non-discrimination guidelines in connection with the project; (d) complete construction in accordance with the City’s deadline; and (e) transfer ownership of the hangar to the City within thirty days after the issuance of the Certificate of Occupancy.
Additionally, a substantial portion of the Chamber’s on-going funding, as well as the funding for the airport construction project, is provided by the City and other public sources. Pursuant to the Chamber’s Bylaws, no portion of the Chamber’s earning or funds go to the benefit of its members. Finally, you believe the Chamber meets the other factors considered by the Department for purpose of identifying a government instrumentality, including the following:
1. The Chamber is not operated for profit and is entitled to tax-exempt status for federal and Iowa tax purposes.
2. The Chamber’s purpose of advancing the general welfare and prosperity of the Ames area, with a focus on economic development activities such as the construction of the new airport hangar, is an essential governmental function.
3. Because the Chamber relies upon public sources (the City and ISU) for substantial portion of its funding, the imposition of Iowa sales and use tax on building materials and other items used to construct the hangar would increase the cost, and in turn, impose an economic burden on the City and its taxpayers.
As respects this project, you believe the Chamber is acting as a mere instrumentality of the City, and thus qualifies as a designated exempt entity. Additionally, at the completion of the construction project, the hangar will be transferred by the Chamber to the City, and thus will become public property. Accordingly, assuming the procedures and due dates specified in the applicable statutes are met, you believe the building materials purchased by contractors and subcontractors for use in the performance of the contract with the Chamber for the construction of the airport hangar will be eligible for the favorable Iowa sales and use tax treatment provided by Iowa Code sec. 423.3(80) and section 423.4(1).
Facts Relevant to the Department’s Discussion:
The Ames Chamber of Commerce (“Chamber”) was initially created by an eighteen (18) member Board of Directors (“Board”) and currently has a seventeen (17) to eighteen (18) member Board which consists of the Chair, the Chair-Elect, 2nd Vice Chair, and the Treasurer. According to the Chamber’s By-Laws, the Chamber observes all State and Federal laws which apply to a non-profit organization under IRC § 501(c)(6) and according to the Chamber’s Articles of Incorporation, the Chamber is organized as a non-profit corporation under Iowa Code chapter 504A.
The purpose of the Chamber is for advancing “the general welfare and prosperity of the Ames area so that its citizens and all areas of its business community shall prosper…with particular attention and emphasis given to the economic, civic, commercial, cultural, industrial, and educational interests of the area.”
As stated in its by-laws, the Chamber is operated not for profit, and has a joint President/CEO with the Ames Economic Development Commission (“AEDC”), who receives an annual salary. The Board of Directors is the fiscal agent of the Chamber, as it reviews all activities including collection and disbursements of funds. In addition, Affiliated Organizations are groups of members of the Chamber that have a specific identity, but are a part of the functioning entity of the Chamber and do not have a separate entity status.
Issue:
Is the Ames Chamber of Commerce deemed to be an instrumentality of the City of Ames and therefore qualifies as a designated exempt entity?
Analysis:
Iowa Code section 423.2(1) imposes a sales tax of six percent on the “sales price of all sales of tangible personal property…sold at retail in the state….” Iowa Code section 423.3 also provides a number of exemptions from sales tax. Tax exemption statutes are strictly construed with all doubts resolved in favor of taxation. Iowa Ag. Constr. Co. v. Iowa State Bd. of Tax Review, 723 N.W.2d 167, 174 (Iowa 2006). The party claiming an exemption bears the burden of proving entitlement to the exemption. Id.
Specifically, Iowa Code section 423.3(80) provides:
a. For purposes of this subsection, “designated exempt entity” means an entity which is designated in section 423.4, subsection 1 or 6.
b. If a contractor, subcontractor, or builder is to use building materials, supplies, and equipment in the performance of a construction contract with a designated exempt entity, the person shall purchase such items of tangible personal property without liability for the tax if such property will be used in the performance of the construction contract and a purchasing agent authorization letter and an exemption certificate, issued by the designated exempt entity, are presented to the retailer. The sales price of building materials, supplies, or equipment is exempt from tax by this subsection only to the extent the building materials, supplies, or equipment are completely consumed in the performance of the construction contract with the designated exempt entity.
Iowa Code section 423.4 provides:
1. A … tax-certifying or tax-levying body or governmental subdivision of the state … may make application to the department for the refund of the sales or use tax upon the sales price of all sales of goods, wares, or merchandise, or from services furnished to a contractor, used in the fulfillment of a written contract with the state of Iowa, any political subdivision of the state, or a division, board, commission, agency, or instrumentality of the state or a political subdivision. if the property becomes an integral part of the project under contract and at the completion of the project becomes public property….
Based on Iowa Code section 423.4, a designated exempt entity includes a tax-certifying or tax-levying body or governmental subdivision of Iowa and all divisions, boards, commissions, agencies, or instrumentalities of state, federal, county or municipal government which do not have earnings going to the benefit of an equity investor or stockholder.
Therefore, in order for the Chamber to be a designated exempt entity, the Chamber would need to be an instrumentality of the City of Ames. When determining whether an organization, like the Chamber, is an instrumentality of a government, the Department has relied on the Wachovia test, among others. This test looks at the following factors:
…(1) whether the organization was created by the government; (2) whether the organization is wholly owned by the government; (3) whether the organization is operated for profit; (4) whether the organization is primarily engaged in the performance of some essential government function; and (5) whether the proposed tax would impose an economic burden on the government or its services to materially impair the usefulness or efficiency of the organization, or to materially restrict the performance of its duties.
Unemployment Compensation of N.C. v. Wachovia Bank and Trust Co., 2 S.E.2d 592, 596 (1939).
An analysis using the Wachovia test is as follows:
(1) The Chamber was not created by the City of Ames but was created by an 18-member Board of Directors with a mix of privately-and-publicly-employed members;
(2) The Chamber is not owned by the government;
(3) The Chamber is not operated for profit; however, it is quite common that nonprofit entities do not qualify as being government entities.
(4) Most important in this analysis is wheter the Foundation performs an essential government function.
The analysis provided by the Chamber has not indicated what essential government function the Chamber provides. The Chamber focuses its programs on projects that strengthen the economic vitality and quality of life in the Ames community. The standard for demonstrating an essential government function is higher than simply serving a general public purpose. In In the Matter of Andover Volunteer Fire Dep’t., Iowa Dep’t of Revenue, Declaratory Order, Dkt. No. 2013-300-2-0143 (Aug. 20, 2013), the corporation at issue was a volunteer fire department. The Director held that it performed an essential government function by providing for the safety and well-being of its citizens. Id. In In the Matter of Iowa State Memorial Union, Iowa Dep’t of Revenue, Declaratory Order No. 99-30-6-0117 (July 23, 1999), the Director held that providing facilities for dining, recreation, postal, and religious needs of students, faculty and guests served an educational purpose for the university and, therefore, provided an essential government function. However, in a 1986 policy letter, a Departmental attorney opined that a foundation engaged in the construction of a civic center for Sioux City was not an essential government function because its benefits were not on the same level of importance as police and fire services. Iowa Dep’t of Revenue, Policy Letter (Nov. 6, 1986).
The Chamber, in this situation, has been hired by ISU to be the party responsible for arranging for construction of the hangar and appears more akin to the civic center example. It is less clear that a Chamber serves an essential government function than an organization that serves public safety or educational needs.
(5) You state in your facts that the Chamber relies upon public sources (the City and ISU) for a substantial portion of its funding, and therefore the imposition of Iowa sales and use tax on the building materials and other items used to construct the hangar would increase the cost, and in turn, impose an economic burden on the City of Ames and its taxpayers. However, it is not clear that in general, imposition of tax on items purchased by the Chamber would impose an economic burden on the City of Ames.
The information provided by the Chamber so far indicates that the Chamber is not an instrumentality of the City of Ames.
In addition, although the Chamber may not be an instrumentality of the government, it is possible that the City of Ames may be able to claim a refund as it will eventually own the property pursuant to the contract you provided. Iowa Code section 423.4(1) provides in relevant part:
423.4 Refunds.
1. A … tax-certifying or tax-levying body or governmental subdivision of the state … may make application to the department for the refund of the sales or use tax upon the sales price of all sales of goods, wares, or merchandise, or from services furnished to a contractor, used in the fulfillment of a written contract with the state of Iowa, any political subdivision of the state, or a division, board, commission, agency, or instrumentality of the state or a political subdivision. if the property becomes an integral part of the project under contract and at the completion of the project becomes public property….
(Emphasis added). There are three factors that must be present to qualify for the refund. First, the entity applying for the refund must be one of the types of entities listed in the statute. Second, the materials furnished to the contractor must be “used in the fulfillment of a written contract with …any political subdivision of the state.” Third, the items must become public property at the completion of the project. Additional procedural requirements are described in the subsections of Iowa Code section 423.4(1).
While the first factor could be met, the Department does not have enough information to determine whether the second requirement will be met. It appears the third requirement will be met. If all three requirements of 423.4(1) are met by the City of Ames, the City of Ames, but not the Chamber, could claim a refund.
I hope this information has been helpful to you. Please remember that this letter is an informal opinion based only on the facts you provided and on the current law. In the future, the Department could take a position contrary to that stated in this 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 7.24 is not binding upon the Department. If you have any additional questions regarding this matter please do not hesitate to contact me.
Sincerely,
Theresa A. Dvorak
Policy Section
Taxpayer Services and Policy Division
Iowa Department of Revenue
(515) 281-3194
theresa.dvorak@iowa.gov