March 1, 2012            

 

 

 

 

            RE: Construction Materials/Sales Tax

 

Dear :

 

Recently, the Department received your inquiry regarding the sales tax treatment of construction materials used in the building of an ambulatory clinic.  Specifically, you asked whether the materials are exempt from sales tax because they are being used in the construction of a clinic for a Federally Qualified Health Center (“FQHC”).

 

Facts

 

Council Bluffs Community Health Center (“CBCHC”) has contracted with ConStruct, Inc., a general contractor, for the building of a free-standing ambulatory clinic facility.  CBCHC is a 501(c)(3) non-profit organization and an FQHC.  An FQHC is a center that receives federal grants and meets the definition of a health clinic under Section 330 of the Public Health Service Act (42 U.S.C. §254(b)).[1]  To qualify for this grant funding, the health center must be located in a designated medically underserved area or serve a medically underserved population.[2]    The board of the health center must be composed of at least 51% users of the health center, and the health center must offer services to all persons in its service area, regardless of their ability to pay or insurance status.[3] 

 

During our telephone conversation on February 21, 2012, you explained that, because your organization is exempt from Iowa sales tax for all supply purchases, you believed your purchase of building materials would be exempt as well.  You told ConStruct to take this sales tax-exempt status into consideration when formulating the bid.  ConStruct did so and, as such, the accepted bid of $4.1million did not include sales tax on building materials.  It is also important to note that CBCHC and ConStruct have structured the material purchasing so that CBCHC is the direct purchaser of all building materials.  ConStruct is merely the purchasing agent.  All receipts reflect this arrangement. 

 

CBCHC received a federal grant of $4,928,778 from the Health Resources and Services Administration and additional federal funding in the amount of $5,586,878, which will cover 95% of the costs of building the clinic.  But, if CBCHC has to pay sales tax on the building materials, CBCHC will have to seek additional funds and delay construction of the clinic. 

 

Analysis

 

Under Iowa law, when contractors purchase building materials, supplies and equipment, they are considered the consumers of those materials, supplies and equipment.[4]  This means that when a contractor purchases building materials, it cannot claim an exemption for resale, even if the materials and labor are separately itemized.[5]  The necessary allowance for tax on materials should be figured in when calculating the bid, but tax should not be identified as a separate item in the formal bid since a contractor cannot charge sales tax.[6]  In other words, the contractor, not the sponsor, is responsible for tax, but the bid will reflect those costs.  However, some sponsors are “ designated exempt entit[ies]” for the purposes of construction contracts.[7]  These designated exempt entities can apply for an exemption certificate through the Department of Revenue and present it to the contractor.[8]  If the contractor presents that certificate to the supplier, the contractor does not have to pay sales tax on the materials, therefore preventing the need to pass such costs on to the sponsor.[9] 

 

Not all non-profits are designated exempt entities; in fact, the list is very limited and the exemption is narrowly construed.[10]  The list only includes:

·         private nonprofit educational institution in Iowa;

·         nonprofit private museum in Iowa;

·         tax-certifying or tax-levying body or governmental subdivision of Iowa, including the state board of regents, state department of human services, state department of transportation;

·         municipally-owned solid waste facility which sells all or part of its processed waste as fuel to a municipally-owned public utility;

·         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;

·         Habitat for Humanity;

·         rural water districts organized under Iowa Code chapter 357A.[11]

It does not include non-profit hospitals or clinics.[12]  Therefore, the CBCHC is not considered a designated exempt entity.  As such, purchases made by ConStruct for construction of the health clinic would not be sales tax exempt.  Therefore, to be exempt from sales tax CBCHC’s building materials must fall under some other sales tax exemption. 

 

Iowa law exempts all community health centers that meet the requirements of 42 U.S.C. 254 §§ (b) or (c) from sales tax on “the sales price of all tangible personal property sold, or of services furnished.”[13]  As stated above, because CBCHC is an FQHC, it meets the requirements of a clinic under 42 U.S.C. 254.[14]  Therefore, it appears that all purchases of tangible personal property by CBCHC should be exempt from sales tax.  Under Iowa law, “[t]angible personal property” is “personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.”[15]  Building materials meet this definition of tangible personal property.  Therefore, if CBCHC is the purchaser of the building materials, it would seem those materials should be sales tax-exempt. 

 

The Department has no case law directly on point.  But, there are similar cases that provide guidance on this matter.  In In re the Petition of the Weitz Company Inc. for A Declaratory Order Regarding Iowa Code § 422.54(54) and Department Rule 701—18.59(422,423), the Department considered a similar matter in the context of non-profit hospitals.[16]  The Weitz Company, a general contractor, was considering construction bids for projects sponsored by Iowa nonprofit hospitals.[17]  These nonprofit hospitals were not designated exempt entities for the purposes of construction projects.[18]  But, these hospitals were exempt from sales tax on purchases of tangible personal property and taxable services “used in the operation of the hospitals.”[19]  Given the exemption on purchases of tangible personal property by non-profit hospitals, the contractor believed that if the hospital was the purchaser of the materials, the building materials would be exempt from sales tax.[20]  So, the contractor contemplated a contract agreement whereby the contractor would provide labor for the project, but the hospital would be the direct purchaser of the building materials, and the contractor would simply serve as a purchasing agent.[21]  But, the director of the Department of Revenue determined that such purchases would not be exempt from sales tax.[22]  This decision rested entirely on the “in the operation of” language of the statute.[23]  The director determined that building materials that become integrated into a completed structure are not used “in the operation of” a hospital.[24]  Though in Weitz the director held that the hospital’s direct purchases were not exempt, the decision suggests that, absent the “in the operation of” language, the director may have reached a different conclusion. 

 

Unlike the non-profit hospitals exemption, the sales tax exemption for 42 U.S.C. 254 (b) and (c) clinics, such as CBCHC, does not include the “in the operation of” language.[25]  The statute simply states that “the sales of tangible personal property sold, or of services furnished, to…Community health centers as defined in 42 U.S.C. § 254(c) and migrant health centers as defined in 42 U.S.C. § 254(b)” are exempt.[26]  Therefore, based on the logic of the Weitz case, and the breadth of Iowa Code section 423.3(18), it appears that purchases made by a 42 U.S.C. 254(b) or (c) clinic—no matter what their use—are exempt. 

 

The other Department policy letters and letters of finding on similar issues all involve contracts where the contractor or subcontractor, rather than the sponsor, was the purchaser of materials.[27]  It is clearly established that, unless the sponsor is a designated exempt entity, if the contractor is the purchaser of materials, the sales tax exemption does not apply.  But, none of these cases involved a scenario where the sponsor was the purchaser of materials. 

 

In conclusion, it appears that, although the CBCHC is not a designated exempt entity, so long as CBCHC is the direct purchaser of the building materials rather than the contractor, the materials should be exempt from Iowa 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.  Also, 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 7.56 is not binding upon the Department.  If you have any additional questions regarding this matter, please do not hesitate to contact me.

 

Sincerely,

 

 

 

Alana Stamas

Policy Section

Taxpayer Services & Policy Division

Iowa Department of Revenue

(515) 725-2265

alana.stamas@iowa.gov