Can a Georgia city buy water-treatment machinery tax-free and furnish it to its construction contractor without triggering use tax?

Plain-English summary

The city could purchase pumps, mixers, chemical-storage and pumping equipment, sedimentation plates, blowers, motor controls, instruments, and electrical components tax-free when it paid the seller directly by warrant on appropriated municipal funds.

If the city furnished that property to its contractor, the contractor did not owe use tax when the equipment retained its identity as tangible personal property after the work. A separate public-water-system exemption also covered city-purchased items used for general distribution even if the contractor incorporated them into real property. That special rule did not extend to property serving only a particular site.

Common questions

Q: Could the contractor use the city's exemption for its own purchases?

A: The ruling addressed items the city purchased under the exemption and then furnished to the contractor, not contractor purchases made in the contractor's own name.

Q: What if the property became part of the real estate?

A: General-distribution property in the public water system could remain exempt under the separate statutory rule.

Citations and references

• O.C.G.A. § 48-8-3(1) -- directly paid municipal purchases
• O.C.G.A. § 48-8-3(2) -- public water-system property for general distribution
• O.C.G.A. § 48-8-63(b)-(c), (h)(1) -- contractor use of government property

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2014-02

Original ruling text

State of Georgia
Douglas J. MacGinnitie
Commissioner

Department of Revenue

Frank M. O’Connell
Director

Legal Affairs & Tax Policy
1800 Century Blvd., Suite 15107
Atlanta, Georgia 30345-3205
(404) 417- 6649

February 28, 2014

Georgia Letter Ruling SUT No. 2014-02-28-01 Government & Govt. Contractors

This letter is in response to your request for guidance on the application of Georgia sales and use
tax to certain purchases by the City for a drinking water treatment plant.
Facts
The City is currently involved in a competitive bid process to procure services for construction
of a new drinking water treatment plant. The City intends to enter into a contract with a qualified
construction entity through which the city will purchase materials, equipment, machinery, labor,
and other services for the project.
The new water treatment plant will involve a number of treatment processes that will utilize
machinery and equipment to produce drinking water from raw water. Examples of such
machinery and equipment include:





Water pumps
Mixers
Chemical storage and pumping equipment
Instruments and electrical components





Sedimentation plate equipment
Blowers
Motor control centers

Drinking water produced by the City’s water treatment plant will be sold to customers.
Issue
Does the City qualify for a sales tax exemption for the production machinery and equipment it
will purchase for its new drinking water treatment plant?

An Equal Opportunity Employer

February 28, 2014
Page 2 of 4

Analysis
Overview
Georgia levies and imposes a tax (subject to certain specific exemptions) on the retail purchase,
retail sale, storage, use, or consumption of tangible personal property and certain enumerated
services.1 “Retail sale” or “sale at retail” means a sale of tangible personal property or taxable
services to any person other than for resale.2 “Sale” means any transfer of title or possession,
exchange, barter, lease, or rental, conditional or otherwise, in any manner, by any means of any
kind of tangible personal property for a consideration.3 The amount subject to tax is the “sales
price”. “Sales price” means the total amount of consideration, including cash, credit, property,
and services, for which personal property or services are sold, leased, or rented, valued in money,
whether received in money or otherwise without any deduction for the following:
(i) The seller's cost of the property sold;
(ii) The cost of materials used, labor, or service cost, interest, losses, all costs of
transportation to the seller, all taxes imposed on the seller, and any other expense
of the seller;
(iii) Charges by the seller for any services necessary to complete the sale; and
(iv) Delivery charges.4
Exemptions
The following transactions are exempt from Georgia sales tax and could be applicable to the case
at hand:


Sales to any or municipality of this state, or any bona fide department of a municipality
of this state are exempt when paid for directly to the seller by warrant on appropriated
government funds.5



Transactions in which tangible personal property is furnished by the United States
government or by a county or municipality of this state to any person who contracts to
perform services for the governmental entity for the installation, repair, or extension of
any public water, gas, or sewage system of the governmental entity when the tangible
personal property is installed for general distribution purposes, notwithstanding Code
Section 48-8-63 or any other provision of this article. No exemption is granted with
respect to tangible personal property installed to serve a particular property site.6

1

O.C.G.A. §§ 48-8-1 and 48-8-30(a).
O.C.G.A. § 48-8-2(31).
3
O.C.G.A. § 48-8-2(33).
4
O.C.G.A. § 48-8-2(34)(A).
5
O.C.G.A. § 48-8-3(1).
6
O.C.G.A. § 48-8-3(2).
2

An Equal Opportunity Employer

February 28, 2014
Page 3 of 4

Contractors
As a general rule, “[e]ach person who orally, in writing, or by purchase order contracts to furnish
tangible personal property and to perform services under the contract within this state shall be
deemed to be the consumer of the tangible personal property and shall pay the sales tax imposed
by this article at the time of the purchase. Any person so contracting who fails to pay the sales
tax at the time of the purchase or at the time the sale is consummated outside the limits of this
state shall be liable for the payment of the sales or use tax.”7
In addition, “[e]ach person who contracts to perform services in this state and who is furnished
tangible personal property for use under the contract by the person, or such person's agent or
representative, for whom the contract is to be performed, when a sales or use tax has not been
paid to this state by the person supplying the tangible personal property, shall be deemed to be
the consumer of the tangible personal property so used and shall pay a use tax based on the fair
market value of the tangible personal property so used irrespective of whether any right, title, or
interest in the tangible personal property becomes vested in the contractors.”8
The two provisions quoted above establish the basic rule that contractors are liable for tax on all
items used by the contractor to perform under the contract. O.C.G.A. § 48-8-63 provides that the
contractor owes tax even on items provided to the contractor by the person for whom the contract
is to be performed. However, O.C.G.A. § 48-8-63(h)(1) provides the following exception to this
rule:
Nothing contained in this Code section shall be construed to impose any sales or
use tax with respect to the use of tangible personal property owned by the State of
Georgia, the University System of Georgia, or any county, municipality, local
board of education, or other political subdivision of this state in the performance
of contracts with such entities when the property is not actually used up and
consumed in the performance of the contract. Tangible personal property
incorporated into real property construction which loses its identity as tangible
personal property shall be deemed to be used up and consumed within the
meaning of this subsection. Any governmental entity which furnishes tangible
personal property to a contractor for incorporation into a construction, renovation,
or repair project conducted pursuant to a contract with such governmental entity
shall issue advance written notice to such contractor of the amount of tax owed
for such tangible personal property. The failure of the governmental entity to
issue such advance written notice to the contractor of such tax liability shall
render such governmental entity liable for such tax.
Thus, if a municipality owns tangible personal property and provides such property to a
contractor to use in performing under a contract, the contractor does not owe use tax on the
7
8

O.C.G.A. § 48-8-63(b).
O.C.G.A. § 48-8-63(c).

An Equal Opportunity Employer

February 28, 2014
Page 4 of 4

property when the property does not lose its identity as tangible personal property, i.e., the
property remains tangible personal property after the contractor has completed his work and has
not been incorporated into real property. However, in the case of a public water system, even
items that become real property retain their exempt status when such items are purchased by the
federal government or a Georgia county or municipality, and the items are used for general
distribution purposes.9
Ruling
As a municipality of this state, the City qualifies for a sales tax exemption pursuant to O.C.G.A.
§ 48-8-3(1) for all purchases of tangible personal property when such purchases are paid for
directly to the seller by warrant on appropriated government funds. Thus, purchases of
machinery and equipment that will be used in the City’s new drinking water treatment plant are
exempt when paid for in such a manner. If the City purchases machinery and equipment pursuant
to this exemption and provides the machinery and equipment to a contractor to use in performing
a contract, the contractor does not owe use tax on the machinery and equipment as long as the
items do not lose their identity as tangible personal property, i.e., the machinery and equipment
remain tangible personal property after the contractor has completed its work and have not been
incorporated into real property.
In addition to the exemption discussed above, which applies to items of tangible personal
property that retain their identity as tangible personal property, certain items that are
incorporated into real property may be purchased and used exempt from sales and use tax.
Specifically, pursuant to O.C.G.A. § 48-8-3(2), items purchased by the City for general
distribution purposes within a public water system are exempt from sales and use tax even if the
items are furnished to a contractor and ultimately incorporated into real property.
Based on the above, the City may make exempt purchases of the following water treatment
machinery and equipment: water pumps, sedimentation plate equipment, mixers, blowers,
chemical storage and pumping equipment, motor control centers, and instruments and electrical
components.
The opinions expressed in this ruling are based upon the information contained in your request
and limited to the specific transactions, facts, circumstances and taxpayer in question. Should the
circumstances regarding the transactions change, or differ materially from those represented,
then this ruling may become invalid. In addition, please be advised that subsequent statutory or
administrative rule changes or judicial interpretations of the Statutes or Rules upon which this
advice is based may subject similar future transactions to a different tax treatment than that
expressed in this response.

9

O.C.G.A. § 48-8-3(2).

An Equal Opportunity Employer