Do construction materials bought with a political subdivision's bond proceeds stay exempt from Kansas sales tax if a private company buys the industrial revenue bonds?

Plain-English summary

This letter is a follow-up that confirms an earlier ruling. The Department had already ruled — on August 30, 2001 — that construction materials for a project would be exempt from Kansas sales tax because they would be purchased with the funds of a political subdivision. This later letter answers a narrower follow-up question: does it matter who buys the industrial revenue bonds that finance the project?

The follow-up question. Industrial revenue bonds (IRBs) are a common financing tool in which a political subdivision (typically a city or county) issues the bonds, and a private company effectively provides the money by purchasing those bonds. The requester wanted to confirm that a private company's purchase of the IRBs would not disturb the sales-tax exemption on the construction materials.

The Department's answer: it makes no difference. The Department agreed that "the purchase of the industrial revenue bonds by [the company] will not affect the ruling issued on August 30, 2001." Its reasoning: "the materials will be purchased with funds of a political subdivision within the meaning of K.S.A. § 79-3606(d) regardless of the ultimate purchaser of the bonds."

Why this works. K.S.A. 79-3606(d) exempts sales of tangible personal property to Kansas political subdivisions. In an IRB structure, the bond proceeds are the political subdivision's funds, and the subdivision is the buyer of the materials — so the materials qualify for the exemption. The identity of the investor who buys the bonds is immaterial to that analysis.

Bottom line: the sales-tax exemption on IRB-financed construction materials follows the fact that a political subdivision is spending the money and buying the materials, not the identity of the bond purchaser. A private company buying the bonds does not convert the purchase into a taxable one.

What this means for you

Developers and companies using industrial revenue bonds

The sales-tax exemption on IRB-financed materials rests on the political subdivision being the purchaser using its own bond-financed funds under K.S.A. 79-3606(d). The private party's role as bond purchaser does not defeat that exemption. Structure and document the purchases so the political subdivision is genuinely the buyer of the exempt materials.

Cities and counties issuing IRBs

Your issuance of the bonds and ownership of the bond proceeds is what supports the exemption. Keep the paperwork clear that the materials are bought with the subdivision's funds and for its account, since that — not the investor's identity — is the basis the Department relied on.

Confirm the underlying ruling still fits

This letter only confirms that the bond purchaser's identity does not change the earlier result. The exemption still depends on the materials actually being purchased with political-subdivision funds within the meaning of 79-3606(d); if the underlying facts differ from the August 30, 2001 ruling, that ruling — and this confirmation — may not apply.

Common questions

Q: Are construction materials bought with a political subdivision's IRB proceeds exempt from Kansas sales tax?
A: Yes. The Department treated them as purchased with the funds of a political subdivision within the meaning of K.S.A. 79-3606(d), which exempts sales to political subdivisions.

Q: Does it matter that a private company buys the industrial revenue bonds?
A: No. The Department said the exemption applies "regardless of the ultimate purchaser of the bonds" — the private company's purchase of the bonds does not affect it.

Q: What is the legal basis for the exemption?
A: K.S.A. 79-3606(d), which exempts sales of tangible personal property to Kansas political subdivisions. The bond proceeds are the subdivision's funds used to buy the materials.

Citations and references

• K.S.A. 79-3606(d) — exempts sales of tangible personal property to Kansas political subdivisions; the Department treated the IRB-financed construction materials as purchased with a political subdivision's funds, exempt regardless of who buys the bonds.
• Prior Department ruling issued August 30, 2001 — the underlying ruling that the project's construction materials are exempt; this letter confirms the bond purchaser's identity does not change that result.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-119

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 26, 2001

XXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXX

Dear XXXXXXXXXX:

The purpose of this letter is to respond to your letter dated September 4, 2001.

In your letter you stated:

This letter is to confirm our conversation of XXXXXX in which we discussed the private letter ruling request submitted by XXXXXXXXX to the Kansas Department of Revenue, XXXXX requested a ruling that construction materials XXXXXXXXXXXXXXXXXXXXXXX bonds and industrial revenue bonds will not be subject to sales tax.

As you and I discussed today, XXXXXX will be the purchaser of the industrial revenue bonds issued with respect to its XXXXXXXXXX. You stated that the purchase of the industrial revenue bonds by XXXXXX will not affect the, ruling issued last week by the Department of Revenue because the materials will be purchased with funds of a political subdivision within the meaning of K.S.A. § 79-3606(d) regardless of the ultimate purchaser of the bonds. As we discussed, it is immaterial for purposes of the sales tax exemption that XXXXXXXX will purchase the bonds.

The Department agrees that the purchase of the industrial revenue bonds by XXXXXXXXXX will not affect the ruling issued on August 30, 2001 by the Department of Revenue. The reasoning is that the materials will be purchased with funds of a political subdivision within the meaning of K.S.A. § 79-3606(d) regardless of the ultimate purchaser of the bonds.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 10/30/2001 Date Modified: 10/30/2001

Table 1

Table 2