Can a contractor buy materials tax-free for a political subdivision's construction project by routing purchases through an affiliated purchasing company?

Plain-English summary

A construction company and an affiliated purchasing company formed a joint venture to contract with a Kansas political subdivision. Under the plan, the purchasing affiliate would sell tangible personal property directly to the political subdivision, the construction affiliate would use that property to build for the subdivision, and every invoice and payment would be in the subdivision's name. The requester asked whether that structure lets the materials be bought tax-free.

The Department looked at the substance of the arrangement, not its form. It viewed the transaction as a construction contract between the joint venture (the contractor) and the political subdivision (the owner). The only way the contractor can buy the project's materials and services tax-exempt is if the project qualifies for a project exemption certificate (PEC): the political subdivision must apply to the Kansas Department of Revenue, and, if approved, give the PEC to the contractor to use when buying materials and services. Routing purchases through a purchasing affiliate and billing them in the subdivision's name does not, by itself, make the materials exempt.

What this means for you

Contractors working for cities, counties, and other political subdivisions

Do not assume that buying in the government's name (or through a related purchasing entity) exempts your project materials. Get a project exemption certificate: have the political subdivision apply for it and hand it to you before you buy.

Political subdivisions

If you want your construction project's materials purchased tax-free, you must apply for the project exemption certificate yourself and provide the approved certificate to your contractor.

Common questions

Q: Can we avoid tax by having a purchasing affiliate buy in the government's name?
A: No. The Department treats the deal as a construction contract; the materials are exempt only under an approved project exemption certificate.

Q: Who applies for the project exemption certificate?
A: The political subdivision applies to the Department, and once approved provides it to the contractor.

Citations and references

• Project exemption certificate (PEC) procedure — the Department stated it "would view the substance of the above-described transaction as a construction contract between the joint venture, as the contractor and the political subdivision, as the owner," and that to buy materials tax exempt "the project must qualify for a project exemption certificate," which "[t]he political subdivision must apply for ... from the Kansas Department of Revenue" and then provide to the contractor. The ruling cites no specific statute section.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2005-001

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 3, 2005

TTTTTTTTTTT
TTTTTTTTTTT
TTTTTTTTTTT
TTTTTTTTTTT

Dear Mr. TTTTTT:

We wish to acknowledge receipt of your letter dated December 13, 2004, regarding the application of Kansas Retailers’ Sales tax.

It is the understanding of this office that TTTTTTTT Construction Company, Inc. (“TTTTTTTT”) uses tangible personal property to erect structures for others or building, improving, altering, or repairing real or personal property. Further, a wholly owned limited liability company, TTTTTTT Purchasing Company, LLC (“Purchasing”) was recently formed, that purchases and resells tangible personal property. Purchasing would not be involved with any construction activities.

TTTTTTT and Purchasing have formed a joint venture. This joint venture intends to enter into a contract with a political subdivision of the State of Kansas. Both TTTTTTT and Purchasing will be named in the contract with a political subdivision as stipulated under the joint venture agreement. As part of the joint venture Purchasing will sell tangible personal property directly to the political subdivision. TTTTTTTTTT will then use that property to erect structures or build, improve, alter or repair real or personal property for the political subdivision. You have further indicated that each bill, invoice, contract or evidence of the transaction will be made out in the name of the political subdivision. Payment for this tangible personal property will be made on the check, warrant or voucher of that political subdivision.

The state of Kansas would view the substance of the above-described transaction as a construction contract between the joint venture, as the contractor and the political subdivision, as the owner. In order for the contractor to purchase the materials tax exempt, the project must qualify for a project exemption certificate. The political subdivision must apply for such a certificate from the Kansas Department of Revenue. If the application for the project exemption certificate is approved by the department, then the political subdivision should provide the approved project exemption certificate to the contractor for use in purchasing materials and services tax exempt.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 02/15/2005 Date Modified: 02/15/2005

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