Can a federally chartered credit union building a new data center in Utah buy construction materials tax-free, and can its general contractor also buy materials tax-free as the credit union's agent?

Plain-English summary

A federally chartered credit union planning a large new Utah data center asked the Commission, on an expedited basis, two related questions: (1) is it exempt from Utah sales tax on construction materials for the project, and (2) can its general contractor, acting as the credit union's agent, also buy those materials tax-free — sparing the credit union from directly handling every purchase. The credit union argued that 12 U.S.C. § 1768's exemption for federal credit unions, combined with the supremacy clause and Utah's own administrative rule exempting sales to federal credit unions, should cover both the credit union's own purchases and its contractor's purchases made on its behalf, drawing an analogy to existing exemptions for contractors buying on behalf of school districts and religious/charitable organizations.

The Commission answered the two questions differently. On the credit union's own purchases: yes, clearly tax-free — federal credit unions are exempt from Utah sales and use tax under Utah Admin. Rule R865-19S-54(B)(11), consistent with the federal exemption in 12 U.S.C. § 1768.

On the contractor's purchases, the answer was not a simple yes — it turned on a fact-specific ownership test from Thorup Bros. Construction, Inc. v. Auditing Division (Utah 1993). Under Rule R865-19S-58, a contractor who converts construction materials into real property is normally treated as the "consumer" of those materials — meaning the contractor, not the tax-exempt entity, is the one who owes sales tax, even when building for a tax-exempt client. Thorup Bros. held that what actually matters is who owns the materials as a factual matter — not simply who is labeled "contractor" versus "owner." If the facts show the credit union genuinely purchased or owned the materials (even though the contractor physically bought and installed them as an agent), the purchase can be tax-free. But if the facts instead show the contractor itself purchased or owned the materials before converting them into the building, the contractor is liable for the sales tax, regardless of who the ultimate client is. The Commission noted this ownership-based approach remains the controlling law today, and flagged (without deciding) that it may separately reconsider whether Rule 58's provisions for religious/charitable organizations are "overly broad" — a signal that this area of law was still evolving.

What this means for you

Federal credit unions and other federal instrumentalities building in Utah

Your own direct purchases of construction materials are tax-free. But don't assume routing purchases through your general contractor automatically preserves that exemption — the tax-free result depends on documented facts showing genuine ownership by the credit union, not merely a contractual "agent" label.

General contractors working for tax-exempt clients

If you're buying materials for a tax-exempt client's project, structure the transaction (and your paperwork) to clearly establish that the client — not you — owns the materials, if you want the purchase to be tax-free. Absent that, you risk being treated as the taxable "consumer" of the materials you convert into the building, per Rule R865-19S-58's default rule.

Accountants and tax professionals structuring exempt-entity construction projects

Thorup Bros. is the controlling authority: the exemption follows actual ownership of the materials, established by the facts and circumstances (title, risk of loss, payment flow, contract language), not simply by labeling the contractor an "agent." Document the ownership chain carefully if you want a tax-exempt client's exemption to extend through the construction process.

Common questions

Q: Is a federal credit union exempt from Utah sales tax on its own construction material purchases?
A: Yes — federal credit unions are exempt from Utah sales and use tax under Rule R865-19S-54(B)(11), consistent with 12 U.S.C. § 1768.

Q: Can a general contractor buy materials tax-free just by calling itself the credit union's "agent"?
A: Not automatically. The Commission applies the Thorup Bros. ownership test — the exemption follows whoever actually owns the materials in fact, not merely a contractual label.

Q: What happens if the contractor, not the credit union, actually owns the materials?
A: The contractor is liable for sales tax on those materials, even though the ultimate client (the credit union) is tax-exempt.

Q: Is this the same rule that applies to school districts and religious/charitable organizations?
A: Not exactly — those entities have their own specific statutory or rule-based exemptions for contractor purchases (§ 59-12-104(2)(a)(i), Rule R865-19S-58(B)(4)). The Commission noted it may reconsider whether those provisions are too broad, but confirmed no comparable specific exemption yet existed for federal government entities beyond the Thorup Bros. ownership test.

Q: Can I rely on this ruling for my own tax-exempt construction project?
A: No — it binds the Commission only for the taxpayer and facts described. Document your ownership structure carefully and confirm current treatment with the Commission or a Utah tax professional.

Citations and references

Statutes, rules, and case law cited:

• 12 U.S.C. § 1768 (federal credit union tax exemption)
• Utah Code Ann. § 59-12-103(1)(a) (sales tax on tangible personal property)
• Utah Code Ann. § 59-12-104(2)(a)(i)-(ii) (construction material exemptions for schools/government entities)
• Utah Admin. Rule R865-19S-54(B)(11) (sales to federal credit unions exempt)
• Utah Admin. Rule R865-19S-58 (contractor as consumer of construction materials converted to real property)
• Thorup Bros. Construction, Inc. v. Auditing Division, 860 P.2d 324 (Utah 1993) (ownership, not labels, determines the taxable consumer)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/03-011.pdf

Original ruling text

REQUEST LETTER

03-011

NAME

ADDRESS

PHONE

Re: Private Ruling Request - Expedited Review Requested

We request your consideration, on an expedited basis, of the following two questions:

1. Whether a federally chartered credit union is responsible for the payment of state sales taxes on materials purchased within Utah for use in construction of a new data center, also within Utah; and

2. If not, whether the federal credit union's general contractor can, as the agent of the federal credit union, purchase materials for use in the construction of the center and likewise be exempt from paying any sale taxes.

We have discussed this matter informally by telephone with TP REP of your office. As the federal credit union is anxious to commence work on the new center, we would appreciate your expedited review of this matter, and your determination within the next one to two weeks, if at all possible. TP REP advised us that you could perhaps expedite consideration of our request in these circumstances.

FACTS

Our client is a federally chartered credit union. It plans to construct a new $$$$$$ data center in Utah. As a federally chartered credit union, it believes it can purchase the materials for the construction of the center without payment of sales tax on those materials. It believes, for administrative convenience, that it can also have its general contractor, as its agent, purchase materials for use in constructing the center and likewise be exempt from paying any sales tax. This would be helpful to the federal credit union in reducing its direct involvement in purchasing materials, and enabling the general contractor to keep better track of these materials on the federal credit union's behalf.

From the earliest days of our Republic, the federal government and its instrumentalities have been immune from state taxation under the supremacy clause of the Constitution, McCullough v Maryland, 17 U.S. (4 Wheat.) (1819).

12 U.S.C. Section 1768 of the United States Code provides as follows:

The federal credit unions organized hereunder, their property, their franchises, capital reserves, surpluses, and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial or local taxing authority; except that any real property and any tangible personal property of such Federal credit unions shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed. Nothing herein contained shall prevent holdings in any Federal credit union organized hereunder from being included in the valuation of the personal property of the owners or holders thereof in assessing taxes imposed by authority of the state or political subdivision thereof in which the federal credit union is located; but the duty or burden of collecting or enforcing the payment of such a tax shall not be imposed upon any such Federal credit union and the tax shall not exceed the rate of taxes imposed upon holdings in domestic credit unions.

It has long been recognized that this federal statute exempts federal credit unions from taxes imposed by the states, including sales taxes. See, e.g., United States vs. State of Michigan, 851 F.2d 803 (6th Cir. 1988); Georgetown University Employee's Federal Credit Union vs. District of Columbia, 525 A.2d 1014 (D.C. Ct. App. 1986); United States vs State of Maine, 524 F.Supp. 1056 (USDC Me. 1981); Tabco Federal Credit Union v Comptroller, as cited in Central Credit Union v. Comptroller of Treasury, 220 A.2d 568, 574 (Md. Ct. App. 1966). We believe the reasoning of these cases should likewise apply in this situation.

We also note that R865-19S-54 B.11. provides that sales to federally chartered credit unions are exempt from sales tax under Utah administrative law, as are sales to United States Instrumentalities. See R865-19S-41.

We recognize, of course, the exception in the federal statute regarding the imposition of taxation on "any real property and any tangible personal property of such Federal credit unions . . . to the same extent [] other similar property is taxed." However, this exception is limited to the imposition of ad valorem taxes on real and personal property. See, e.g., United States vs. State of Michigan, supra, 851 F.2d at 805. Under no circumstances does this exception enable the imposition of sales tax in this situation. Moreover, in at least two instances (public education situations, and in situations involving religious or charitable organizations) the purchase of construction materials is not subject to sales tax under state law, meaning that "other similar property" is not so taxed.

We further see no reason why materials purchased on behalf of the federal credit union by its contractor should not likewise also be considered exempt. This is, of course, the rule for materials purchased by contractors on behalf of school districts (U.C.A. Section 59-12-104(2)(a)(i)), and religious or charitable institutions (R865-19S-58 B.4), and presumably the recordkeeping requirements attendant to such transactions can be satisfied by virtue of R865-19S-23.

We further recognize, as we discussed with TP REP, that U.C.A. Section 59-12-104(2)(a)(ii) provides that construction materials purchased by the state, its institutions, and its political subdivisions may only be exempted from sales tax if they are "installed or converted to real property by employees of the state." We also recognize that R865-19S-58 A. provides that "[s]ales of construction materials and other items of tangible personal property to real property contractors and repairmen of real property are generally subject to tax if the contractor or repairman converts the materials or items to real property." However, in this situation, the federal statute and the various state exemptions supersede these provisions, in our view. Attempting to impose the sales tax in this situation would violate the federal statute, and the supremacy clause.

We thank you for your consideration of these issues and look forward to your response.

Sincerely,

NAME

COMPANY

RESPONSE LETTER

July 25, 2003

NAME

ADDRESS

RE: Private Letter Ruling Request - Federally Chartered Credit Unions

Dear NAME,

We have received your request for a private letter ruling concerning federally chartered credit unions ("federal credit union"). Specifically, you have asked whether a federal credit union can purchase construction materials tax-free and whether a contractor hired by a federal credit union may purchase construction materials tax-free on its behalf.

The purchase of construction materials is considered the sale of tangible personal property. Although Utah Code Ann. Section 59-12-103(1)(a) provides that sales of tangible personal property are taxable, Utah recognizes that a federal credit union is exempt from Utah sales and use tax. Utah Admin. Rule R865-19S-54(B)(11). Accordingly, a federal credit union may purchase tangible personal property, including construction materials, tax-free.

However, when a tax-exempt federal government entity, including a federal credit union, hires a contractor to convert tangible personal property into real property, the taxability of the construction materials depends on which party is considered to have purchased or owned the items. Utah Admin. Rule R865-19S-58(B)(2) ("Rule 58") provides that a contractor who converts construction materials into real property is the consumer of the personal property, even if the contract is performed for a tax-exempt, federal government entity. In Thorup Bros. Construction, Inc. v. Auditing Division, 860 P.2d 324 (Utah 1993), the Utah Supreme Court determined that ownership of the construction materials was key to identifying the final consumer. The Court explained that if the facts and circumstances showed the construction materials were purchased by a tax-exempt entity and not its contractor, then the materials could be purchased tax-free. However, if the facts showed the construction materials were purchased or owned by the contractor, the contractor would be liable for sales tax on its purchase of the items.

The guidance offered in Thorup Bros. is still relevant today. While there has been subsequent legislative and administrative action concerning construction materials purchased by certain other tax-exempt entities, no such action relates to federal government entities. As there is a concern that certain provisions in Rule 58 relating to religious and charitable organizations may be overly broad, we will study whether these provisions should be reconsidered. Again, if a federal credit union purchases or owns construction materials, its purchase of these items is tax-free, even if it hires a contractor to convert them to real property. But, if the contractor purchases or owns the materials, the contractor is liable for sales tax.

If you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

03-011