I. Background/Purpose

The Department of Revenue has previously allowed contractors and other persons or entities acting for utilities and similar businesses to take advantage of the exemptions provided under G.L. c. 64H, § 6(r) and § 6(s) by demonstrating that they are purchasing certain items as agents for the utilities or other entities who will use the items in the exempt manner specified by the statute. Because this test has in some instances proven unwieldy for both taxpayers and the Department of Revenue [DOR], DOR is modifying its policy with respect to G.L. c. 64H, § 6(r) and § 6(s), as discussed below.

II. The Statute

Under G.L. c. 64H, § 6(r), sales of materials, tools and fuels, or any substitute therefor are exempt from sales tax if the materials, tools or fuels:

  • become an ingredient or component part of tangible personal property to be sold; or are consumed and used directly and exclusively:
  1. in agricultural production;
  2. in commercial fishing;
  3. in an industrial plant in the actual manufacture of tangible personal property to be sold, including the publishing of a newspaper;
  4. in the operation of commercial radio broadcasting or television transmission;
  5. in the furnishing of power to an industrial manufacturing plant;
  6. in the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines or pipes;
  7. in the production of animals for research, testing, or other purposes relating to the promotion or maintenance of the health, safety or well being of human beings or animals; or
  8. in research and development by a manufacturing corporation.

Section 6(s) likewise exempts sales of machinery or replacement parts thereof used in substantially the same manner as the materials, tools and fuels covered by § 6(r). With some few exceptions not relevant here, items exempt from sales tax are also exempt from use tax. G.L. c. 64I, § 7(b).

III. Modification of Current Policy

In Hart and McGinley v. Commissioner of Revenue, Appellate Tax Board, Docket No. F233702 (1998), and Araserve, Inc. v. Commissioner of Revenue, Appellate Tax Board, Docket No. 223264 (1998), the Appellate Tax Board ruled that purchases of tangible personal property by a party on behalf of an entity exempt from tax pursuant to G.L. c. 64H, § 6(d) and § 6(e) are exempt from tax if the purchaser is acting as the agent of the exempt entity. See TIR 99-4. DOR subsequently extended the agency principle behind these cases to the exemptions afforded under G.L. c. 64H, § 6(r) and § 6(s), and announced that sales of materials, tools and fuels, or any substitute therefor, or of machinery and replacement parts would be exempt from sales or use tax when consumed and used for the purposes and in the manner indicated by § 6(r) and § 6(s) if the purchaser is acting as the agent of the party that will use the materials, tools, fuels, machinery or replacement parts in the manner indicated by the statute. TIR 99-21. DOR further announced that the Department would look to Massachusetts law when determining whether a purchaser was an agent of an exempt user. Id.

Under Massachusetts law, the existence of an agency relationship is a question of fact based upon a review of the actual course of dealings between the parties. While this rule is simply stated, the Department's experience has been that verifying whether an agency relationship exists in this context can be both cumbersome and time consuming for taxpayers and the Department, and the test is therefore frequently difficult to apply in practice. As a result, the Department has reviewed its policy in this area, and concluded that a simplified standard for exemption is consistent with law and sound tax administration, and is in the interests of both taxpayers and the Department. The Department is therefore modifying its policy with respect to G.L. c. 64H, § 6(r) and § 6(s) and will hereafter permit any person or entity, such as contractors, to purchase items covered by G.L. c. 64H, § 6(r) and § 6(s) without payment of tax provided that the property itself will be used in the manner specified by the statute. A showing of agency will no longer be required for exemption under § 6(r) and § 6(s). Purchasers purchasing qualifying property may do so by presenting an exempt use certificate, Form ST-12, to the vendor. Such purchasers bear the burden of proof of showing on audit that the items purchased are or will be used in an exempt manner. In the event that the items do not qualify for the §6 (r) or §6 (s) exemption, a contractor will be liable for the tax. [1]

IV. Discussion of Law

The change in policy is consistent with law because the exemptions in § 6(r) and § 6(s) do not themselves refer to purchases made by particular persons or their agents, but to sales of items for particular uses. The statute thus differs significantly in wording from the statutes explicated in Hart and McGinley and Araserve, both of which deal with sales made to particular entities (G.L. c. 64H, § 6(d), § 6(e)). Language of this sort is missing from G.L. c. 64H, § 6(r) and § 6(s), which in each instance speaks only of sales of items to be used in a particular manner, and does not require that the purchaser be a particular type of party or entity, nor act as an agent for such a party or entity. This view of the statute is, moreover, consistent with case law, notably Houghton Mifflin Co. v. State Tax Commission, 373 Mass. 772 (1977), which states that "the test of [§] 6(r) is the item of property itself and not the character of the buyer. . . . [The statute] requires simply that the item purchased be consumed and used in carrying out the purpose for which it was bought." Houghton Mifflin at 777 (italics supplied). The same is true under G.L. c. 64H, § 6(s), which is also phrased in terms of sales of property for specified uses rather than of sales to particular buyers.

V. Scope of Policy Change

As § 6(r) and § 6(s) differ in phrasing from certain other exemptions under G.L. c. 64H, § 6; the change in policy is limited to the two named sections. For parties or entities purchasing items potentially exempt under G.L. c. 64H, § 6(d) and § 6(e), a showing of agency will continue to be necessary if the party purchasing the items is not itself an exempt purchaser. [2] Nothing herein alters the general contractor rule that contractors are the consumers of the tangible personal property they purchase for use in the fulfillment of their contracts as set forth in the contractor regulation, Emergency Regulation 12. See, e.g., LR 06-5.

VI. Status of DOR Statement on § 6(r) and § 6(s)

In 1966, DOR issued two statements dealing with the tax exemptions under G.L. c. 64H, § 6(r) and § 6(s). These statements were of limited application, dealing only with regulated electric utilities and regulated gas utilities. In addition to a statement of the Department's interpretation of the exemption, each contained a detailed list of taxable and non-taxable items that were associated with the particular utilities at issue.

This Directive reaffirms the underlying principles of the 1966 statements in so far as they deal with purchases by or for utilities under § 6(r) and § 6(s). The 1966 statements are, however, no longer considered in force. More than forty years have elapsed, and the lists of exempt and non-exempt items are no longer in force and are not binding on the Department. In addition, the ruling in this Directive is not limited to utilities, but applies to all purchases of items described in § 6(r) and § 6(s), regardless of the identity or character of the purchaser, so long as the items will be used in a manner specified by the statute. This Directive supersedes all other DOR public written statements to the extent they are inconsistent with it, and applies to all open periods and to cases still open on direct appeal.



/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:MTF:lr
236594

June 29, 2007

DD 07-6



[1] In this situation, an exempt use certificate furnished by the contractor's customer to the contractor will not relieve the contractor from liability; the contractor has the burden of proving that an exemption applies.

[2]Cf. G.L. c. 64H, § 6(f), which exempts sales of building materials and supplies to be used in the construction, reconstruction, alteration, remodeling or repair of any building or structure "owned or held in trust for the benefit of" a governmental body or an IRC § 501(c)(3) organization. G.L. c. 64H, § 6(f)(italics supplied). For statutory agency, see G.L. c. 64H, § 6(tt). Under § 6(tt) no "facts and circumstances" test is required, as a party must simply agree to act as the agent of a governmental body or agency.