July 3, 1980

Your client, ********** ("Developer"), is the principal developer of an urban real estate complex that will include several large office buildings and two hotels. The developer contemplates entering into a "cost plus fixed fee" contract with a construction company ("Contractor") under which the Contractor will bill the Developer at cost for materials and supplies, separately bill the Developer for labor, and charge a fixed fee for its services. The contract recites that title to the materials shall be deemed to have passed to the Developer prior to their use, consumption, or incorporation into the complex, but it also provides that the Contractor will bear the risk or loss up to $5,000 per item of tangible personal property.

You inquire whether (1) the Contractor's suppliers must collect the tax on their sales of materials to the Contractor, and pay over the tax to the Commonwealth as vendors; or (2) the Contractor may purchase the materials pursuant to a resale certificate given to its suppliers and add the sales tax to its charges for materials under the contract with the Developer.

The contract provides that:

(1) "[t]he title of all Work completed and in course of construction, and of all materials on account of which payment has been made or provided for herein shall be in the name of [the Developer] and title to all tangible personal property shall conclusively be deemed to have passed to [the Developer] prior to the use or consumption thereof or the incorporation thereof into the Work. Notwithstanding the above, the risk of loss, destruction or damage to or of any item of tangible personal property up to a limit of $5,000 per item of property shall be Contractor's, who specifically hereby assumes the same;"

(2) "[a]ll materials, supplies, goods and other such items of tangible personal property to be used or consumed in connection with the Project and/or incorporated into the Work shall be acquired by contractor and reconveyed at Direct Cost to [the Developer] prior to their use, consumption or incorporation into the Work;"

(3) "[c]ontractor shall qualify, and maintain its status throughout the term hereof, as a registered vendor in the Commonwealth of Massachusetts, in order that it may provide its suppliers and subcontractors with valid resale certificates with respect to exemption from Massachusetts Sales or Use taxes, it being the express intention of this Contract that [the Developer] be the purchaser and ultimate consumer of all materials, supplies, goods and other such items of tangible personal property used or consumed in or incorporated into the Work;"

(4) "[monthly applications for payment] will set forth the cost of the Work completed since the last such application... Each application shall be accompanied by... itemized invoices for each purchase of materials, supplies, goods and other items of personal property used or consumed in connection with the Project and/or incorporated into the Work during such period, setting forth separately in each instance the Sale and Use taxes applicable thereto and due thereon;" and

(5) "[i]t is specifically understood and agreed that [the Developer] is the ultimate consumer of all tangible personal property employed in the Work.

Massachusetts General Laws Chapter 64H, Section 2 imposes the sales tax on sales at retail of tangible personal property; "sale at retail" is defined in Section 1(13) as a sale of tangible personal property for any purpose other than resale in the regular course of business. Under Chapter 64H, Section 8, all gross receipts of a vendor from the sale of tangible personal property are presumed to be from sales subject to tax until the contrary is established. The sales tax does not apply to sales of real property.

It is generally held that a contractor who purchases materials from a retailer for use in building construction is the consumer of the materials and not a purchaser for resale for sales and use tax purposes. Seltzer and Co., Inc. v. State Tax Commission, ATB Docket Nos. 68886, 68887 (1975), aff'd sub nom. Ace Heating Service, Inc. v. State Tax Commission, 371 Mass. 254 (1976); Salem Glass Co. v. State Tax Commission, ATB Docket No. 60903 (1974); State v. J. Watts Kearny & Sons, 181 La. 554 (1935); see Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597 (1975). In a case predating the Massachusetts sales tax, the Supreme Judicial Court cited with approval cases so holding, and ruled that a contractors excavation of gravel for use under a highway reconstruction contract was not a removal of the gravel "for sale," even though the contract set a unit quantity price for the gravel. Town of Saugus v. B. Perini & Sons, Inc., 305 Mass. 403 (1940). One court as gone so far as to characterize as "contrary to law" a state tax regulation declaring that a contractor's purchases must be deemed purchases for resale where the contract provides that title to the materials purchased shall vest in the government prior to their use in construction for the government. Olson Construction Co. v. State Tax Commission, 12 Utah 2d 42 (1961).

Based on the foregoing, it is ruled that the materials will not be sold by the Contractor to the Developer as tangible per­sonal property for the purposes of the sales tax. Therefore, the Contractor will be the consumer of the materials, and its suppliers must collect and pay over the tax on their sales of materials to the Contractor.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers
Commissioner of Revenue

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LR 80-44