December 3, 1987

You request a ruling that the building materials and supplies to be purchased by ("Contractor") and used in the rehabilitation of two public housing developments in a turnkey project are exempt from the sales and use tax under G.L. c. 64H, § 6(f). 1 As a corollary, you ask us to find that the buildings being rehabilitated as part of the turnkey project are "owned by" the I ("Authority") or, in the alternative, "held in trust" for the Authority for the purpose of G.L. c. 64H, § 6(f).

We conclude that the decision.of the Supreme Judicial Court in Northgate Construction Co., Inc. v. State Tax Commission, 377 mass. 205 (1979), governs this matter. Accordingly, we rule that:

  1. The buildings being rehabilitated as part of this turnkey project will not be "owned by" or "held in trust" for the Authority; and
  2. the Contractor will be liable for sales and use taxes on building materials and supplies purchased and used in the rehabilitation and construction of the turnkey project for the Authority.

Facts

Beginning some time in November, 1987, the Authority will contract with ("Developer") for the rehabilitation and construction of approximately three hundred units of public housing. The Developer will subcontract the proposed rehabilitation and construction work to Contractor, a Massachusetts corporation. The Developer and Contractor will enter into a construction contract on a cost plus basis. The Contractor will purchase the building materials and supplies used in the rehabilitation and construction work.

The rehabilitation and construction work will take place in seven buildings ("Project Sites") located in portions of two of the Authority's housing developments. The Authority is required by a court order to rehabilitate these two housing developments. The two housing developments are owned and operated by the Authority with funds provided by the U.S. Department of Housing and Urban Development ("HUD"). The rehabilitation and construction work is expected to cost approximately $40 million dollars and to be completed in approximately two years.

The Authority has received both federal and state funds to finance the cost of the rehabilitation and construction work. Originally, the Authority sought "conventional" method development funds from HUD to cover its rehabilitation and construction costs. 2 At the time, conventional method funds were unavailable. However, HUD did indicate that $26 million dollars in "turnkey" development funds were available for the rehabilitation and construction of the Project Sites. The Authority accepted these turnkey development funds. The Executive Agency will provide the supplemental funding necessary to cover the full cost of the rehabilitation project. There are no federal or state restrictions on the taxation of the respective development funds.

Under a turnkey method of development, a private developer which owns or has an option to buy land or improved property contracts with the local housing authority to build housing on the land or to rehabilitate the property. See 24 CFR 5 941.102(b)(1987). The developer prepares all of the development plans and construction documents. If the plans and documents are acceptable to the local housing authority and HUD field office, the developer and local housing authority enter into a turnkey contract of sale under which the local housing authority agrees to purchase the completed development. This contract of sale is backed up by HUD's financial assistance commitment to the local housing authority, i.e., the turnkey development funds included in HUD's Annual Contributions Contract with the local housing authority. Until the project is completed, the local housing authority does not take title to the property or pay the developer. During the construction period, the developer is responsible for all construction costs, including construction financing.

To meet the requirements of the turnkey program here, the Authority will convey title to the Project Sites to the Developer for a nominal consideration. The Project Sites will be conveyed subject to the express conditions stated in the deed and the Turnkey Contract of Sale ("Contract of Sale") between the Developer and the Authority.

Under the express conditions referred to in the deed of conveyance and stated in the Contract of Sale, the Developer will be required to convey each Project Site to the Authority upon the completion of the rehabilitation and construction work. The completed Project Site will be purchased by the Authority only if it meets the construction requirements set out in the Contract of Sale. The Authority has the right to require the Developer to reconvey the Project Sites if the Developer fails to complete or to reconvey the Project Sites in accordance with the Contract of Sale.

During the rehabilitation and construction period, the Developer will have title to the Project Sites. The Developer will be responsible for all construction costs associated with the Project Sites. The Developer will obtain a construction loan for the project from the Finance Agency in an amount equal to 97.5% of the price to be paid under the Contract of Sale. The Developer will draw down on the construction financing on a monthly basis over the estimated two year construction schedule. The construction loan will be a non-recourse mortgage loan secured by a mortgage lien on the Project Sites. The Contract of Sale will be pledged by the Developer to the Finance Agency.

The Developer will be required to pay all water and operating charges during its period of ownership of the Project Sites. Moreover, the Developer will be required to pay all real property taxes during this period. 3 The Developer will be responsible for the risk of loss or damage to the Project Sites by fire or other casualty from the time of conveyance to the Developer until the time of conveyance to the Authority upon the completion of the work. Insurance coverage for the Project Sites during the construction period will be the responsibility of the Developer.

The Contract of Sale provides that the construction and rehabilitation work will be regulated extensively by the Authority, HUD, and the construction lender, Finance Agency. Under the Contract of Sale, the Authority will impose construction safety requirements and minority workers and minority business participation requirements. The Authority will have an inspecting architect on site to make recommendations regarding the Project Sites. The Developer and Contractor will be required to employ a specific number of Authority residents in the construction of the Project Sites.

Discussion

Section 6(f) of G.L. c. 64H exempts from the sales tax "([s]ales of building materials and supplies to be used in the construction, reconstruction, ... or repair of (1) any building... owned by or held in trust for the benefit of any governmental body or agency mentioned in paragraph (d)." Paragraph (d) refers to "the United States, the commonwealth or any political subdivision thereof, or their respective agencies." The Authority is a "governmental body" of the type mentioned in paragraph (d). Nevertheless, we conclude that the sales tax exemption provided by Section 6(f) does not apply here.

1. The Project Sites will not be "owned by" the Authority or "held in trust for the benefit of" the Authority at the time building materials and supplies are purchased and used in the turnkey rehabilitation and construction project for the Authority.
In Northgate Construction Co., v. State Tax Commission, the Supreme Judicial Court held that a contractor is liable for sales and use taxes on the materials purchased and used in the construction of a turnkey project for a local housing authority, 377 Mass. 205 (1977). The courts determination of of sales tax liability focused on the facts in existence at the time of sale. Id. at 208. In Northgate, to meet the requirements of turnkey development, the local housing authority was required to convey title to the property on which the turnkey project was constructed to the developer, Northgate. Id. at 206. Northgate and the local housing authority then entered into a turnkey contract of sale whereby the developer arranged for the construction of the project in accordance with the contract of sale. Id. The local housing authority agreed to purchase the completed project. Id. The Court noted that the local housing authority did not have legal title to the buildings when they were being constructed by Northgate. Id. at 208. Thus the buildings were not "owned by" the local housing authority for the purpose of Section 6(f). Id.

The facts and circumstances surrounding the Authority's request are substantially the same as those in Northgate. At the time of the sale of the building materials, the Authority will not have legal title to the Project Site. As in Northgate, to meet the requirements of turnkey development, the Authority will convey title to the Project Sites to the Developer. The Developer and Authority will then enter into a Contract of Sale whereby the Developer arranges for the rehabilitation and construction of the Project Sites and the Authority agrees to purchase the completed project in accordance with the Contract of Sale. Accordingly, we must follow the Northgate decision and rule that the Project Sites will not be "owned by" the Authority for the purpose of Section 6(f).

The Authority attempts to distinguish its situation from Northgate on the ground that it will convey the Project Sites to the Developer under the express condition that the property will be returned to the Authority, whether or not the Developer completes the construction of the Project Sites in accordance with the Contract of Sale. This so-called reversionary interest in the Project Sites insures "certainty of ownership" by the Authority in the Project Sites. Hence, the Authority "owns" the Project Sites for the purpose of Section 6(f), and the sale of building materials and supplies to the Contractor for the rehabilitation and construction work is exempt from the sales tax. We disagree.

While ownership may be a flexible concept, when the words "owned by" are used in distinction to the words "held in trust for the benefit of," the Supreme Judicial Court has determined that reference to legal ownership was intended. Northgate, 377 Mass. at 208-209. Also, the Authority, like the contractor in Northgate, "has cited no authority in support of the proposition that one who has a contract to purchase land at a future date is thereby an owner of the land." Id. Hence, even if the Authority had a reversionary interest in the Project Sites, which we do not concede, such a future interest is not the direct, present, legal ownership required by Section 6(f). See id.

In our opinion, the Developer will "own" the Project Sites for .the purpose of Section 6(f). Under Massachusetts law, a mortgagee has the legal title to the mortgaged property, subject to defeasance, and in this aspect the mortgagee is the "owner." But for most purposes and according to popular understanding the mortgagor is considered the "owner" of the mortgaged property. See Milton Savings Bank v. United States, 345 Mass. 302, 305 (1963); Gulesarian v. P rust Co., 331 Mass. 431, 434 (1954). Here the Authority conveyed title to the Project Sites to the Developer in order to meet the requirements of turnkey development. The Developer then mortgaged the Project Sites to the Finance Agency in order to obtain the necessary construction financing. The Finance Agency will hold legal title to the Project Sites, but the Developer, who holds the equity of redemption, is clearly the "owner" of the Project Sites for the purpose of Section 6(f). See Northgate, 377 Mass. at 208-209.

Moreover, the attributes of ownership during the turnkey project period will be with the Developer. one of the functions of turnkey construction is to place the risks of ownership and of construction on the Developer and not the ultimate purchaser. See 24 CFR § 941. 102(b). Accordingly, under the Contract of Sale, the Developer will be responsible for all operating charges, risk of loss or damage to the Project Sites by fire or other casualty, and insurance coverage. It will be required to pay real property taxes on the Project Sites even though, ordinarily, the Authority is exempted from payment of taxes on the same property. 4

The Developer will not hold the Project Sites "in trust" for the benefit of the Authority. As the Northgate case held, a person under a contractual obligation to construct a project and then to convey the property to another is not a trustee of that property for the benefit of the prospective purchaser. Id. at 209. The turnkey developer's obligation is contractual, not fiduciary.

We conclude, then, that the building materials and supplies purchased for the Project Sites will not be used in any building "owned" by or "held in trust" for any governmental body exempt from tax. Accordingly, the sale of building materials and supplies used in the Project Sites will not be exempt from sales and use taxes under G.L. c. 64H, § 6(f).

2. The Contractor will be liable for sale and use taxes on materials purchased and used in the rehabilitation and construction of the Project Sites for the Authority.

A five percent excise is imposed upon the sale or use of tangible personal property in Massachusetts, unless otherwise exempted. G.L. c. 64H, § 2; c. 64I, § 2, respectively. Sales of tangible personal property exempt under Chapter 64H are also exempt from the use tax. G.L. c. 64I, § 7(b). For the reasons stated above, the exemption of the sale of building materials and supplies from sale and use taxes under G.L. c. 64H, § 6(f), will not be applicable to this case. Furthermore, the Contractor will not be considered a purchaser for resale. See G.L. c. 64H, § 8. A contractor who purchases materials from a retailer for use in building construction is considered the consumer of the materials. See Seltzer and Co., Inc. v. State Tax Commission, ATB Docket Nos. 68886, 6887 (1975), aff'd sub. nom. Ace Heating Service, Inc. v. State Tax Commission, 371 Mass. 254 (1976). Although the legal incidence of the tax falls upon the vendor, the payment of the tax falls upon the purchaser. See G.L. c. 64H, §§ 2 and 3(a), respectively; see also Harvard Business School Association of Boston v. Department of Revenue, ATB Docket No. 144464 (1986). Hence, the Contractor will be liable for the payment of sales and use taxes on the building materials and supplies purchased and used in the rehabilitation and construction of the Project Sites under turnkey development.

Finally, the Authority makes a number of policy arguments to support its claim of exemption from sales and use taxes. it contends that the imposition of sales and use taxes will increase the cost to the Commonwealth, that under conventional construction of a building for a governmental agency the materials purchased by the contractor are exempt from sales and use taxes, and that the turnkey construction will be used solely to secure funding for the rehabilitation of the Project Sites in the absence of conventional method funds. The Authority's arguments may have force if addressed to the Legislature. See Northgate, 377 Mass. at 207; see also S.J. Groves & Sons v. State Tax Commission, 372 Mass. 140, 145 (1977). We have no choice but to administer and enforce the relevant statutory provisions as written and as interpreted by the Supreme Judicial Court.

Very truly yours,
Stephen W . Kidder
Commissioner of Revenue
December 3, 1987
LR 87-16

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Footnotes:

1 The Authority itself requests the ruling, presumable on behalf of the Contractor, the party which will purchase the building supplies and materials.

2 Under the conventional method of development, a local housing authority develops plans for the construction or rehabilitation of public housing on property owned by the local housing authority. After HUD approval of the plans, the local housing authority directly hires and pays a contractor to construct or rehabilitate public housing with the funds provided by HUD. See 24 CFR 5 941.102(a)(1987).
3 Ordinarily, the Authority is exempted from the payment of real property taxes on its lands and buildings. See G.L. c. 121B, § 16.

4 The Authority argues that, besides its "reversionary" interest in the Project Sites, it will possess other indicia of ownership. In particular, the Authority points to its right to control various aspects of the project relating to construction safety and hiring of minority workers and business. We believe that such control is indicative of the customary control a local housing authority exercises over a developer under a turnkey contract of sale. See 24 CFR 5 941.208; see also Commissioner of Labor and Industries v. Lawrence Housing Authority , 358 Mass. 202, 207 (1970). Furthermore, we believe that these "indicia of ownership" are outweighed by the attributes of ownership in the Developer.