February 13, 1998

You requested a letter ruling on the application of the Massachusetts sales tax to the purchase of repair parts for machinery and equipment being used on the *************** ("the Project"). The Project involves the construction, reconstruction, alteration, remodeling or repair of building structures, public highways, bridges or other public works owned by or held in trust for the benefit of the Commonwealth of Massachusetts, and used exclusively for public use. Specifically, you ask whether the purchase of repair parts under the circumstances described below is exempt from the Massachusetts sales tax. For the reasons stated below, we rule that the replacement parts purchased by the Contractor that owns its own construction equipment are subject to the sales tax, but the replacement parts purchased by the Contractor that rents the construction equipment exclusively for use in the project are exempt from sales tax under G.L. c. 64H, § 6(f) provided that (a) the Contractor supplies the Vendor with an exempt use certificate indicating that the parts are being purchased to replace parts of rented construction equipment that is exempt under § 6(f), and (b) the parts are either completely expended in the project or returned to the rental agent with the rented construction equipment.

Facts

You describe the facts as follows.

Scenario One: *************** ("Vendor"), a heavy equipment dealership, is in the business of (a) selling and renting construction equipment and engines, (b) selling parts for construction equipment and engines, and (c) repairing and servicing construction equipment and engines. The Vendor's customer ("Contractor") owns a piece of construction equipment that it uses on the Project. The equipment will not become physically incorporated into the final project. The equipment requires repairs and maintenance to continue working on the project. The Contractor either purchases parts from the Vendor to repair its own equipment at the job site or brings the equipment into the Vendor's shop for repair.

Scenario Two: The Vendor rents construction equipment to the Contractor who uses it on the Project and returns it when finished with the Project. During the rental period, the Contractor purchases replacement parts to do its own repairs and maintenance on the rented equipment at the job site. The replacement parts are either consumed in the Project or returned with the rented equipment.

Both Scenarios: Due to the magnitude of the construction jobs on the Project, some of the construction equipment is used for years, being run over double and triple shifts. The equipment's intense usage accelerates the repair schedule on parts with a normal life in excess of a year to a fraction of a year.

Discussion

Chapter 64H, Section 2 of the General Laws imposes a tax on the retail sale of tangible personal property or services performed in Massachusetts. The phrase "tangible personal property" means "personal property of any nature consisting of any produce, goods, wares, merchandise and commodities whatsoever, brought into, produced, manufactured, or being within the commonwealth . . . ." G.L. c. 64H, § 1. Replacement parts for construction equipment fall within the definition of tangible personal property. The sale of replacement parts will be subject to the state sales tax unless the sale is exempt under G.L. c. 64H, § 6.

In relevant part, G.L. c. 64H, § 6(f) provides an exemption from sales tax for:

Sales of building materials and supplies to be used in the construction, reconstruction, alteration, remodeling or repair of (1) any building structure, public highway, bridge or other public works owned by or held in trust for the benefit of [of the United States, the Commonwealth of Massachusetts, any of the Commonwealth's political subdivisions or any of their respective agencies] and used exclusively for public purposes . . . . In this paragraph the words "building materials and supplies" shall include all materials and supplies consumed, employed or expended in the construction, reconstruction, alteration, remodeling, or repair of any building, structure, public highway, bridge or other such public work, as well as such materials and supplies physically incorporated therein. Said terms shall also include rental charges for construction vehicles, equipment and machinery rented specifically for use on the site of any such tax exempt project or while being used exclusively for the transportation of materials for any such tax exempt project.

The courts have interpreted G.L. c. 64H, § 6(f) on several occasions, and these decisions largely control the outcome of the ruling for the first fact pattern. In S.J. Groves and Sons Co. v. State Tax Commission, 372 Mass. 140 (1977), the Supreme Judicial Court ruled that the ordinary usage of the phrase "building materials and supplies" does not connote equipment, tools, machinery and replacement parts that are not physically incorporated in the project. The Appellate Tax Board in E. T. L. Construction Corporation v. Commissioner, A.T.B. No. 147697, (December 15, 1987), approvingly cited the S.J.Groves interpretation of "building materials and supplies" as not including "replacement parts." Thus, the purchase of replacement parts by the Contractor using its own construction equipment on the Project is a taxable transaction. Likewise, if the Contractor sends his own construction equipment to the Vendor's shop for repairs, the purchase of replacement parts is also taxable. See LR 83-34; LR 85-8 (Where the item repaired is personalty and the repair charges are separately for parts and materials, the transfer of the parts and materials is a retail sale.)

The purchase of replacement parts for heavy construction equipment rented solely for use on the Project by the Contractor where such replacement parts are either consumed in the Project or returned with the rented equipment, however, is a transaction exempt from the sales and use tax under G.L. c. 64H, § 6(f). As discussed in S.J. Groves, the phrase "building materials and supplies" is narrowly construed and does not ordinarily include materials and supplies that are not physically incorporated into the project. The Appellate Tax Board, however, has ruled that certain materials and supplies qualify for the exemption under G.L. c. 64H, § 6(f) even if they are not physically incorporated, so long as they are specifically and exclusively attributed to a public works project and are consumed during that project. In E. T. L. Construction Corporation, the Appellate Tax Board ruled that diesel fuel consumed on a public works project that is both specifically and exclusively attributable to that project qualifies for the exemption under G.L. c. 64H, § 6(f). Other sources of power, such as electricity, consumed on a public works project also qualify for the exemption. Letter Ruling 91-7. In addition, in Essex Bituminous Concrete Co. v. Commissioner, A.T.B. No. 105993 (January 26, 1981), the Appellate Tax Board ruled that rental charges on certain traffic and safety equipment rented specifically and exclusively for use on a public works project are exempt from sales tax under § 6(f). The extension of the exemption under § 6(f) to materials and supplies that are completely consumed in a project, however, is limited by a requirement the material or supply be consumed in actual construction and not in the administration of an exempt project. [1]

Thus, replacement parts purchased for construction equipment rented specifically and exclusively for a public works project will be considered as "building materials and supplies" for purposes of G.L. c. 64H, § 6(f) and therefor exempt from the sales tax provided that (a) the Contractor supplies the Vendor with an exempt use certificate indicating that the parts are being purchased to replace parts of rented equipment that is exempt under § 6(f), and (b) the parts are either consumed during the exempt rental use of the equipment or returned to the rental agent with the rented equipment.

Conclusion

Under the facts stated above, it is ruled that:

(1) the replacement parts purchased by the Contractor that owns its own construction equipment are subject to the sale tax; and,

(2) the replacement parts purchased by the Contractor that rents the construction equipment exclusively for use in the project are exempt from sales tax under G.L. c. 64H, § 6(f) provided that (a) the Contractor supplies the Vendor with an exempt use certificate indicating that the parts are being purchased to replace parts of rented construction equipment that is exempt under § 6(f), and (b) the replaced parts are either completely consumed during the exempt rental use of the construction equipment or returned to the rental agent with the rented construction equipment.

Very truly yours,

/s/Mitchell Adams

Mitchell Adams
Commissioner of Revenue

MA:HMP:dms

LR 98-2



[1] "Although electricity may be a building material or supply when used directly in construction, not every use of electricity under a public works contract is therefore exempt under § 6(f). See S.J. Groves & Sons Co., 372 Mass. 140 (1977). In drawing the line between purchases of electricity that will qualify for the § 6(f) exemption and those that will not, we think it is necessary to examine the precise manner in which electricity is consumed. In general, only electricity used to power construction vehicles, equipment, and machinery of a type whose rental for exclusive use in a public works project would be exempt from sales and use tax under G.L. c. 64H, § 6(f) and G.L. c. 64I, § 7(b), will qualify as a building material or supply under § 6(f). Electricity used for other purposes will not." Letter Ruling 91-7. Although LR 91-7 concerns only electricity, the same rationale and result would apply to other items of personal property.