April 11, 2006

You have requested a letter ruling on behalf of the ********** Company, regarding the application of M.G.L. c. 64H, § 6(tt) to the purchase of vehicles used in the operation of the commuter rail system in eastern Massachusetts.

Facts

The facts as you state them are as follows. ********** is a privately-owned limited liability company solely engaged in the business of operating the commuter rail public transportation system in eastern Massachusetts [the Commuter Rail Operations ] pursuant to that certain Commuter Rail Operating Agreement dated as of February 19, 2003 by and between the [Authority] and ********** [the Operating Agreement]. On July 1, 2003, ********** assumed responsibility for the performance of the Commuter Rail Operations in accordance with the Operating Agreement. The initial term of the Operating Agreement is five (5) years, and the [Authority] has an option to extend the Operating Agreement for a total of five (5) additional years.

The [Authority] is a body politic and corporate and a political subdivision of the Commonwealth of Massachusetts that is responsible for providing public transportation services in certain areas of the Commonwealth. The [Authority] is exempt from taxation pursuant to M.G.L. c. 161A, § 24. The [Authority] and ********** agreed, in Section 10.4 of the Operating Agreement, that ********** should be exempt from paying sales tax on certain property purchased by ***** in connection with the Commuter Rail Operations. Specifically, Section 10.4 of the Operating Agreement provides:

The [Authority] and Contractor agree that, pursuant to M.G.L. c. 64H [§ 6] (tt)(E), Contractor is exempt from Massachusetts Sales Tax on property it purchases that is required to perform Agreement Services. In the event of a change in state law or any other duly authorized legislative, judicial, or regulatory determination that Contractor is required to pay sales tax on such property, the Parties shall enter into a Service Change that compensates Contractor for its increased costs resulting from such determination. The Parties agree that, consistent with M.G.L. c. 64H [§ 6] (tt)(E), Contractor is not entitled to a sales tax exemption on the purchase of any property used to administer, oversee, supply, maintain, or control any of Contractor's own offices, facilities, workshops, vehicles, equipment or business operations. Contractor is responsible for maintaining all appropriate and required records related to the purchase of property required to perform the Agreement Services and for compliance with all applicable tax laws.

The Operating Agreement requires ***** to lease or purchase certain vehicles necessary to carry out the Commuter Rail Operations [Non-Revenue Vehicles]. Non- Revenue Vehicles include but are not limited to (a) high rail vehicles, which may be operated on rails or roadways and are used for track or train maintenance; (b) boom trucks, (c) pick-up trucks, (d) snow plows, (e) dump trucks and (f) vehicles used by commuter rail operations staff. The [Authority] must approve the quantity, style and use of the Non-Revenue Vehicles and ensure that such vehicles are consistent with the standards applicable to publicly funded vehicles. See Section 9.8(b)(1) of the Operating Agreement. Upon the termination or expiration of the Operating Agreement, ********** will not retain title to the Non-Revenue Vehicles. Rather, Section 41.5(d) of the Agreement requires ********** to turn over to the [Authority] all Support Property (which includes Non- Revenue Vehicles, such as automobiles and work equipment, related to the maintenance of the equipment and property used in the Commuter Rail Operations). If ********** fails to return any Support Property to the [Authority] at the termination of the Operating Agreement, ********** must pay the fair market value of the property to the [Authority].

Since the commencement of the Commuter Rail Operations in 2003, ********** has purchased Non-Revenue Vehicles for use in the Commuter Rail Operations. In accordance with the Operating Agreement, the Non-Revenue Vehicles are titled in **********'s name, and ********** maintains insurance on all such Non-Revenue Vehicles. ********** registers the Non-Revenue Vehicles in the Commonwealth of Massachusetts by presenting the title of each such vehicle to the Registry of Motor Vehicles [RMV]. The RMV first accepted, but has recently refused, to accept Form ST-5C by which the Non-Revenue Vehicles would be exempt from sales tax as contemplated by the Operating Agreement and Massachusetts law. ********** has paid sales tax on the Non-Revenue Vehicles that it has purchased since the inception of the Operating Agreement.

Issue

********** believes that the Non-Revenue Vehicles are exempt from sales tax pursuant to the provisions of M.G.L. c. 64H, § 6(tt) and requests a letter ruling from the Department finding that the Non-Revenue Vehicles are exempt from sales tax. ********** also requests a finding that it is entitled to a tax abatement for all sales tax paid on Non-Revenue Vehicles purchased for use in Commuter Rail Operations from the date of the Operating Agreement to the present.

Discussion

********** argues that the purchase of Non-Revenue Vehicles is exempt from sales tax pursuant to G.L. c. 64H, § 6(tt), which provides:

The following sales and gross receipts therefrom shall be exempt from the tax imposed by this chapter:-

(tt) Sales of tangible personal property purchased by a consultant contractor or subcontractor, or operating contractor or subcontractor, of any governmental body or agency, described in paragraph (d), for use in fulfilling a consulting or operating contract to provide qualified services in a public project, provided that the consultant contractor or subcontractor or operating contractor or subcontractor is required both to acquire such property and to be reimbursed for the cost of such property pursuant to such contract.

Chapter 64H, § 6 sets out several factors that must be analyzed to determine whether a contractor qualified for sales tax exemption. Pursuant to this analysis, the first question is whether ********** is an "operating contractor." Under the statute, an operating contractor is a person who enters into an operating contract to provide qualified services and agrees to act as agent for a government body or agency with respect to the purchaser of tangible personal property on behalf of such governmental body or agency. "Qualified services" include managing the operation or maintenance of any publicly owned mass transportation equipment or facilities. See M.G.L. c. 64H, § 6(tt)(F). ********** has a contract with a governmental body or agency, namely the [Authority], to provide commuter rail services, including maintenance of commuter rail equipment. As ********** both operates and maintains this (which is clearly "publicly owned mass transportation equipment"), we find that ********** is an operating contractor under the statute.

Under G.L. c. 64H, § 6(tt)(D), an operating contractor must be authorized by the governmental body or agency to make purchases on its behalf. A contractor satisfies this requirement if it has entered into a contract with a governmental body or agency in which the agency "expressly authorizes [the contractor] to act as an agent or sub-agent of such . . . body or agency for purposes of making such purchases." Id. We find that ********** satisfies this requirement because the Operating Agreement makes ********** responsible for procuring any Non-Revenue Vehicles needed to carry out the commuter Rail Operations, subject to the approval of the [Authority]. See Operating Agreement, § 9.8(b)(1). The [Authority] authorizes ********** to purchase property for the Commuter Rail Operations, and the [Authority] directly reimburses ********** for the purchase of Non-Revenue Vehicles. S ee M.G.L. c. 64H, § 6(tt)(B); see also Section 9.8(b)(3) of the Operating Agreement. We therefore find that the [Authority] has given ********** the authorization to purchase required by statute. [1]

The sales tax exemption in § 6(tt) applies only if the property being purchased is used in fulfilling an operating contract, meaning that (a) the acquisition of the property is authorized by the terms of the contract and (b) one of the following factors is true: (i) the property is completely expended in an agreement to provide qualified services, (ii) title to and possession of the property is turned over to the governmental body or agency pursuant to the operating contract or (iii) the property becomes a component part of the property that is turned over to the governmental body or agency. See M.G.L. c. 64H, § 6(tt)(E). The property cannot, however, be used to administer, oversee, supply or maintain the contractor's own offices, facilities, vehicles or business operations. G.L. c. 64H, § 6(tt)(E).

As discussed above, Section 9.8(b) of the Operating Agreement explicitly authorizes ********** to acquire Non-Revenue Vehicles for use in the Commuter Rail Operations. The Operating Agreement provides that title to and possession of the Non-Revenue Vehicles shall be turned over to the [Authority] upon termination of the Agreement. See Operating Agreement, § 41.5(d). [2] Moreover, you have stated that the Non-Revenue Vehicles are used directly in the Commuter Rail Operations and are not used to administer or supply **********'s own business operations, offices or facilities. Accepting these statements as true, we find that the Non-Revenue Vehicles constitute tangible personal property used to fulfill an operating contract. Finally, an operating contractor's services must be for a public project. Such a project expressly includes a project for the operation of any public mass transportation equipment or facility owned by or held in trust for the benefit of any governmental body or agency. See M.G.L. c. 64H, § 6(tt)(G). The Commuter Rail Operations involve the operation of a mass transportation system that is owned by the [Authority], a political subdivision of the Commonwealth of Massachusetts. Accordingly, the Commuter Rail Operations are a public project for the purposes of M.G.L. c. 64H, § 6(tt).

Ruling

As ********** satisfies the statutory requirements of G.L. c. 64H, § 6(tt), we rule that the Non-Revenue Vehicles are exempt from sales tax. ********** has also requested a finding that it is entitled to an abatement for any sales tax paid to date on the acquisition of Non-Revenue Vehicles for use in the Commuter Rail Operations. The Rulings and Regulations Bureau is not authorized to issue such a finding. ********** must proceed by filing an application for abatement, Form CA-6, with the Department within the time limitations set forth in G.L. c. 62C, § 37.

Very truly yours,

/s/Alan LeBovidge

Alan LeBovidge
Commissioner of Revenue

AL:MTF:lr

LR 06-4



[1] The question of whether ********** is an "agent" of the [Authority] here is to be decided under the specific terms of G.L. c, 64H, § 6(tt). The analysis used does not extend to other situations in which an agency relationship is at issue.

[2] As noted above, if ********** fails to return any Support Property to the [Authority] at the termination of the Operating Agreement, ********** must pay the [Authority] the fair market value of the property. If ********** does retain property, it must pay sales tax based on the sales price paid the [Authority] for the property when the Operating Agreement terminates.