February 24, 2009

You have requested a letter ruling on behalf of the *********************************** public agency in charge of the redevelopment of a portion of the *********** (the "Project") in **********, Massachusetts. ******************* has partnered with ******************************, a non-profit corporation, to turn the former ************ campus into a mixed housing and commercial community, which will include 207 housing units and 551,000 square feet of commercial development. You request a letter ruling with respect to purchases of building materials and supplies used in the construction of the Project and their exemption from the sales tax imposed under G.L. c. 64H, § 2.

I. FACTS

The following is your representation of the facts upon which we base this letter ruling. ***************** provides customized financing and real estate solutions to stimulate economic growth across Massachusetts. ******************works with financial institutions and other partners to help businesses, non-profits, developers and communities in all regions of the state to create jobs, housing and a strong economy. **********************************'s charitable purpose is engaging in the development, construction and long-term management of low-income rental housing. *************** is a non-profit corporation exempt from federal income tax under Internal Revenue Code (IRC) § 501(c)(3). *************** is exempt from Massachusetts tax under G.L. c. **************. Both *********** and ********************* hold valid sales and use tax Certificates of Exemption (Forms ST-2).

In furtherance of ********************'s public purposes and ***************'s non-profit objectives, these entities formed ********************, LLC ("**********") for the purpose of acquiring and renovating a portion of the **************** property (the "Property"). The Property was acquired in 2002 from the Commonwealth. ***************** and *************** are the only members ("Members") of ***************. The purpose of the Project is to redevelop an historic site, preserve open space, provide affordable housing and offer housing and job opportunities for certain clients of the Department of Mental Health. In doing so, costs will be incurred related to demolition of existing buildings, roadway construction and certain infrastructure improvements.

The demolition costs will include asbestos abatement involving the construction of wall closures and consumption of tangible property necessary for the asbestos materials ( e.g., wrap materials). The demolition will also include excavation and backfill. Of the more than seventy structures located on the 124-acre site, only eight will be renovated, while the rest will be demolished. ************************and ****************** of ************* are performing the demolition. You argue that costs incurred in the demolition process should be exempt from the sales tax under G.L. c. 64H, § 6(f) as they are part of the reconstruction process and are necessary for the completion of the Project. You state that demolition and excavation activities are necessary elements of any rebuilding effort where one building is being replaced by another.

Roadway construction will include the building of roads and sidewalks, including the installation of trees, reflector lines, street lamps, hydrants, manholes and traffic signs. Roadway construction will also include the purchase of gravel, crushed stone, hay, asphalt, seed, granite curbs and cement. Any roadway construction will result in roads that are dedicated to the local municipality. Permanent infrastructure improvements will include installation of water and sewer pipes, gas lines, utility conduits and piping. The materials involved in the infrastructure improvements include: cement, PVC and iron pipes, fabric, frames, grates, fencing, electric switches, pull boxes, cable and telephone conduits and water quality basins. You believe that the construction of roads and infrastructure should fall under the "building structure, public highway, bridge or other public works" and "building or structure" requirements of the § 6(f) exemption since the roadways and infrastructure are being constructed for an entity wholly owned by a governmental authority and a non-profit corporation and since the roadways will be accessible to the public.

II. RULINGS REQUESTED

  1. Pursuant to G.L. c. 64H, § 6(f)(1) and (2), the building materials and supplies used in the demolition and excavation phase of the Project will be exempt from the sales tax imposed under G.L. c. 64H, § 2.

  2. Pursuant to G.L. c. 64H, § 6(f)(1) and (2), the building materials and supplies used in the construction of the Project will be exempt from the sales tax imposed under G.L. c. 64H, § 2.

  3. Pursuant to G.L. c. 64H, § 6(f)(1) and (2), the building materials and supplies used in the construction of roadways, infrastructure and landscaping will be exempt from the sales tax imposed under G.L. c. 64H, § 2.

III. DISCUSSION

Generally, sales of tangible personal property and certain services are subject to the sales tax under G.L. c. 64H, § 2. However, purchases of building materials and supplies may be exempt from the sales tax if they are to be used in the construction, reconstruction, alteration, remodeling or repair of any building or structure owned by or held in trust for the benefit of any corporation, foundation, organization or institution described in chapter 64H, § 6(e) and used exclusively in the conduct of its religious, scientific, charitable or educational purposes. G.L. c. 64H, § 6(f).

In Northgate Construction Company, Inc. v. State Tax Commission, 377 Mass. 205 (1979), the Court considered whether materials and supplies purchased by a private for-profit developer in the construction of two low-income housing projects were subject to the sales tax. The projects were built for the Malden Housing Authority but were owned by the developer during the construction period. Id. at 208. Based on the fact that the project was not owned by or held in trust for the Malden Housing Authority, the Court determined that the sales of building materials and supplies were not exempt from the Massachusetts sales tax. Id. at 209.

In Letter Ruling 87-16, the Department ruled that the imposition of the sales tax on materials and supplies used in the rehabilitation of two public housing developments for a local housing authority under a so-called "turnkey project" was proper. The materials and supplies purchased by the contractor for the rehabilitation of the project were subject to the sales tax because the exemption provided under G.L. c. 64H, § 6(f) did not apply. This was so because the property being rehabilitated was not owned by or held in trust for the local authority during the construction period. See Letter Ruling 87-16.

Recognizing the need to establish complex business arrangements that involve several entities to secure funding, financing or tax credits, the Department has viewed the requirement that the building or structure be "owned by or held in trust for a non-profit entity as described in G.L. c. 64H, § 6(e)" more broadly in several recent rulings. For instance, the Department allowed the sales tax exemption in Letter Ruling 01-13. That case involved a non-profit § 501(c)(3) corporation that was formed for the construction, development, operation and sale of affordable housing within the Commonwealth of Massachusetts. The non-profit formed several entities for the purpose of acquiring and constructing the project. The result was that an LLC and Limited Partnership were tenants in common as to the project through the vehicle of a nominee trust. The non-profit was the sole member of the LLC, which was a disregarded entity for federal and state income tax purposes. The Limited Partnership was a Massachusetts Limited Partnership with a corporate general partner and a corporate limited partner, both wholly owned by the non-profit. The Realty Trust was formed as a "nominee trust" and did not pay tax. The beneficial interests in the trust were owned solely by the LLC and the Limited Partnership, which were solely owned by the non-profit.

In addition, in Letter Ruling 08-9, the Department allowed the exemption where two charitable non-profit organizations formed a business trust that purchased the property under development. The business trust was wholly owned and controlled by the non-profit organizations, for the advancement of their non-profit, charitable objectives. The Department ruled that indirect ownership of the project by two non-profit entities through the vehicle of a business trust was adequate for purposes of qualifying for the sales tax exemption afforded under G.L. c. 64H, § 6(f).

In each of these Letter Rulings, the Department ruled that since the building materials and supplies were used exclusively in the conduct of the non-profits' charitable purposes, and since during the entire construction project the property was "owned by or held in trust for" a non-profit, the purchases of building materials and supplies were exempt from the sales tax under G.L. c. 64H, § 6(f).

In the present case, *************** and **************** each hold a Certificate of Exemption Form ST-2. In addition, ************** and ************** are the only members of ******************, LLC. ************** is a governmental entity that serves as the Commonwealth's finance and economic development authority under G.L. c. ********. ********************** is a non-profit corporation formed under § 501(c)(3) of the Code.

In general, building materials and supplies that are physically incorporated into a structure, such as wood, brick, stone or steel are exempt from the sales tax under G.L. c. 64H, § 6(f). The exemption defines "building materials and supplies" as follows:

"'[B]uilding 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."

See also DOR Directive 02-16. To meet the terms of this exemption, the item must be fully consumed and used exclusively in the construction activities of the project, and it must not be used or useable by the contractor after the project is completed. Id. Items may be exempt from the sales tax even if they are not physically incorporated into a structure so long as they are consumed, employed or expended in the construction of a public work. See S.J. Groves & Sons Co. v. State Tax Commission, 372 Mass. 140 (1977). Therefore, purchases of materials and supplies that are fully consumed and used exclusively for demolition, excavation, backfill and asbestos removal are exempt from the Massachusetts sales tax under G.L. c. 64H, § 6 (f).

Pursuant to G.L. c. 64H, § 6(f), sales of building materials and supplies to be used in the construction, reconstruction, alteration, remodeling or repair of any public highway are exempt from the sales tax. In this case, all roadway construction will result in roads that are dedicated to the local municipality. In addition, permanent infrastructure improvements will include installation of water and sewer pipes, gas lines, utility conduits and piping that are all necessary for successful completion of the Project and are physically incorporated into the building structures and their immediate surroundings. Therefore, the Department rules that the materials and supplies involved in roadway construction in and around the Project site and the infrastructure improvements described above are exempt from the sales tax. The exemption extends to purchases of landscaping materials that become physically incorporated into the real estate, such as trees, shrubs, gravel, loam, sod or seed as well as fencing and walkway materials. The exemption does not extend to purchases of temporary construction fencing, temporary foundations for office trailers or other similar items, as they are for the contractor's use and are removed from the site upon completion of the Project.

IV. CONCLUSION

The Project is and will continue to be owned by or held in trust for ******** during the entire construction period. Purchases by ************* of building materials and supplies that are to be used in demolition and excavation of the old structures on the site as well as materials and supplies used in construction of the Project, including roadways, infrastructure and landscaping are therefore exempt from the sales tax, providing the purchases otherwise qualify under G.L. c. 64H, § 6(f). Accordingly, we rule affirmatively on each of your three ruling requests, subject to the limitations discussed herein.

Very truly yours,

/s/Navjeet K. Bal

Navjeet K. Bal
Commissioner of Revenue

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LR 09-1