Ruling 93-22, Sales and Use Taxes / Construction Contract / Exemption, Governmental

This Ruling is obsoleted in part by AN 2000(8)

FACTS:

A limited partnership (hereinafter "the Partnership") is under contract with a political subdivision of the State of Connecticut (hereinafter "the Agency") to operate, manage and maintain the Agency's facility (hereinafter "the Facility"). The general partner (hereinafter "the Partner") of the Partnership is the wholly-owned subsidiary of another company (hereinafter "the Company").

The Agency has title to the Facility and fee ownership of the real property on which the Facility is located. Prior to the aforementioned contract being entered into, the Agency had contracted with another party (hereinafter "the Predecessor") to design, construct, test and conduct interim operations of the Facility and later to operate, manage and maintain the Facility. After the Predecessor was unable to fulfill its contractual obligations, the Agency negotiated with the Company to purchase the Predecessor's partnership interest and to enter into its own service contract with the Agency. To induce the Company to purchase the partnership interests, the Agency agreed to bear the cost of certain improvements to the Facility that would be made by the Partnership and that the Partner and the Company deemed necessary to the proper operation of the Facility. The Agency issued bonds whose stated purpose was to pay for the aforementioned improvements. As part of the bond issuance, the Partner executed a Tax Compliance Certificate providing that the Partnership would employ the bond proceeds to make the specified improvements. Requisitions for payment of completed work were to be reviewed by the Agency's engineers to insure that the work had been completed prior to payment being made from the bond proceeds.

Coincident with the above, the Agency and the Partnership entered into a service contract under which the Partnership agreed to operate, manage and maintain the Facility. That contract provided, inter alia, that the Partnership might undertake or be required to undertake certain capital projects at the cost and expense of the Agency. These costs the contract distinguished from certain other costs incurred by the Partnership for which there was no right to reimbursement from the Agency pursuant to the Partnership's obligation to operate and maintain the Facility.

ISSUE:

Whether improvements made by the Partnership to the Agency's Facility were made pursuant to a construction contract within the meaning of Conn. Agencies Regs. § 12-426-18(a), thus allowing the Partnership, because the contract was with a political subdivision of the State of Connecticut, to make purchases of materials and supplies to be physically incorporated into, and become a permanent part of, the Facility that are exempt from sales and use taxes.

DISCUSSION:

A contractor who enters into a construction contract with an entity exempt from sales and use taxes by virtue of Conn. Gen. Stat. § 12-412(1), (2) or (5) may make purchases of materials and supplies to be physically incorporated into such entity's real property that are exempt from sales and use taxes. Conn. Agencies Regs. § 12-426-18. In order for those purchases to be so exempt, there must be a construction contract, as defined in Conn. Agencies Regs. § 12-426-18(a), between a contractor, as defined therein, and an exempt entity.

The Agency is an entity exempt from sales and use taxes pursuant to Conn Gen. Stat. § 12-412(1). The critical question, thus, is whether there is a construction contract between the Agency and the Partnership for the improvement of the Agency's Facility. If such a contract exists, then the partnership as a contractor may make purchases of materials and supplies to be physically incorporated into the Agency's Facility as part of that contract that are exempt from sales and use taxes.

It is apparent that the road to operational capacity for the Agency's Facility was a long and tortuous one. After failing to achieve operational status with the Predecessor, the Agency contracted with the Company to bring the Facility to operational ability. Through a chain of events that included a letter of intent, an escrow agreement and a letter of understanding, the Agency, the Company and the Partnership arrived at a point where the Agency agreed to pay for improvements that the Company and the Partnership deemed necessary for the proper operation of the Facility. These improvements were delineated and the party responsible for making the improvements, the Partnership, was designated.

The negotiations between the parties did not result in a traditional construction contract as that term is customarily used. However, it is clear that there was an agreement between the parties based on an offer and acceptance for consideration with sufficient certainty as to the improvements to be made. 13 Am. Jur. 2d Building and Construction Contracts §1. While the agreement between the parties may lack many of the formalities often associated with contracts, it nonetheless is a binding contract between the parties for the improvement of the Agency's Facility. As such it meets the construction contract requirement of Conn. Agencies Regs. § 12-426-18(a).

The capital projects that the parties agreed that the Partnership might undertake or be required to undertake at the cost and expense of the Agency also comply with the construction contract requirement of the regulation. Thus, purchases of materials and supplies to be physically incorporated into the Agency's Facility and the cost for which is borne by the Agency are exempt from sales and use taxes pursuant to Conn. Agencies Regs. § 12-426-18.

RULING:

As a contractor acting pursuant to a construction contract between the Partnership and the Agency, under which contract the Partnership is obligated to make, and the Agency is obligated to pay for, certain improvements, the Partnership may make purchases of materials and supplies to be physically incorporated into the Agency's Facility pursuant to the contract that are exempt from sales and use taxes.

LEGAL DIVISION

Issued: November 9, 1993