Ruling 94-1, Sales and Use Taxes / Nonprofit Housing Organization / Services to Commercial, Industrial or Income-Producing Real Property / Contractors
FACTS:
A Connecticut corporation has as its purpose the development of low-income housing programs. The bylaws of such corporation state that "no member, director, or officer of the corporation shall receive any pecuniary benefit from the corporation, except reasonable compensation for services rendered affecting its corporate purposes or as a proper beneficiary of its strictly charitable purposes." Such corporation (hereafter "the Exempt Organization") is exempt from federal income taxation pursuant to 26 U.S.C. §501(c)(3).
In 1973, the Exempt Organization stated in its certificate of incorporation that its purpose was to develop "low to moderate community based housing programs." Such purpose was the basis for the Department's issuance of a sales and use taxes exemption permit under Conn. Gen. Stat. §12-412(cc), now §12-412(29), to the Exempt Organization in 1975. In 1979, however, the Internal Revenue Service (IRS) informed the Exempt Organization that because it was not designed to provide relief exclusively to the poor or low-income persons or families, such purpose may have disqualified the Exempt Organization from meeting the organizational test under 26 U.S.C. §501(c)(3). The IRS noted that in practice the Exempt Organization served only low-income persons or families, then deleted the reference to moderate income in the Exempt Organization's certificate of incorporation to permit it to qualify under 26 U.S.C. §501(c)(3). The Exempt Organization's amended certificate of incorporation states that one of the purposes of the corporation is to provide low-income community-based housing programs.
The Exempt Organization is the sponsor of a low-income housing facility (hereafter "the Housing Facility") being developed in Connecticut. The Housing Facility involves both the renovation of existing historic houses and the construction of two new buildings. The existing buildings will be renovated so that only the external walls and roof will remain intact; new floors, new internal walls, new support columns and new electrical and mechanical systems will be constructed to the extent consistent with preserving the buildings' historic structure certification. The Housing Facility is owned by a partnership (hereafter "the Partnership").
The Exempt Organization is party to three contracts relative to the Housing Facility: a "Construction Contract;" a "Development Services Agreement;" and a "Management Services Contract." The Construction Contract provides, inter alia, that the building contractor will renovate the existing buildings and construct the new buildings. The Construction Contract also provides that the Exempt Organization will sponsor the Housing Facility; that as sponsor, the Exempt Organization shall oversee and supervise the development of the Facility; and that such oversight and supervision duties include overseeing and coordinating the Project's development, obtaining the building permit and approving the contractor's work.
The Development Services Agreement further details the Exempt Organization's sponsorship duties. Under this agreement the Exempt Organization, as Developer, is responsible for providing certain services to the Partnership, some of which include selecting and consulting with an architect on the design of the Housing Facility, obtaining financing, hiring the general contractor and negotiating and enforcing all contracts associated with the Project's development.
Under the Management Services Contract, the Partnership appoints the Exempt Organization to manage the day-to-day operations of the Housing Facility upon its completion. Such operational duties include budget planning; inspecting, marketing, and maintaining the Housing Facility; and renting the Housing Facility units to tenants eligible for low-income housing, as set out by the Connecticut Department of Housing (DOH) and the Connecticut Housing Finance Authority (CHFA).
ISSUES:
Whether sales of and the storage, use or other consumption of tangible personal property acquired for incorporation into or used and consumed in the operation of the Housing Facility are exempt from sales and use taxes under Conn. Gen. Stat. §12-412(29).
Whether services rendered in the renovation of the existing buildings and the construction of the two new buildings are excluded from the meaning of "services to income-producing real property" as defined in Conn. Gen. Stat. §12-407(2)(i)(I), and therefore not subject to sales and use taxes.
Whether the building contractor may issue a "Contractor's Exempt Purchase Certificate" as provided for in Conn. Agencies Regs. §12-426-18, with respect to sales of materials and supplies that will be physically incorporated in and will become a permanent part of the Housing Facility.
DISCUSSION:
Conn. Gen. Stat. §12-412(29) exempts from sales and use taxes the
[s]ales of and the storage, use or other consumption of tangible personal property acquired for incorporation into or used and consumed in the operation of housing facilities for low and moderate income families and persons, provided such facilities are constructed under the sponsorship of and owned or operated by nonprofit housing organizations. For the purposes of this subsection, (A) "nonprofit housing organization" means any Connecticut organization which has as one of its purposes the development, construction, sponsorship or ownership of housing for low and moderate income families, and which has received exemption from federal income tax under the provisions of Section 501(c) of the Internal Revenue Code, as amended from time to time, provided the charter of such organization, if it is incorporated, or its constitution or bylaws, if unincorporated, shall contain a provision that no officer, member or employee thereof shall receive or at any future time may receive any pecuniary profit from the operation thereof, except a reasonable compensation for services in effecting the purposes of the organization; (B) "housing facilities" means facilities having as their primary purpose the provision of safe and adequate housing and related facilities for low and moderate income families and persons...and (D) "low and moderate income families" means those families as defined in subsection (h) of...section 8-243.
Conn. Gen. Stat. §12-412(29) (emphasis added).
The criteria of Conn. Gen. Stat. §12-412(29) are satisfied in the instant case. First, the Housing Facility is a "housing facility" as defined under Conn. Gen. Stat. § 12-412(29)(B). The Management Services Contract establishes that the Housing Facility is a facility that has as its primary purpose the provision of safe and adequate housing and related facilities for low and moderate income families and persons. Under the Management Services Contract, the Exempt Organization agrees to verify prospective tenants' eligibility for low-income housing in accordance with the requirements of the Connecticut DOH and CHFA. (CHFA is required to establish income limits for the admission to low and moderate income housing of "families and persons who lack the amount of income necessary as determined by CHFA to rent or purchase safe and adequate housing without special financial assistance not reasonably available." Conn. Gen. Stat. §8-243(h).)
Second, the Exempt Organization is a "nonprofit housing organization." To reach this conclusion it must be noted that Conn. Gen. Stat. §12-412(29) defines "nonprofit housing organization" as "any Connecticut organization which has as one of its purposes the development, construction, sponsorship or ownership of housing for low and moderate income families, and which has received exemption from federal income tax under the provisions of Section 501(c) of the Internal Revenue Code." Conn. Gen. Stat. §12-412(29)(A) (emphasis added).
Although the Exempt Organization qualified for a sales and use taxes exemption permit in 1975, it did not satisfy the requirements of 26 U.S.C. §501(c)(3), as the IRS later pointed out. Only by deleting the reference to moderate income families in its certificate of incorporation was the IRS satisfied that the Exempt Organization met the criteria of 26 U.S.C. §501(c)(3).
Strictly speaking, an organization whose sole purpose is to serve low and moderate income families and persons cannot qualify under 26 U.S.C. § 501(c)(3), although it could qualify under 26 U.S.C. §501(c)(4). However, in enacting Conn. Gen. Stat. §12-412(29), "the legislature is presumed to have acted with knowledge of existing statutes and with an intent to create one consistent body of laws [citations omitted]." Zachs v. Groppo, 207 Conn. 683, 696, 542 A.2d 1145 (1988). Since Conn. Agencies Regs. §12-426-15(c)(2) defines "low and moderate income families and persons" as those "who lack the amount of income necessary to rent or purchase safe and adequate housing without special financial assistance," there is really no practical distinction between "low" and "moderate" income levels for purposes of this exemption. To construe Conn. Gen. Stat. §12-412(29) so that its provisions are more harmonious and to give effect to the legislative intent, it should be interpreted to allow an organization that serves either low- or moderate-income families and persons to qualify as a "nonprofit housing organization." Additionally, because the Exempt Organization's bylaws provide that officers, members or employees shall receive no more than a reasonable compensation for their services, the Exempt Organization meets all the requirements of a "nonprofit housing organization."
Third, the Housing Facility is constructed "under the sponsorship of," and will be "operated by," the Exempt Organization. The Construction Contract expressly states that the Housing Facility is constructed under the sponsorship of the Exempt Organization and outlines some of the the oversight and development duties of the Exempt Organization as sponsor. The Development Services Agreement further outlines the Exempt Organization's sponsorship duties that relate to the development of the Housing Facility. Finally, the Management Services Contract establishes that the Housing Facility will be operated by the Exempt Organization by designating it as the exclusive manager of the day-to-day operations of the Housing Facility.
It is not fatal to the Exempt Organization's qualification under Conn. Gen. Stat. § 12-412(29) that the Partnership owns the Housing Facility. All of the criteria of Conn. Gen. Stat. §12-412(29) are satisfied because the Housing Facility is constructed under the sponsorship of and operated by the Exempt Organization.
The second question presented is whether renovation of the existing buildings of the Housing Facility and construction of the two new buildings are excluded from the meaning of "services to income-producing real property."
Conn. Gen. Stat. §12-407(2)(i)(I) defines "sale" and "selling" as including "services to industrial, commercial or income-producing real property..." Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1) establishes that
[s]ervices to real property are within the purview of section 12-407(2)(i)(I)...if and only if the services are rendered to existing industrial, commercial or income-producing real property. Services to real property that are rendered in the construction of new industrial, commercial or income-producing real property are not within the purview of said section 12-407(2)(i)(I). Services to real property will be considered to be rendered in the construction of new real property only to the extent that they are directly connected with the construction of a new building (or a new addition that expands the cubic footage of an existing building); otherwise, services to real property will not be considered to be rendered in the construction of new real property. Where only the external walls and roof of an existing building are left in place, services will nonetheless be considered to be rendered in the construction of new real property, as long as new floors, new internal walls, new support columns and new electrical and mechanical systems are constructed, provided where a structure purported to be a certified historic structure, as defined in 26 U.S.C. §48(g)(3)(A), is being substantially rehabilitated, as defined in 26 U.S.C. §48(g)(1)(C), and the rehabilitation will be a certified rehabilitation, as defined in 26 U.S.C. §48(g)(2)(C), new floors, new internal walls and new support columns will not be required to be constructed to the extent that such construction would prevent such structure from being listed in the National Register or certified as a certified historic structure, as the case may be.
Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1) (emphasis added).
Thus, the regulation establishes that services rendered in the construction of the two new Housing Facility buildings are excluded from the meaning of "services to income-producing real property" and charges for such services are not subject to sales and use taxes.
The Housing Facility also will include renovated buildings. Because the existing buildings will be renovated so that only the external walls and roof will remain intact, and because new floors, new internal walls, new support columns and new electrical and mechanical systems will be constructed to the extent consistent with preserving the buildings' historic structure certification, the plans for renovating the 13 existing buildings of the Housing Facility fall squarely within the exception in Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1). Therefore, charges for the services involved in such renovation are not subject to sales and use taxes. (See also Ruling No. 93-10.)
The third issue relates to the contractor's exempt purchase certificate provided for in Conn. Agencies Regs. §12-426-18. That regulation allows a contractor who
enters into a construction contract with a...nonprofit housing organization qualifying pursuant to section 12-412(cc) [now 12-412(29)] of the Connecticut General Statutes holding a valid exemption permit...[to] purchase such materials and supplies as are to be physically incorporated in and become a permanent part of the projects being performed under these contracts without payment of the tax and shall not charge any such exempt organization...any sales or use tax thereon. The contractor shall, in the case of such exempt purchases, furnish his suppliers with a completed certificate for each project...
Because the Exempt Organization is a "nonprofit housing organization" within the meaning of Conn. Gen. Stat. §12-412(29)(A) holding a valid exemption permit, the requirements of Conn. Agencies Regs. §12-426-18(a) are satisfied. The contractor may issue a Contractor's Exempt Purchase Certificate to his suppliers in order to purchase, without payment of sales and use taxes, those materials and supplies that will be physically incorporated in and become a permanent part of the Housing Facility as provided by the Construction Contract.
RULING:
The Exempt Organization is a "nonprofit housing organization" and the Housing Facility is a "housing facility" as those terms are defined in Conn. Gen. Stat. §12-412(29). The requirements of Conn. Gen. Stat. §12-412(29) are satisfied and the sales of and the storage, use or other consumption of tangible personal property acquired for incorporation into or used and consumed in the operation of the Housing Facility are exempt from sales and use taxes.
Because the existing buildings will be renovated so that only the external walls and roof will remain intact, and because new floors, new internal walls, new support columns and new electrical and mechanical systems will be constructed to the extent that they will not destroy the buildings' historical certification, the planned renovation of the existing buildings is excluded from the meaning of "services to income-producing real property" and charges for such services are not subject to sales and use taxes. Services rendered in the construction of the two new buildings also are excluded from the meaning of "services to income-producing real property" and charges for those services are not subject to sales and use taxes.
The Exempt Organization is a "nonprofit housing organization" within the meaning of Conn. Gen. Stat. §12-412(29)(A), and the Construction Contract is a "construction contract" within the meaning of Conn. Agencies Regs. §12-426-18(a). The requirements of Conn. Agencies Regs. §12-426-18(a) are satisfied in the instant case and the contractor may issue a Contractor's Exempt Purchase Certificate to its suppliers in order to purchase, without payment of sales and use taxes, those materials and supplies that will be physically incorporated in and become a permanent part of the Housing Facility as provided by the Construction Contract.
LEGAL DIVISION
January 3, 1994