When my county pays for materials to build a new school, can the county get back the sales tax it paid on those materials?

Plain-English summary

Deputy Treasurer Robert M. High asked the AG when, if ever, a county could claim a sales-tax refund under G.S. § 105-164.14(c) on purchases made for a local school administrative unit. The question came up because counties were trying to stretch the proceeds of the 1996 Public School Building Bond Act as far as possible. If counties could recover the sales tax on bond-funded construction, that recovery would meaningfully expand effective building budgets.

Senior Deputy AG Edwin M. Speas, Jr., with Special Deputies George Boylan and Douglas A. Johnston, gave a narrow answer. Counties were on the eligible list in G.S. § 105-164.14, but local boards of education were not. A 1961 AG opinion had already concluded that school boards themselves cannot get sales-tax refunds, and the 1997 office adhered to that conclusion. The question, then, was whether a county purchase "on behalf of" a school board could re-route the transaction back onto the eligible-entity list.

The AG said yes, but only in limited circumstances. Two mechanisms could give a county the legal authority to acquire personal property or construct buildings for a local school administrative unit: (1) a series of local acts (1995 Sess. Laws chs. 251, 651, 703, 750 and 1997 Sess. Laws chs. 24, 162, 190) granting acquisition or construction authority to specific counties, and (2) inter-local cooperative agreements under G.S. § 160A-460 et seq. between a county board and a local school board. When a county acted under one of those authorities and actually was the purchaser or contractor, the refund was available. When the school board acted directly, even with county appropriations, the refund was not.

For personal-property purchases, the test was strict: the county must have "paid by" itself, and must have had the legal authority to purchase for the school board in the first instance. For construction materials, the test had two prongs: the building must be "owned or leased" by the county (not the school board) and "for use by" the county. The AG read "for use by" the county to include construction of a school building by the county "in fulfillment of a statutory duty, including the specific duty to support the public schools within the county." That reading was permissive: the building does not have to be a courthouse, only a building the county is authorized to build to discharge its school-support duties.

Currency note

This opinion was issued in 1997. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. G.S. § 105-164.14 has been amended substantially since 1997, including a 2008 restructuring of the local-government refund regime that altered which entities get full refunds, partial refunds, or no refunds at all. The local acts referenced in this opinion may also have been amended, repealed, or supplemented. Any current question about sales-tax refunds on school facility costs should be analyzed against the current G.S. § 105-164.14 framework and the current local-act landscape, not the 1997 framework.

Background and statutory framework

G.S. § 105-164.14 listed the entities that could claim refunds of sales and use tax paid in NC. The list included interstate carriers, nonprofit hospitals, charitable and religious organizations, private not-for-profit educational institutions, state agencies, counties, cities, sanitary districts, and seventeen other enumerated local-government entities. Local boards of education were conspicuously absent. The General Assembly had repeatedly amended G.S. § 105-164.14 to add or remove entities, and had never added boards of education.

The default school-construction framework in G.S. § 115C-521 placed construction and repair of school buildings under the "direction and control" of local school boards. G.S. § 115C-522 placed purchasing of supplies and materials with the school boards. So the default rule was: school boards build, school boards buy, school boards get no refund. The 1997 opinion identified the two narrow workarounds (county local acts and inter-local agreements) that could shift the purchaser identity to the county and bring the transaction onto the eligible-entity list.

Common questions

Does using county bond money for a school project trigger a sales-tax refund?

No, not by itself. The source of the funds is not the question. The question is who actually paid for the materials or signed the construction contract. If the county sent bond proceeds to the school board and the school board contracted with builders, the school board was the purchaser and no refund was available. If the county contracted directly under a local-act authority or an inter-local agreement, the refund was available.

What is an "inter-local cooperative agreement"?

G.S. § 160A-460 et seq. let two or more units of local government agree to exercise a power jointly or to allocate functions between them. For school construction, a board of commissioners and a board of education could sign an inter-local agreement specifying that the county would acquire personal property or construct buildings for the school board. That agreement, properly executed, gave the county the legal authority that the AG required.

Could a county acquire property for a school board without a local act?

Not as a general matter in 1997. The default statutes (G.S. § 115C-521 and § 115C-522) placed those activities with the school boards. The local-act mechanism was the General Assembly's way of giving specific counties (Wake, Mecklenburg, and others identified in the 1995 and 1997 session laws) the authority that the default statutes did not provide. The inter-local agreement was the other route.

What does "owned or leased" by the county actually require?

For a construction refund, the building under construction or repair had to be owned or leased by the county itself, not by the school board. In counties operating under one of the local acts that empowered them to "construct, equip, expand, improve or renovate" school facilities, a county-built school could meet that test. Without the local-act or inter-local foundation, the school board was the natural owner and no refund could be claimed.

Did the AG's "for use by" reading help counties or hurt them?

It helped counties. The phrase "for use by" the county could have been read narrowly (sole, exclusive, or direct county use, like a county office building). The AG read it more broadly, to include construction of a school building by the county in fulfillment of the county's statutory duty to support the schools. That reading let bond-funded county-as-builder construction qualify for the refund.

Does this opinion say the Secretary of Revenue must give heightened scrutiny to county claims?

No, and the AG explicitly closed with that caveat: "Our response to the question raised is narrow. It does not suggest that the Secretary of Revenue must review the refund claims of counties with any more particularity than for those filed by other entities." The AG was saying who could file, not how strictly Revenue had to police filings.

Source

• Landing page: https://ncdoj.gov/opinions/sales-tax-refunds-when-counties-purchase-personal-property/

Citations

• N.C. Gen. Stat. § 105-164.14(a)
• N.C. Gen. Stat. § 105-164.14(c)
• N.C. Gen. Stat. § 105-164.14(e)
• N.C. Gen. Stat. § 115C-521
• N.C. Gen. Stat. § 115C-522
• N.C. Gen. Stat. § 115C-522(c)
• N.C. Gen. Stat. § 115C-524(b)
• N.C. Gen. Stat. § 160A-460 et seq.
• 1995 Sess. Laws chs. 251, 651, 703, 750
• 1997 Sess. Laws chs. 24, 162, 190
• Public School Building Bond Act of 1996, 1995 Sess. Law, ch. 631 (1996)

Original opinion text

August 5, 1997

Robert M. High
Deputy Treasurer
State and Local Government Finance Division
Office of State Treasurer
Raleigh, NC

Advisory Opinion; Sales Tax Refunds When Counties Purchase Personal Property or Construct Buildings for Local School Administrative Units; G.S. § 105-164.14(c)

You are concerned with the distribution and expenditure of state bond funds for public school facilities and have asked under what circumstances, if any, counties may submit refund claims under G.S. § 105-164.14(c) for sales taxes paid upon purchases of personal property to be used by a local school administrative unit or paid upon materials used in the construction of school buildings for a school unit. You have indicated that your concerns arise chiefly in efforts to identify the most efficient and equitable means of meeting the costs of school facility construction using proceeds of the Public School Building Bond Act of 1996, 1995 Sess. Law, ch. 631 (1996).

The General Assembly in G.S. § 105-164.14(a)-(e) has directed the Department of Revenue to make sales and use tax refunds to a series of enumerated entites. The entities include interstate carriers, nonprofit hospitals, charitable and religious organizations, private not-for-profit educational institutions, state agencies, counties, cities, sanitary districts and 17 other enumerated local government entities. The refunds authorized are generally for sales and use taxes incurred directly in purchasing tangible personal property and indirectly in constructing, repairing and equipping buildings and other structures.

Absent from the long list of enumerated entities eligible for refunds are local boards of education. In an opinion dated August 25, 1961, the Attorney General concluded that "no refunds of sales and use taxes paid by county and city boards of education may be made" pursuant to G.S. § 105-164.14 or any other statute. We continue to adhere to that opinion in all circumstances where local school boards themselves are purchasing personal property or constructing, repairing or equipping school buildings pursuant to their statutory authority.

When our 1961 opinion was issued, local boards of education directly purchased personal property and directly contracted for the construction of their buildings with funds provided by the State and the counties. There was no mechanism at that time by which counties could undertake to perform these activities for local school boards. This remains the general rule today. See G.S. § 115C-521 (construction and repair of school buildings under direction and control of local school boards) and G.S. § 115C-522 (local schools boards to purchase supplies and materials). The General Assembly, however, has adopted two mechanisms by which counties in certain instances may undertake these activities for local school boards. The first is a series of local acts providing that "a county may acquire, by any lawful method, any interest in real or personal property for use by a local school administrative unit within the county" and that "a county may construct, equip, expand, improve, renovate or otherwise make available property for use by a local school administrative unit within the county." See 1995 Sess. Laws chs. 251, 651, 703, 750 and 1997 Sess. Laws chs. 24, 162, 190. The second is through inter-local cooperative agreements made under G.S. § 160A-460 et. seq.

The sole criterion a county must meet in order to receive a refund under G.S. § 105-164.14(c) on the purchase of tangible personal property not used in the construction or renovation of buildings is that the cost of the purchase was "paid by" the county. (county allowed refund on sales taxes "paid by it . . . on direct purchase of tangible personal property"). In our opinion a county can meet this criterion in purchasing personal property for a local school board only when the county has the lawful authority in the first instance to purchase tangible personal property directly for a school board. Only two sets of counties have the lawful authority to purchase tangible personal property directly for local school boards: (1) those covered by the local acts granting them the authority to acquire property for use by local school boards and (2) those that have entered into inter-local cooperative agreements with school boards specifically providing for the counties to exercise that power for the local school board. Additionally, a county may only make a refund claim when this lawful authority has been exercised in making the purchase for which the refund is sought. For example, in a county that has the power by local act to acquire personal property for the school board, the particular property for which a refund is sought must have been purchased and paid for directly by the county. Property acquired and paid for by the school board using county or other appropriations will not qualify for a sales tax refund.

Different criteria must be met by a county to obtain refunds on sales tax liability indirectly incurred on materials used in constructing, repairing or equipping buildings. The first criterion is that the materials are used in a building "owned or leased" by the county. This requirement is unambiguous. It is met when the particular building under construction or repair is owned or leased by the county rather than the school board. As a matter of municipal law, this can lawfully occur in those counties which by local act have the power to "construct, equip, expand, improve or renovate property for use by a local school administrative unit within the county" or in those counties where the board of commissioners and the board of education have entered into an inter-local cooperative agreement for the construction of a school building by the county.

The second criterion is that the building is "for use by" the county. This criterion is potentially subject to differing interpretations. On the one hand, all public school buildings are "for use by" the counties in fulfilling the duties imposed on them to provide funding to support the public schools. See, e.g., G.S. § 115C-522(c) (duty of counties and local school boards "to provide suitable supplies for the school buildings under their jurisdiction"); G.S. § 115C-524(b) (duty of counties and local school boards "to keep all school buildings in good repair"). In another sense, all public school buildings are "for use by" local school boards in fulfilling their educational duties. Indeed, the local acts conferring authority on counties to construct school buildings specifically state that they are to exercise that power "for use by a local administrative unit within the county." In our opinion, the better interpretation of the "for use by" the county criterion in G.S. § 105-164.14(c) is that it encompasses both the construction or renovation of buildings by the county for its own direct and immediate use, e.g., a county office building, and the construction or renovation of buildings by the county in fulfillment of a statutory duty, including the specific duty to support the public schools within the county. Notably, the phrase "for use by" does not include limiting words like "sole use," "exclusive use" or "direct use."

As in the case of refunds of sales taxes directly incurred by counties in purchasing personal property for local school boards, refunds of sales taxes indirectly incurred by counties through contracts they make for constructing, repairing and equipping school buildings are limited to those instances where the county is itself constructing, repairing or equipping the school building. When a local school board itself contracts for the construction, repair or equipping of its own building no refund is available even when county appropriations are used. This limitation is the necessary consequence of the General Assembly's decision not to include local school boards among the enumerated entities eligible for refunds under G.S. § 105-164.14.

In sum, a county may submit refund claims for sales taxes under G.S. § 105-164.14(c) only in those limited instances where (1) it has the authority to purchase, and has actually purchased, particular personal property for a local school board and (2) it has the authority to make contracts for the construction, repair or equipping of a school building for a local board of education and has undertaken to do so. When local boards of education purchase their own personal property or construct, repair or equip their own buildings a refund is not available.

Our response to the question raised is narrow. It does not suggest that the Secretary of Revenue must review the refund claims of counties with any more particularity than for those filed by other entities.

Sincerely,

Edwin M. Speas, Jr.
Senior Deputy Attorney General

George Boylan
Special Deputy Attorney General

Douglas A. Johnston
Special Deputy Attorney General