Can a contractor buy consumable supplies and rent equipment tax-free on a tax-exempt university construction project?

Plain-English summary

Despite the ruling's own official title, the Missouri Department of Revenue actually reached a split result for a contractor working on a tax-exempt construction project for a medical-based university: rented machinery and equipment (lifts, construction fencing, motorized machinery) are fully taxable, while true consumables (plywood used as ground cover, drill bits, small miscellaneous tools that get used up) are exempt.

Section 144.062.1(6), RSMo lets a contractor buy or rent items tax-free on behalf of an exempt entity like a university, to the extent the purchases relate to the entity's exempt functions. But Section 144.062.3, RSMo carves that exemption back: it specifically does NOT cover "construction machinery, equipment or tools used in constructing, repairing or remodeling facilities" -- so lifts, rented fencing, and motorized machinery stay taxable no matter whose exempt project they're used on. That same section's exemption certificate, however, does cover "tangible personal property and materials to be incorporated into or consumed in the construction of that project" -- covering genuine consumables like plywood walkways and drill bits, but not small tools, because tools (even small ones) aren't actually consumed.

What this means for you

Contractors working on tax-exempt projects (schools, universities, hospitals, government entities)

Don't assume that because your customer is a tax-exempt entity, everything you buy or rent for the job is exempt. Missouri draws a firm line: equipment and machinery (even rented, even used solely on the exempt project) stay taxable, while items truly consumed in construction (materials incorporated into the project, or supplies used up and discarded, like plywood sheeting) are exempt. Small tools -- even inexpensive, disposable-feeling ones like drill bits used up over a job -- straddle this line; this ruling treated small tools as NOT exempt because they aren't truly consumed the way plywood or drill bits are, so check your specific items carefully.

Universities, hospitals, and other exempt entities hiring contractors

Your exemption certificate doesn't automatically flow through to every purchase your contractor makes on your project. Equipment and machinery your contractor rents or buys to do the work remains taxable regardless of your own exempt status.

Accountants and tax professionals serving the construction industry

When reviewing a contractor's purchases on an exempt-entity project, sort every line item into "consumed in construction" (exempt) versus "machinery, equipment, or tools used to do the construction" (taxable) -- the exemption certificate under Section 144.062.3, RSMo explicitly draws this line, and it applies regardless of how essential the equipment is to the job.

Common questions

Q: If my customer is a tax-exempt university, can I rent equipment for their project tax-free?
A: No. Section 144.062.3, RSMo specifically excludes construction machinery, equipment, and tools from the exemption, even when used on an exempt entity's project.

Q: What counts as an exempt "consumable"?
A: Materials incorporated into the project (becoming part of the building) or supplies genuinely used up during construction, like plywood laid down as a temporary walking surface or drill bits worn out on the job. Small hand tools are treated differently -- they're durable items, not consumables, so they don't qualify even though they may be inexpensive.

Q: Does this exemption apply to any exempt entity, or just universities?
A: Section 144.062.1(6), RSMo applies to exempt entities generally (institutions of higher education is one example), but the exemption's scope -- consumables yes, machinery/equipment/tools no -- is set by Section 144.062.3, RSMo regardless of which specific exempt entity is involved.

Q: Can another contractor rely on this ruling for a different exempt project?
A: No. A Missouri letter ruling binds the Department only as to the requesting Applicant, only for three years, and only while the facts and law don't change. Another contractor should sort its own purchases using the same consumables-vs-equipment framework and consult a tax professional.

Citations and references

Statutes:

• Section 144.020.1, RSMo (imposition of sales tax on retail sales of tangible personal property)
• Section 144.010.1(13), RSMo (definition of "sale at retail")
• Section 144.062.1(6), RSMo (exemption for purchases by an exempt entity such as an institution of higher education)
• Section 144.062.3, RSMo (exemption certificate covers consumed materials but excludes construction machinery, equipment, and tools)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8313

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated June 28, 2024.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is a contractor working on a tax-exempt project for a medical based University. Rental equipment is used on the project such as lifts, rented construction fencing and rented motorized machinery.  Consumables such as plywood put on the ground to walk on, bits for drills, small misc. tools, etc. are also used on the project.

ISSUE 1:

Is the rental equipment used on the project exempt from sales tax?

RESPONSE 1:

No. Purchase and rental of machinery and equipment such as lifts, construction fencing, and motorized machinery is not exempt from sales tax.

Section 144.020.1, RSMo, imposes a tax "upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state."

Section 144.010.1(13), RSMo, provides: "'[s]ale at retail' means any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration..."

Section 144.062.1(6), RSMo, provides that a sales tax exemption shall be allowed for purchases by an exempt entity as defined in that section, such as an institution of higher education, to the extent that the purchases are "related to the entities' exempt functions and activities."

However, section 144.062.3, RSMo, provides, "Nothing in this section shall be deemed to exempt the purchase of any construction machinery, equipment or tools used in constructing, repairing or remodeling facilities for the exempt entity." Consequently, the sale or rental of machinery and equipment such as lifts, construction fencing, and motorized machinery is not exempt from sales tax.

ISSUE 2:

Are the consumables used in the project sales tax-exempt?

RESPONSE 2:

Yes. Consumables used in the project are sales tax-exempt.

Section 144.062.3, RSMo, provides that the exemption certificate created in this section exempts, "[a]ll tangible personal property and materials to be incorporated into or consumed in the construction of that project and no other." Thus, a difference is recognized between machinery, equipment and consumables, the former not being tax exempt and the latter being tax exempt. This exemption does not apply to small tools which might be purchased and used in the construction of the project because they are not consumable.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis.

Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Senior Counsel, Kent L. Brown, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961,
e-mail [email protected].

Sincerely,

Wayne Wallingford