Were a private developer's purchases of materials for a pumping station that would be dedicated to the Providence Water Supply Board exempt from sales or use tax?

Plain-English summary

The private developer's purchases of materials for the pumping station were subject to Rhode Island sales or use tax. Even though the completed facility would be dedicated to and owned by the Providence Water Supply Board, the developer had no construction contract with the Board or the Town of Johnston and did not qualify under the exempt-entity contract rule.

The developer was subdividing Johnston land for single-family homes. To obtain project permits and approvals, the Water Supply Board required a pumping station on Greenville Avenue. The station would serve the development, benefit existing customers, and become Board property when completed.

Article II of Regulation SU 91-27 allowed contractors on construction contracts for governments and other exempt entities to buy essential project materials without tax. The developer argued that a direct public contract was unnecessary under B.G. Bailey Construction Co. v. Norberg, 524 A.2d 595 (1987).

The Division distinguished that case. B.G. Bailey was a subcontractor to Amica, and Amica had contracted with the state to build the project on state-owned land. Here, neither the developer nor an upstream contractor had a construction contract with the Water Supply Board or Town. The exemption therefore did not apply.

What this means for you

Private developers

A permit condition requiring construction and later public dedication did not turn the work into a government construction contract for purposes of the exemption.

Contractors and subcontractors

An indirect contract can qualify only when it sits under an actual construction contract with the exempt entity, as the Division described in B.G. Bailey.

Accountants and tax professionals

Document the contractual chain, not just ultimate ownership. Public benefit and transfer of title at completion did not replace the missing exempt-entity contract.

Common questions

Did the Water Supply Board's ownership of the finished station create the exemption? No. The ruling focused on the absence of a construction contract with the Board or Town.

Why did the developer cite B.G. Bailey? That case allowed a subcontractor's exemption even without a direct state contract.

Why was B.G. Bailey different? The subcontractor worked under Amica, which had contracted with the state. No comparable contract chain existed here.

Did the station's benefit to existing water customers matter? The order states that benefit as a fact but did not treat it as enough for exemption.

What was the final result? Materials required to build the pumping station were not exempt from sales or use tax.

Citations and references

• R.I. Gen. Laws § 42-35-8 — authority for the declaratory-ruling request.
• Rhode Island Regulation SU 91-27, article II — exemption for essential materials used under construction contracts with exempt entities.
• B.G. Bailey Construction Co. v. Norberg, 524 A.2d 595 (1987) — indirect-contract case distinguished by the Division.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1993-02

Original ruling text

Ruling Request No. 93-02

Declaratory Rulings

Ruling Request No. 93-02

Re: Application of Sales/Use Tax to Construction of Pumping Station Required by the Water Supply Board of the City of Providence

Request for Ruling

A request for ruling pursuant to R.I.G.L. 42-35-8 regarding the applicability of the sales and use tax law on the purchase of materials required to build a pumping station.

Facts

The petitioner is in the process of developing a parcel of land located in the Town of Johnston, Rhode Island. The developed parcel will be subdivided and residential single family homes will be built upon the parcel.

In order to secure the proper permits and licenses for the project, the Water Supply Board of the City of Providence ("PWSB") has required that a pumping station be built on Greenville Avenue in Johnston to serve the new development. The pumping station will also benefit many of the PWSB's existing customers.

Upon completion of the station, the facility will be dedicated to and become the property of the PWSB. This transfer is required by PWSB and the Town of Johnston for the approval of the development.

Ruling Requested

The petitioner requests a ruling that its purchases of materials required to build the pumping station are exempt from the sales and/or use tax.

Discussion

In his request for ruling the petitioner cites Regulation C under SU 91-27 which reads in pertinent part as follows:

ARTICLE II. Contracts with EXEMPT Agencies, Institutions and Organizations

Contractors performing construction contracts for the Federal Government, its agencies or instrumentalities, this state, or any other state of the United States of America, its agencies, any city, town, district, or other political subdivision of said states, hospitals not operated for profit, educational institutions not operated for profit, churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes, may purchase without payment of the tax, materials and supplies which are essential to the construction project and which are to be utilized in the construction thereof.

Exemption applies only to materials and/or supplies essential to the project which are to be utilized in the construction of the project... (emphasis added)

The petitioner herein is a private developer subdividing a parcel of land for its own purpose. He has not entered into a contract with either the PWSB or the Town of Johnston for the construction of the pumping station.

The petitioner cites the case of B.G. Bailey Construction Co. v. Norberg , 524 A.2d 595 (1987) for the proposition that it need not have a contract directly with the PWSB in order to secure the exemption.

"In B.G. Bailey Construction Co. v. Norberg , the Supreme Court of Rhode Island stated that the fact that the taxpayer did not contract directly with the state is of no significance."

This statement is taken out of context, however. When making that pronouncement the court recognized that Amica had a contract with the state to build the hangar (on state-owned land) and B.G. Bailey had a contract with Amica as its subcontractor. The court continued:

"Since Amica contracted with the state to perform construction work for the state, Amica was, in substance, a contractor for the state. Had Amica performed the work itself, it would unquestionably have been entitled to an exemption." (emphasis added)

The court held that the fact that B.G. Bailey did not contract directly with the state was of no significance since it was the subcontractor of Amica, which did have a contract with the state.

In the present matter the petitioner has not contracted with either the PWSB or the Town of Johnston for the building of the pumping station. Therefore, the exemption under Article II of Regulation SU 91-27 does not apply.

Ruling

The petitioner's purchases of materials required to build the pumping station are not exempt from the sales or use tax.

This ruling may be relied upon by this taxpayer and shall be valid until the applicable statutory provisions are amended in a manner requiring a different result or until the underlying factual presentation changes.

**R. Gary Clark

Tax Administrator

February 23, 1993**