Did Rhode Island's EDC exemption cover a tenant's building materials, equipment, software, and replacements for a service center?

Plain-English summary

Qualifying improvements and purchased materials for the EDC-backed service center were exempt from Rhode Island sales and use tax even when the Client, rather than EDC, held title or a leasehold or license interest. The result required EDC's board to adopt the statutory resolution, the ruling's stated contingencies to occur, and the Client to follow a pay-first refund procedure.

The Client planned a consumer-finance, credit-card, customer-service, and commercial-loan operations center on land leased from EDC in Warwick. The project included office buildings, parking and related improvements, furniture, fixtures, equipment, cabling, computer hardware and software, and replacements. Some supporting computer property would be located in East Providence.

Section 42-64-20(b) exempted EDC and its projects from state taxes. Section 42-64-20(c) allowed project property to remain in a lessee's name and receive the same exemption if EDC's board adopted a resolution finding that the undertaking was an EDC project and that lessee-held title served EDC and the project.

The Division therefore approved the exemption for qualifying property acquired, installed, and used for the project. Goods or inventory held for sale in the ordinary course of business were excluded. The facts also excluded ordinary office supplies and common office items with a useful life of less than one year from the defined purchased materials.

The ruling did not permit the Client simply to avoid paying tax at purchase. The Client had to pay the sales or use tax and request a refund with proof of payment, supplier invoices, and an independent consultant's report verifying that the materials were installed at or delivered to the project.

What this means for you

EDC project developers and tenants

The exemption turned on the formal EDC structure, including the ground lease, the board resolution required by § 42-64-20(c), and the contingencies identified in the ruling. A project label alone was not enough.

Procurement and accounting teams

Keep proof of tax payment and complete supplier invoices by project item. The ruling required those records for the refund claim rather than allowing an undocumented exemption at checkout.

Facilities and technology teams

The described project property included construction materials, furniture, fixtures, partitions, cabling, electronic hardware and software, and later replacements. Connect each claimed item to the approved project and the independent installation or delivery verification.

Common questions

Did EDC have to hold legal title to every exempt item? No. The Client could hold title or a leasehold or license interest if the statutory resolution and other conditions were satisfied.

Were replacement computers and related property covered? Yes. The facts treated qualifying replacement items as purchased materials during the ten-year ground-lease term.

What property was excluded? Goods or inventory held for sale were expressly excluded. The project description also left out office supplies and common office items with a useful life of less than one year.

Could the Client claim exemption without first paying tax? No. The ruling required payment followed by a written refund request.

What documentation supported the refund? Proof of Rhode Island sales or use tax payment, supplier invoices, and an independent consultant's report confirming installation at or delivery to the project.

How long did the ruling remain valid? Until express revocation, a statutory change requiring a different result, or a change in the underlying circumstances, subject also to the three contingencies stated in the footnote.

Citations and references

• R.I. Gen. Laws § 42-35-8 — authority for the declaratory-ruling request.
• R.I. Gen. Laws § 42-64-3(p) — definition of an EDC project.
• R.I. Gen. Laws § 42-64-20(b) — tax exemption for EDC and its projects.
• R.I. Gen. Laws § 42-64-20(c) — exemption for qualifying project property held by an EDC lessee.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1996-04

Original ruling text

Ruling Request No. 96-04

Declaratory Rulings

Ruling Request No. 96-04

Re: Request for Declaratory Ruling Regarding the Application of the Exemption Provided by R.I.G.L §42-64-20(c) for Purchases of Certain Personal Property

Request for Ruling

On behalf of your Client you request, pursuant to the provisions of section 42-35-8, Rhode Island General Laws, 1956 (as amended)("R.I.G.L."),a declaratory ruling as to the exemption from Rhode Island Sales and Use Tax of the building and construction materials, personal property, furniture, fixtures and equipment (including all computer hardware and software systems) and replacements, additions and enhancements thereof, the legal title to, and/or contractual right to use of which will be in the name of Client or an affiliate of Client, in connection with a project be developed on land in Warwick, Rhode Island, with respect to which the Rhode Island Economic Development Corporation created under chapter 64 of title 42, R.I.G.L. ("the EDC") is the landlord and Client is the tenant.

Facts

Client and EDC are parties to a development agreement dated May 1, l996, pursuant to which Client shall develop a service and operations center for consumer finance, credit card, customer service and commercial loan operations activities ("The Service and Operation Center") in Warwick, Rhode Island (the "Project Site"). The project will consist of one or more office buildings (including all furniture, fixtures and equipment and replacements thereto), together with parking and related improvements in Warwick, Rhode Island, and certain computer hardware and software located in East Providence, Rhode Island, to be purchased, leased or licensed to support the activities to be undertaken at the Project Site ("the East Providence Personal Property") (collectively, the "Improvements") which are collectively intended to be used as the Service and Operation Center by Client (collectively, the "Project") Construction and development of the Project and payment of all Project related costs will be the responsibility of client. The land on which the Project will be located, shall be leased to client under a ground lease (the "Ground Lease") to be entered into between EDC and Client. Under the Ground Lease, Client will lease the land to be used in the Project from EDC. Client will then construct and equip the Project (including the Improvements, except for the East Providence Personal Property) on the leased land. All materials used in the construction, development and operation of the Project (other than office supplies or common office items which have a useful life of less than one year), including without limitations all furniture, fixtures, equipment, partitions, cabling, electronic hardware and software and any other items of personal property acquired for use with respect to the Project (collectively, "Purchased Materials") will constitute part of the Project. Further, throughout the ten (10) yr. term of the Ground Lease and operation of the Project, it is expected that many items of personalty (excluding office supplies or other common office items which have a useful life of less than one year.) including for example, computers and computer related hardware and software, will be replaced or enhances ("Replacement Items") the Replacement Items also constitute Purchased Materials. Client will use the Project as a Service and Operations Center and will not hold goods or accumulate inventory for sale in the ordinary course of business.

Ruling Requested

The Purchased Material as set forth and described under the caption "Facts," so long as they do not include goods or inventory held for sale in the ordinary course of business, constitute part of an EDC Project as set forth in Section 42-64-3(p) of the R.I.G.L. Assuming the EDC makes the determinations required by Section 42-64-20(c), the Improvements and the Purchased Materials that will be acquired and installed to support the Project, the legal title to which will be in the name of Client or in which Client will have a leasehold interest or license in, will be exempt from Rhode Island Sales and Use Tax to the same extent as if legal title of such Improvements and Purchased Materials were in the name of the EDC.

Discussion

The pertinent provision of the Rhode Island General Laws read as follows:

42-64-3(p)-- "Project" or "port project" means the acquisition, owner, operation, construction, reconstruction, rehabilitation, improvement, development, sale, lease or there dispositions of, or the provision of financing for, any real or personal property (by whomever owned) or any interests therein, including without limiting the generality of the foregoing, any port facility, recreational facility, industrial facility, airport facility, pollution control facility, utility facility, solid waste facility, or any other facility, or any combination of two (2) or more of the foregoing, or any other activity undertaken by the corporation.

42-64-20(b)-- The Corporation shall not be required to pay state taxes of any kind, and the corporation, its projects, property, and monies and except for estate, inheritance, and gift taxes, any bonds or notes issued under the provisions of this chapter and the income (including gain from sale or exchange) therefrom shall at all times be free from taxation of every kind by the state and by the municipalities and all political subdivisions of the state...

42-64-20(c)-- For purposes of the exemption from taxes and assessments upon or in respect of any project under subsections (a) or (b) of this section, the corporation shall not be required to hold legal title to any real or personal property, including any fixtures, furnishing or equipment which are acquired and used in the construction and development of such project, but such legal title may be held in the name of a lessee (including sublessees) from the corporation. Such property, which shall not include any goods or inventory used in such project after completion of construction, shall be exempt from taxation to the same extent as is legal title of such property were in the name of the corporation, provided that the board of directors of the corporation adopts a resolution confirming use of such tax exemption for such project by such lessee. Such resolution shall include findings that (1) the project is a project of the corporation under §42-64-3(p) and (2) it is in the interest of the corporation and of the project that legal title be held by the lessee from the corporation. In adopting any such resolution, the board of directors may consider any factors it deems relevant to the interests of the corporation or the project including, for example, but without limitation, reduction in potential liability or costs to the corporation or designation of the project as a "Project of Critical Economic Concern" pursuant to Chapter 117 of this title.¹

¹ This amendment became effective upon passage but the act provided that it shall be contingent upon the approval, execution and delivery by the Economic Development Corporation and the developer of (i) the Public Investment and HOV Agreement, (ii) the Agreement Regarding Providence Place Mall and (iii) the Ground Lease, and shall be repealed in its entirety upon the failure of such contingencies to occur. therefore, this ruling shall be valid only if the three (3) contingencies occur,

Chapter 64 of title 42 entitled "Economic Development Corporation" was enacted in 1974. Under subsection (b) of §42-64-20, EDC was granted an exemption from all state taxes except estate, inheritance and gift taxes. R.I.G.L §42-64-20 was amended in 1995 by adding subsection (c). That new section allows EDC to "assign" its tax exemption granted under subsection (b) to its lessee (or sublessee) of the EDC.

Since the Purchased Material and Replacement used in the Project as that term is defined in R.I.G.L. §42-64-3(p), supra, would be exempt if EDC adopts a resolution making the aforementioned findings thereby "assigning" its exemption to Client.

Ruling

Assuming that EDC adopts the resolution required by Section 42-64-20(c) and the contingencies noted herein occur, the Purchased Materials as set forth and described under the caption "Facts" so long as they do not include goods of inventory held for sale in the ordinary course of Business, constitute part of an EDC Project as set forth in Section 42-64-3(p) of the R.I.G.L. The Improvements and the Purchased Materials that will be acquired, installed and used at the Project, the legal title to which will be in the name of Client, or in which Client will have a leasehold or license in, will be exempt from Rhode Island sales and use tax to the same extent as if legal title of such Improvements and Purchased Materials were in the name of the EDC.

The foregoing ruling will be subject to Client complying with the following refund procedure. Client shall pay or cause to be paid the sales and use tax on the Purchased Materials and shall submit a written request for a refund of such tax to the Division of Taxation, such refund request to be in a form satisfactory to the Division of Taxation and shall be accompanied by (i) proof of payment of the Rhode Island sale s and use tax, (ii) copy of supplier invoices for all Purchased Materials for which a refund is sought and (iii) a report executed by an independent consultant appointed by EDC verifying the Purchased Materials were installed at or delivered to the Project. Said independent consultant may either be an employee of the EDC or a professional architectural or engineering firm licensed to practice in Rhode Island.

This ruling may be relied upon by Client and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying situations described above change.

**R. Gary Clark

Tax Administrator

May 20, 1996**