Which premises, equipment, and replacement purchases qualified for the RIIFC project exemption, and did the exemption continue after project completion while the bond remained outstanding?

Plain-English summary

Qualifying premises, equipment, and replacement property acquired or leased and installed during the RIIFC project were exempt from Rhode Island sales and use tax when RIIFC held title or a leasehold or license interest. The exemption ended when the defined project was completed; the bond's continued existence did not extend it.

The project involved approximately 26 acres of Rhode Island land, a roughly 100,000-square-foot manufacturing facility, and furnishings, machinery, and equipment. A $1 million taxable industrial revenue bond financed part of the project, whose inducement resolution stated a total cost of $27 million.

The Company planned to transfer the project to RIIFC, which would lease it back during acquisition, construction, and installation. RIIFC would hold title during the lease and transfer title back to the Company after project completion.

Corporation X, an affiliate, could purchase the bond and receive RIIFC's assigned lease and lease-income interests without affecting the Company's sales-and-use-tax exemption. The Act provisions cited in the order did not restrict the bond purchaser or lease assignee in the way the Company feared.

What this means for you

Industrial project owners

The exemption was tied to qualifying RIIFC ownership or interests during the life of the defined project. Project completion, not bond maturity, controlled the endpoint for later company purchases.

Purchasing teams

Replacement equipment acquired or leased and installed as part of the active project could qualify. Materials bought by the Company with its own funds after completion for reconstruction, improvement, or maintenance were taxable.

Accountants and tax professionals

Do not use outstanding bond indebtedness as a proxy for continuing exemption eligibility. Document the project's completion date and whether RIIFC, rather than the Company alone, was purchasing or leasing the property.

Common questions

Which project property was exempt? The premises and equipment, including replacements, acquired or leased and installed during the project when RIIFC held title or a leasehold or license interest.

Did an affiliate's bond purchase eliminate the exemption? No. Corporation X's bond purchase and RIIFC's assignment of lease and income interests to it did not affect the exemption.

Were company-funded purchases after completion exempt? No, even if the bond was still outstanding.

Did RIIFC's lease of project property back to the Company remain exempt? The discussion says RIIFC's lease of qualifying project items to the Company was exempt as part of the project.

Who could rely on the ruling? The reliance sentence says Company A, although the request consistently identifies the taxpayer only as Company. That discrepancy is in the official page.

Citations and references

• R.I. Gen. Laws § 42-35-8 — authority for the declaratory-ruling request.
• R.I. Gen. Laws § 45-37.1-3(5) — definition of an RIIFC project.
• R.I. Gen. Laws § 45-37.1-5(9)-(10) — RIIFC's bond and lease-assignment powers described in the order.
• R.I. Gen. Laws § 45-37.1-6(a) — additional bond authority cited in the order.
• R.I. Gen. Laws § 45-37.1-9 — tax exemption for RIIFC and its projects.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2000-02

Original ruling text

Ruling Request No. 2000-02

Declaratory Rulings

Ruling Request No. 2000-02

Re: Ruling Relating to The Exemption from Sales/Use Tax Under the Rhode Island Industrial Facilities Act, RIGL §45-37.1-1 et seq.

Request for Ruling

Pursuant to RIGL §42-35-8, and Rhode Island division of Taxation Regulation DR94-01, you request on behalf of your client, ("Company"), a declaratory ruling regarding issues relating to the exemption from the Rhode Island Sales and Use Tax under Rhode Island Industrial Facilities Act, RIGL §45-34.1-1 et seq. ("The Act") for the building and construction materials, personal property, furniture, fixtures and equipment and replacements, additions and enhancements thereof, the legal title to which will be in the name of the Rhode Island Industrial Facilities Corporation ("RIIFC") in connection with a project and which will be leased to the Company.

Facts

The facts set forth herein are taken from the request for ruling of the Company dated September 6, 2000. Incorporated by reference and made a part of this ruling request is the resolution of RIIFC authorizing the issuance and sale of an economic development revenue bond, the inducement resolution of RIIFC to proposed industrial facilities for the Company and all amendments thereto, and various other documents submitted as part of this request.

Company, a corporation organized under the laws of the state of New York, and RIIFC intend that the RIIFC will issue a taxable Industrial Revenue Bond (the "Bond") in the principal amount of $1,000,000. RIIFC will deliver the proceeds of the sale of the Bond to the Company in compliance with the Act. Under the terms and conditions of a Bond Purchase Agreement by and among RIIFC, the Company and Corporation X, Corporation X will purchase the Bond. Corporation X is an affiliate of the Company.

The Company will use the proceeds of the Bond to finance a portion of the cost of: (i) the acquisition of approximately 26 acres of land situated in Rhode Island (the "Premises"); (ii) the construction of a manufacturing facility of approximately 100,000 square feet (including all furniture, fixtures, hardware and replacements thereof) (the "Facility") on the Premises; and (iii) the acquisition and installation of furnishing, machinery and equipment to support the activities located in the Facility (the "Equipment"; the Equipment, Premises, and Facility are collectively referred to as the "Project").

RIIFC and the Company will enter into a Lease Agreement (the "Lease"), under which the Company will transfer title to the Project to RIIFC and RIIFC will lease the Project to the Company through the actions described below:

(i) The company will convey the Premises to RIIFC by Warranty Deed on the date the bond is delivered.

(ii) The company will convey the Facilities and equipment to RIIFC on the date the bond is delivered.

(iii) RIIFC will lease the Premises to the company for a specified term as is necessary for the acquisition, construction or installation of the Project.

(iv) The company will construct the Facilities on the Premises and install the Equipment in the Facility during the term of the Lease.

(v) During the term of the Lease, RIIFC will hold title to the Project and upon completion of the Project, it will deliver title to the Project to the company for consideration.

RIIFC will assign its interests in the Lease, including the rental payments due to RIIFC from the company under the Lease, to Corporation X as the holder of the Bond to secure the payments made by the Company under the Lease to the payment of corresponding installments of principal and interest on the Bond in the order that corporation X may determine.

After the Project is completed, the Company may desire to purchase additional materials to be incorporated into the Project. The Company would purchase these materials with its own funds, independent from the proceeds of the bond, in order to reconstruct, improve or maintain all or any portion of the completed Project during the period in which the Bond remains outstanding.

Rulings Requested

1. The acquisition of the Premises and the Equipment including the replacements thereto constitute part of a RIIFC Project as defined in § 45-37.1-3 of the Act. Therefore, the Equipment thereto that will be acquired or leased and installed at the Project, the legal title to which will be in the name of RIIFC or in which RIIFC will have a leasehold or license interest, will be exempt from Rhode Island sales and use tax.
2. If Corporation X, as an affiliate of the Company, purchases the Bond under the Bond Purchase Agreement and if RIIFC assigns its interest in the Lease and income derived under the Lease to Corporation X, these events will have no effect on the Company's exemption from Rhode Island sales and Use Tax.
3. While the Bond remains outstanding and if RIIFC continues to own the project, If the Company should purchase additional materials with its own funds in order to reconstruct, improve or maintain all or any portion of the Project, and the moneys spent by the Company are not related to the proceeds of the bond, these purchases for materials to be incorporated into the Project made by the Company will nonetheless be exempt from sales and use tax under the Act.

Discussion

RIGL §45-37.1-9 reads in pertinent part as follows:

"...[RIIFC] is not required to pay any taxes or assessments upon or in respect of a project, or any property or moneys of the corporation levied by a municipality or political subdivision of the state, nor is [RIIFC] required to pay any state taxes of any kind and [RIIFC], its projects, property, and moneys and any bonds and notes issued under the provisions of this chapter, their transfer and the income therefrom, including any profit made on their sale are at all times free from taxation of every kind by the state ..."

RIGL §45-37.1-3(5) defines "Project" as follows:

"...'Project' means any land and any buildings or other improvement, and all real and personal properties including but not limited to machinery and equipment, or any interest therein, whether or not now in existence or under construction, which shall be suitable for manufacturing, warehousing or other commercial or industrial purposes ..."

RIIFC and its projects are exempt from taxation to the extent that RIIFC purchases or leases the equipment and improvements. To the extent that RIIFC purchases replacement equipment, those purchases would also be exempt. the subsequent lease of those items to the Company, as part of the Project, would likewise be exempt.

As to the second ruling request, sections 45-37.1-5(9) and 45-37.1-6(a) of the Act provide that RIIFC has the power to issue its bonds in order to carry out its corporate purposes under the Act. Further, section 45-37.1-5(10) of the Act provides in pertinent part, that RIIFC has the power to assign the lease on a project and the income received under that lease. Moreover, none of these sections contains any restriction as to whom RIIFC may issue its bonds or assign the lease or its rights to income from the lease.

RIIFC authorized the issuance of the Bond with full knowledge that an affiliate of the Company would purchase the Bond (re: exhibit f, "Inducement Resolution of the Rhode Island Industrial Facilities Corporation Relating to Proposed Industrial Facilities"). Therefore, RIIFC's assignment of its interest in the Lease and the income derived under the Lease to Corporation X, and affiliate of the Company and corporations X's purchase of the Bond under the Bond Purchase Agreement would have not effect on the Company's sales and use tax exemption.

In its final request for ruling, the Company seeks exemption for purchase of additional materials, after the Project is completed and with its own funds, in order to reconstruct, improve, or maintain any portion of the Project while the Bonds remain outstanding.

The company seeks to extend the sales and use tax exemption beyond the completion date of the Project. The Inducement Resolution defines the Project as costing $27,000,000 and comprised of the land acquisition, the construction of an approximately 100,000 square foot building (the Facility) and the acquisition and installation of furnishings, machinery and equipment used in the manufacture of jewelry and related products and for general office purposes.

To the extent that the land has been acquired, the Facility constructed and acquisition and installation of furnishings, machinery and equipment is completed, the Project is completed and the exemption ceases. Purchases of additional materials by the Company with its own funds are not exempt notwithstanding the fact that Bond indebtedness remains outstanding. The exemption is in no was related to the period of Bond indebtedness.

RIGL §45-37.1-9, supra, exempts RIIFC and its Projects from taxation. Since RIIFC is not purchasing these materials and since these purchases will be made after the Project is completed, these materials are not exempt from taxation.

Ruling

(1) The acquisition of the Premises and the Equipment including the replacements thereto that will be acquired or leased and installed at the Project during the life of the Project, the legal title to which will be in the name of RIIFC or in which RIIFC will have a leasehold or license interest, will be exempt from Rhode Island sales and use tax.

(2) If Corporation X, as an affiliate of the Company, purchases the bond under the Bond Purchase Agreement and if RIIFC assigns its interest in the Lease and the income derived under the Lease to Corporation X, these events will have no effect on the Company's exemption from Rhode Island sales and use tax.

(3) Purchases of materials by the Company with its own funds after the Project is completed, will be subject to the sales and use tax notwithstanding the fact that the Bond remains outstanding.

This ruling may be relied upon by Company A 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 facts described herein change.

R. Gary Clark

Tax Administrator

September 28, 2000