Were project materials owned by Company X or its affiliates exempt from Rhode Island sales and use tax for the EDC-designated manufacturing expansion?

Plain-English summary

Qualifying materials owned by Company X or its affiliates for an EDC-designated manufacturing expansion were exempt from Rhode Island sales and use tax as if the EDC held title. The exemption was subject to the investment limitation in Section 5.4 of the Development Agreement.

Company X had purchased a Rhode Island manufacturing facility and planned an expansion involving additional facilities, equipment, and personal property. The facts said the expansion would create at least 250 additional Rhode Island jobs.

The EDC board designated the facility as an EDC project, provided a project exemption, and resolved that a lessee or sublessee should hold title to the related real and personal property. The EDC leased part of the facility property and subleased it back to Company X, which remained responsible for the project's construction and development.

Purchased Materials included furniture, fixtures, machinery, equipment, partitions, cabling, electronic hardware and software, other personal property, and replacement goods or parts used for the project. The ruling excluded office supplies and common office items with a useful life under one year, along with goods or inventory held for ordinary sale.

What this means for you

Manufacturers and project affiliates

Company ownership did not by itself prevent the exemption. The EDC designation, board resolution, lease structure, project definition, and Development Agreement were central to the result.

Purchasing and facilities teams

The order covered a broad range of qualifying construction, production, technology, and replacement property, but not short-lived common office items or resale inventory.

Accountants and tax professionals

Apply Section 5.4's investment-based limitation and the order's historical duration rule. The exemption lasted for the lesser of ten years from January 28, 2002; termination of the Ground Leases; or a qualifying change in law or the underlying facts.

Common questions

Did the EDC have to own the purchased materials? No. Company X or its affiliates could own qualifying materials and receive the same exemption as if the EDC held title.

Were replacement parts covered? Yes, when acquired for use with respect to the project and otherwise within the ruling's definition and limits.

What was excluded? Office supplies and common office items with a useful life under one year, plus goods or inventory held for sale in the ordinary course of business.

Did the benefits extend to affiliates? The request, first holding, and reliance sentence say Company X and its affiliates. The second holding then names “Company A” in one clause, an internal inconsistency in the official page that should not be silently corrected.

How long did the ruling remain effective? Only for the lesser of the three endpoints stated in the order.

Citations and references

• R.I. Gen. Laws § 42-35-8 — authority for the declaratory-ruling request.
• R.I. Gen. Laws § 42-64-3(20) — definition of an EDC project.
• R.I. Gen. Laws § 42-64-10(a)(2) — economic-impact analysis described in the facts.
• R.I. Gen. Laws § 42-64-20(b) — EDC exemption from state and local taxation.
• R.I. Gen. Laws § 42-64-20(c) — extension of the project-property exemption when a lessee or sublessee holds title, subject to an EDC board resolution.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2002-01

Original ruling text

Ruling Request No. 2002-01

Declaratory Rulings

Ruling Request No. 2002-01

Re: RULING REQUEST NO. 2002-01

Request for Ruling Regarding the Application of the Exemption provided by §42-64-20(c) for Purchases of Certain Personal Property

REQUEST FOR RULING

On behalf of your client, "Company X", you request a ruling pursuant to RIGL §42-35-8, as to the exemption from the sales and use tax of construction materials, personal property, furniture, machinery, equipment, cabling, electronic hardware and software and any replacement goods or parts thereto acquired for use and with respect to a project of the Rhode Island Economic Development Corporation ("EDC").

FACTS

The salient facts set forth in your request for ruling are as follows:

Company X operates a certain manufacturing facility located in Rhode Island (the "Facility"). Company X purchased the Facility on January 1, 2002.

Company X is expanding its operations at the Facility. Company X will create at least two hundred fifty (250) additional jobs in the State in connection with its further expansion which will require the construction of additional facilities by Company X together with the acquisition of additional equipment and other personal property, to enable Company X manufacture its product in quantities sufficient to help address the significant market demand for this product.

On January 28, 2002, the Board of Directors of the EDC unanimously passed a resolution, among other provisions, confirming that the Facility has been designated a "Project" of the EDC pursuant to Rhode Island General Laws §42-64-3(20). Further in conjunction with this designation, the EDC provided an exemption from taxation and assessments for the expansion of the Project pursuant to Rhode Island General Laws §42-64-20. Finally, the EDC resolved that it was in the best interest of the EDC and the Project that legal title to all real and personal property relating to the Project be held by a lessee or sub lessee of the corporation.

Pursuant to Rhode Island General Laws §42-64-10(a)(2), the EDC has performed an economic impact analysis of the expanded project. Company X and the EDC have executed a Development Agreement dated as of January 28, 2002. In addition, the EDC, as tenant, has leased a portion of the property at the Facility (the "ground lease") In turn, Company X, as a subtenant, has leased back this property (the "Sub-ground lease") from the EDC as subtenant. Company X, under the Development Agreement, is financially responsible for the construction and development of the Project, including all manufacturing, administrative and other support facilities (the "Improvements"). Such improvements may or may not be on the ground lease property, but will be an intricate part of the Project. 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 limitation all furniture, fixtures, machinery, equipment, partitions, cabling, electronic hardware and software, any other item of personal property, and any replacement goods or parts thereto acquired for use and with respect to the Project (collectively, the "Purchased materials") will constitute part of the Project.

RULING REQUEST

1. The Purchased Materials, as may be owned by Company X or its Affiliates, so long as they do not include goods or inventory held for sale in the ordinary course of business, validly constitute part of an EDC project as set forth in Section 42-64-3(20), R.I.G.L., are exempt under Section 42-64-20, R.I.G.L., from Rhode Island sales and use tax to the same extent as if legal title of such Purchased Materials was in the name of the EDC; and

2. All the rights and obligations associated with project status, as outlined in the paragraph immediately above, shall continue to inure to Company X and its Affiliates, moreover, pursuant to Section 7.2 of the Development Agreement, all rights and responsibilities of the Development Agreement, including the benefits outlined in the paragraph immediately above, shall continue to inure to Company X and its Affiliates.

DISCUSSION

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

42-64-3(20). "Project" or "port project" means the acquisition, ownership, operation, construction, reconstruction, rehabilitation, improvement, development, sale, lease, or other disposition 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, furnishings or equipment which are acquired and used in the construction and development of the project, but such legal title may be held in the name of a lessee (including subleases) from the corporation. This property, which shall not include any goods or inventory used in the project after completion of construction, shall be exempt from taxation to the same extent as of legal title of the property were in the name of the corporation, provided that the board of directors of the corporation adopts a resolution confirming use of the tax exemption for the project by the lessee. The resolution shall include findings that (1) the project is a project of the corporation under § 42-64-3(20) 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.

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 for 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 sublease). The Development Agreement sets forth the exemption period which exemption shall remain in effect for the lesser of (i)ten (10) years from the date of the effective date of the Development Agreement (January 28, 2002), or (ii) the date of termination of the Ground Leases, whether terminated by expiration, express termination or otherwise, or (iii) the date this exemption is no longer legally permitted. It further limits the scope of the sales tax exemption upon achievement of the Investment Requirement (Section 5.4).

Since the Purchased Materials used in the Project as that term is defined in RIGL §42-64-3(p), supra, would be exempt if title vested in EDC, those same purchases by Company X or its affiliates would likewise be exempt during the above-stated period subject to the limitation of the sales tax exemption set forth in section 5.4 of the Development Agreement.

RULING

1. The Purchased materials used in the Project as the Project is defined in Section 2.1 of the Development Agreement as may be owned by Company X or its affiliates, so long as they do not include goods or inventory held for sale in the ordinary course of business, validly constitute part of an EDC Project as set forth in Rhode Island General Laws §42-64-20, from Rhode Island sales and use tax to the same extent as if legal title of such Purchased Materials were in the name of the EDC, subject to the limitation set forth in Section 5.4 of the Development Agreement

2. All the rights and obligations associated with Project status, as outlined in the paragraph immediately above, shall inure to Company X and its Affiliates; moreover, pursuant to section 7.2 of the Development Agreement, all rights and responsibilities of the Development Agreement , including the benefits outlined in the paragraph immediately above, shall continue to inure to Company A and its Affiliates.

This ruling may be relied upon by Company X and its Affiliates and shall remain in effect for the lesser of (i) ten (10) years from the effective date of the Development Agreement (January 28, 2002); or (ii) the date of termination of the Ground Leases, whether terminated by expiration, express termination or otherwise; or (iii) 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 3,2002**