Were project materials and replacement items owned or used by Company X or its affiliates exempt from Rhode Island sales and use tax when the EDC was the landlord?

Plain-English summary

Qualifying materials owned by Company X or its affiliates for the Economic Development Corporation project were exempt from Rhode Island sales and use tax as if the EDC held legal title. The exemption covered project property under the stated lease and development structure, subject to the Development Agreement's limitations.

Company X was responsible for developing the land and buildings, adding to existing structures, making infrastructure improvements, and paying the project costs. The EDC held a ground-lease interest and subleased the project land to Company X. Its board resolved that the development was an EDC project and that Company X or its subsidiary should hold title to the improvements and purchased materials.

Purchased Materials included furniture, fixtures, equipment, partitions, cabling, electronic hardware and software, and other personal property acquired for the project. Replacement and enhancement items acquired during the Ground Lease and project operation were also treated as Purchased Materials.

The ruling excluded office supplies and common office items with a useful life under one year, as well as goods or inventory held for sale in the ordinary course of business. It also made the exemption subject to the investment-based limitation in Section 5.4 of the Development Agreement.

What this means for you

Project owners and affiliates

Company ownership of qualifying property did not by itself defeat the exemption. The result depended on the EDC project designation, the board findings, the lease structure, and the Development Agreement.

Purchasing and operations teams

The order treated qualifying replacement and enhancement property as project materials, but it did not cover short-lived common office items or resale inventory. Maintain records separating those categories.

Accountants and tax professionals

Review both the dollar limitation in Section 5.4 and the order's historical duration provision. The ruling says it remained in effect for the “lessor” of three listed endpoints: ten years from November 5, 1998; termination of the Ground Lease; or the date the exemption ceased to be legally permitted.

Common questions

Did the EDC need to hold title to the purchased materials? No. Under the facts and required board resolution, Company X or its affiliates could own the materials and receive the same exemption as EDC-owned property.

Were replacement items covered? Yes. The ruling's facts classified qualifying replacements and enhancements as Purchased Materials.

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

Was there a dollar limitation? The ruling made the exemption subject to the investment-based restriction in Section 5.4 of the Development Agreement; the official page does not state the restriction's amount.

Who could rely on the ruling? Company X and its affiliates, for the specified duration and stated facts.

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 § 42-64-20(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 2003-01

Original ruling text

Ruling Request No. 2003-01

Declaratory Rulings

Ruling Request No. 2003-01

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

On behalf of your clients, collectively referred to as “Company X”, you request, pursuant to the provisions of §42-35-8, Rhode Island General Laws, 1956 (as amended), a declaratory ruling as to the exemption from Rhode Island sales and use tax of building and construction materials, personal property, furniture, fixtures and equipment and replacements, additions and enhancements thereof, the legal title to, and/or contractual right to the use of which will be in the name of, Company X or an affiliate of Company X, in connection with a project to be developed on land in Rhode Island, with respect to which the Rhode Island Economic Development Corporation (“EDC”) is the landlord and Company X is the tenant.

Facts

The facts set forth in your request for ruling dated January 16, 2002, the documents attached thereto, and the documents submitted subsequent to that date, are incorporated herein by reference. Such facts and documents form the basis for this ruling.

Company X and EDC are parties to a Development Agreement pursuant to a Resolution approved by the EDC, to which Company X shall develop land and buildings, construct additions to an existing structure(s), and make certain infrastructure improvements to the land (the “Project”) in Rhode Island (the “Project Sites”). The Project will consist of one or more buildings (including all furniture, fixtures and equipment and replacements thereto), together with parking and related improvements in Rhode Island. Construction and development of the Project and payment of all Project related costs will be the responsibility of Company X. The land on which the Project is located was leased to EDC under a ground lease (The “Ground Lease”) entered into between EDC and Company X. The EDC then subleased the land to be used in the Project to Company X. All materials used in the construction and development 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, 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 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), will be replaced or enhanced (“Replacement Items”). The Replacement Items also constitute Purchased Materials.

By resolution, the Board of Directors of the EDC has made the following findings:

1. The Project is a project of the EDC under §42-64-3(20), R.I.G.L. and;
2. It is in the best interest of the EDC and of the Project that legal title to the Improvements and Purchased Materials be held by Company X or its subsidiary rather than the EDC.

Ruling Requested

The Purchased Materials as set forth and described under the caption “Facts” above, 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 §42-64-3(20) of the R.I.G.L. Since the EDC has made the determinations required by §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 Company X or in which Company X will have a leasehold interest, 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

Section 42-64-20(b), R.I.G.L. provides, with respect to the EDC, in pertinent part as follows:

> “ The corporation shall not be required to pay state taxes of any kind, and the corporation, its projects, property, and moneys 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) from these shall at all times be free from taxation of every kind by the state and by the municipalities and all political subdivision of the state . . .”

Section 42-64-20(c), R.I.G.L., provides as follows:

> “For purposes of the exemption from taxes and assessments upon or in respect of any project under subsection (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 the legal title may be held in the name of a lessee (including sublessees) from the corporation. This 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 if legal title of such property were in the name of the corporation; provided that the board of directors of the corporation adopts a resolution conforming 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 R.I.G.L. 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 cost to the corporation or designation of the project as a “Project of Critical Economic Concern” pursuant to Chapter 117 of this Title.”

The term “project” is defined in §42-64-3(20) as:

> “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 disposal facility, civil facility, residential facility, water supply facility, or any other facility, or any combination of two (2) or more of the foregoing, or any other activity undertaken by the corporation.”

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 subsection allows EDC to “assign” its tax exemption granted under subsection (b) to its lessee (or sublease). In order to make such an assignment the board of directors must, by resolution, find that (1) the project is a project of the EDC under §42-64-3(20); and (2) that it is in the interest of the EDC and the project that legal title be held by the lessee (or sublease) of the EDC. This resolution was adopted by the board of directors on October 29, 2001. Section 4.2 of the Development Agreement entered into between EDC and Company X sets forth the period of the sales tax exemption as the lessor of (i) ten (10) years from the date of the effective date of the Development Agreement (November 5, 1998), or (ii) the date of termination of the Ground Lease, whether terminated by expiration, express termination or otherwise, or (iii) the date this exemption is no longer legally permitted. Section 5.4 of the Development Agreement restricts the amount of the sales tax exemption upon attainment of the required investment by Company X.

Since the Purchased Materials used in the Project as that term is defined in R.I.G.L. §42-64-3(20), supra, would be exempt if title vested in EDC, those same purchases by Company X or its affiliates would likewise be exempt under the terms of the Development Agreement.

Ruling

Based upon the facts presented and representations made in the request for ruling and accompanying documents, the following ruling is made.

The Purchased Materials (excluding office supplies or common office items which have a useful life of less than one year) 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 constitute part of an EDC Project as set forth in §42-64-3(20) of the R.I.G.L., and as such, are exempt under §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, subject to the limitation set forth in Section 5.4 of the Development Agreement.

This ruling may be relied upon by Company X and its affiliates and shall remain in effect for the lessor of (i) ten (10) years from the date of the effective date of the Development Agreement (November 5, 1998), or (ii) the date of termination of the Ground Lease, whether terminated by expiration, express termination or otherwise, or (iii) the date this exemption is no longer legally permitted.

**R. GARY CLARK

TAX ADMINISTRATOR

MARCH 26, 2003**