Can a 501(c)(3) foundation buy construction materials tax-free for a large educational building project that's funded partly by government bonds and partly by private donations?

Plain-English summary

A 501(c)(3) foundation asked whether it could buy construction materials tax-free for a large multi-million-dollar educational facility, funded by a mix of school district bonds, county bonds, a legislative appropriation, and private donations, built on land jointly owned by the foundation and a school district. The foundation would hire a general contractor to build it, then take ownership of the finished building; the school district would separately transfer its land interest to the foundation once complete.

The Commission first ruled out the public education / government-entity exemption under § 59-12-104(2), for two independent reasons:

• Subsection (a) (materials purchased on behalf of the "public education system") only covers K-12 institutions as constitutionally defined — not a private foundation, and not colleges/universities (which fall under "higher education," a separate category not covered by this subsection).
• Subsection (b) (materials converted to real property by government employees) requires that government employees — not a private contractor's — actually do the construction-materials-to-real-property conversion. Since a private general contractor was doing the building here, this route was also unavailable.

The Commission then turned to the charitable institution exemption under § 59-12-104.1(2)(a), which exempts sales made TO a religious or charitable institution "in the conduct of [its] regular religious or charitable functions and activities." This required three things: (1) the foundation is a genuine charitable institution — satisfied by its 501(c)(3) status; (2) the sale is made in the conduct of its regular charitable functions — the Commission assumed satisfied, since building educational facilities was described as part of the foundation's regular charitable work; and (3) the sale is actually made to the foundation — this was the hard part.

Here's the wrinkle: under Utah's general real-property-contractor doctrine, when a contractor is hired to build something, the contractor — not the party who commissioned the building — is treated as the buyer of the construction materials (the commissioning party is treated as having bought only the finished real property, not the raw materials). So even though the foundation itself is tax-exempt, its contractor would normally still owe sales tax on the materials, since the sale is legally "made to" the contractor, not the foundation.

Tax Bulletin 2-96 and Rule R865-19S-58(4) provide a specific fix for charitable institutions: construction materials are treated as sold "to" the charity — unlocking the exemption — if either:

• (a) the charitable institution pays the vendor directly for the materials; or
• (b) the materials are purchased on behalf of the charity, meaning they're clearly identified/segregated AND installed/converted to real property owned by the charity.

Because the foundation didn't yet own the underlying land at the time of construction (that transfer happens only after completion), path (b) wasn't available here. That left only path (a): the foundation must pay vendors directly for the construction materials. Practically, that means each vendor should receive a completed Form TC-721 exemption certificate at the time of sale, and the foundation should keep records proving it paid the vendor directly. The Commission specifically warned that if the contractor pays for the materials and the foundation simply reimburses the contractor afterward, the exemption does not apply — that indirect payment structure defeats the whole mechanism.

What this means for you

Charitable foundations funding construction projects through a contractor

If you want your construction materials purchases to be tax-exempt, structure your payment flow so you pay material vendors directly — not by paying your general contractor, who then pays the vendors. Get a Form TC-721 exemption certificate to each vendor and keep direct-payment records as proof.

Foundations that don't yet own the land their building sits on

The "materials converted to real property you own" exemption path isn't available to you until you actually hold title. Until then, direct vendor payment is your only route to the exemption — plan your project financing and procurement process around that from day one.

School-affiliated or education-adjacent nonprofits assuming the public education exemption covers them

Don't assume affiliation with a school district gets you the § 59-12-104(2) government/public-education exemption — that exemption is narrowly limited to actual K-12 public education system institutions (or government employees doing the construction themselves), not to a separately organized charitable foundation, even one built to support a public school.

Common questions

Q: Can a charitable foundation always buy construction materials tax-free through its general contractor?
A: Not automatically. The contractor is normally treated as the buyer of the materials, not the charity — the charity has to affirmatively bring itself within the "sold to the charity" exception, typically by paying vendors directly.

Q: What happens if the contractor pays for materials and the foundation reimburses it later?
A: The exemption is lost. Reimbursing a contractor after the fact does not satisfy the direct-payment requirement.

Q: Does owning the land the building sits on matter for this exemption?
A: Yes — if the charity already owns the land and the materials are clearly segregated/converted to real property it owns, that's an alternate path to the exemption. If not (as here), direct vendor payment is the only available route.

Q: Does the public education exemption cover a private foundation building a school-affiliated facility?
A: No, unless the foundation itself is an actual institution of the K-12 public education system, or government employees (not a private contractor) do the construction.

Q: Does this ruling apply to my nonprofit's construction project?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts. It can't be relied on as binding by anyone else, though it may carry weight if your facts closely match.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-104(2)(a)-(b) (public education system / government construction materials exemption)
• Utah Code Ann. § 59-12-104.1(2)(a) (religious/charitable institution exemption)
• Utah Tax Bulletin 2-96
• Utah Admin. Rule R865-19S-58(4) (construction materials treated as "made to" a charity — direct payment or purchase-on-behalf-of)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/01-004.pdf

Original ruling text

REQUEST LETTER

01-004

Response March 9, 2001

Dear Mr. TAXPAYER REP:

I would like to request an
advisory opinion from your office in reference to the ability of FOUNDATION, which
has a 501(c)(3) status, to claim exemption from sales tax on a construction
project. This project is a $$$$$
million facility for education paid for with tax funds and private
contributions. Of this $$$$$ million,
$$$$$ million is School District bond money, $$$$$ million is County bond
money, $$$$$ million is a legislative appropriation, and the balance is private
donations. It is being built on
property owned by FOUNDATION and SCHOOL district.

Would you please provide an
advisory opinion as to whether the FOUNDATION, which is responsible for the
construction of the building, can use the sales tax exemption as described in
Utah Code 59-12-104.

Thank you very much for your
response to this request.

Respectfully

NAME

Executive Vice President

CMH/pd

RESPONSE LETTER

March
9, 2001

NAME:

RE: Advisory Opinion � Purchase of Construction Materials for Educational Building

Dear NAME

We have
received your request for an advisory opinion on whether construction materials
incorporated into a new building at FOUNDATION may be purchased tax-free. From your letter and a recent telephone
conversation with you, we understand that the FOUNDATION (the �Foundation�) is
a �501(c)(3) entity responsible for building the project with funds derived
from tax sources and private donations.
The Foundation will hire a general contractor to construct the building
and, once the project is complete, transfer its ownership of the building to
FOUNDATION. The Foundation will
construct the building on land owned by two parties, FOUNDATION and the COUNTY
School District. Once the project is
complete, the COUNTY School District will transfer its ownership interest in
the land to FOUNDATION. Given these
facts, two sections of the Utah Code should be discussed to determine whether
the construction materials may be purchased tax-free.

Utah Code Ann. �59-12-104(2). Section
59-12-104(2) provides that construction materials may be purchased tax-free by
the state, its institutions, and its political subdivisions under certain
limited conditions, as follows:

(a) construction materials purchased by or on behalf of institutions of the public education system as defined in Utah Constitution Article X, Section 2, provided the construction materials are clearly identified and segregated and installed or converted to real property which is owned by institutions of the public education system; and

(b) construction materials purchased by the state, its institutions, or its political subdivisions which are installed or converted to real property by employees of the state, its institutions, or its political subdivisions;

However, neither of these subsections provides an exemption under the circumstances you describe. First, subsection (a) only applies to purchases made on behalf of the �public education system.� The �public education system� is defined to include elementary and secondary schools, but not colleges and universities, which are part of the �higher education system.� Accordingly, any purchases made on behalf of FOUNDATION do not qualify under this subsection. Second, subsection (b) only applies if state employees convert the construction materials to real property. As a private general contractor will construct the building and convert the construction materials into realty, the exemption under subsection (b) is also unavailable.

Utah Code Ann. �59-12-104.1(2)(a).
Section 59-12-104.1(2)(a) provides that �sales made to a religious or
charitable institution are exempt from . . . [taxation] if the sale is made in
the conduct of the institution�s or organization�s regular religious or
charitable functions and activities.�
Accordingly, the sale of construction materials will be exempt if: (1)
the Foundation is a religious or charitable institution; (2) the sale is made to the Foundation; and (3) the
sale is made in the conduct of the Foundation�s regular charitable functions or
activities.

If, as you state, the Foundation is a �501(c)(3) entity, it qualifies as a charitable institution under Section 104.1. Also, we assume the Foundation�s regular charitable functions include raising funds and building educational facilities for FOUNDATION . Should these assumptions be correct, the first and third conditions listed above would be satisfied. As a result, whether the construction materials may be bought tax-free would depend upon the second condition being satisfied, i.e., whether the materials are sold to the Foundation.

When a contractor is hired to build a structure, he or she will generally purchase the construction materials incorporated into it. The contractor is considered to be the final consumer of the personal property before it becomes realty and, thus, the person to whom the sale of the construction materials was made. The party who contracted to have the structure built is considered to have bought real property only, not the materials incorporated into it. Accordingly, even if the party purchasing the building is exempt from taxation, the contractor must generally pay sales tax on his or her purchase of the construction materials.

However, there is an exception to
this general rule provided in Section 104.1.
Enclosed are copies of Tax Bulletin 2-96 and Utah Admin. Rule
865-19S-58(4), which state that sales of construction materials are considered made to a religious or charitable
institution for purposes of the Section 104.1 exemption if:

(a) the religious or charitable institution makes payment for the materials directly to the vendor;

or

(b) the materials are purchased on behalf of the religious or charitable institution.

(i) Materials are purchased on behalf of the religious or charitable institution if the materials are clearly identified and segregated and installed or converted to real property owned by the religious or charitable institution.

While subsection (b) does not apply
to your situation because the Foundation does not own the underlying realty,
subsection (a) does. Subsection (a)
allows the construction materials to be purchased tax-free if the Foundation directly
pays the vendors for them. For the
exemption to apply, a vendor should receive a Form TC-721 exemption certificate
at the time of the sale, and the Foundation should retain evidence that it paid
the vendor directly for the materials.
Please be aware that should the contractor pay for the materials and the
Foundation reimburse the contractor, the sale of the materials would not
qualify for the exemption.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

01-004