Can a charitable foundation buy construction materials tax-free and donate them toward a university research building?

Plain-English summary

A 501(c)(3) foundation supporting a university cancer-research institute agreed to fund construction of a new research building, partly in cash and partly by directly purchasing roughly a portion of the building materials, which it planned to have delivered to the job site, assign ownership of to the university, and have converted into the building by the university's construction project manager and contractors. The foundation asked the Commission to rule that none of this chain — its own purchases, the assignment to the university, the university's provision of materials to the builders, or the final construction — would trigger Utah sales or use tax for anyone involved (the foundation, the university, the project manager, or any contractor). The foundation's request leaned on the charitable-purchase exemption (Utah Code Ann. § 59-12-104(9)), the rule that a donor rather than a donee is the taxable consumer of donated property (Rule R865-19S-68), and Utah Supreme Court cases holding that a contractor using materials supplied by a government or tax-exempt entity isn't the "owner" of those materials for tax purposes (Thorup Brothers Construction, Inc. v. State Tax Comm'n, 860 P.2d 324 (Utah 1993); Arco Electric v. State Tax Comm'n, 860 P.2d 435 (Utah 1993); Brown Plumbing & Heating Co. v. State Tax Comm'n, 861 P.2d 453 (Utah 1993)).

The Commission's answer was narrower than what was requested, and addressed the university's and the foundation's own purchases specifically rather than blessing the entire multi-party chain:

• The university's own purchases of construction materials are NOT exempt the way the foundation assumed. Utah's limited construction-materials exemption for "public education system" entities (§ 59-12-104(3)(a)) applies only to elementary and secondary schools under Article X, Section 2 of the Utah Constitution — public universities and colleges are part of the separate "higher education system" and don't qualify. The university could only buy materials tax-free as a state entity under § 59-12-104(3)(b), and only if its own employees (not a contractor) do the conversion to real property.
• The foundation's proposed structure — buying materials, then assigning ownership to the university before the materials are converted to real property owned by the university — does NOT qualify for the charitable exemption under Rule R865-19S-58(b), because the materials are never converted to real property owned by the charitable institution itself (the foundation).
• However, the foundation CAN get the exemption a different way: under Rule R865-19S-58(a), a charitable institution can buy construction materials tax-free if it pays the vendor directly itself, then donates the materials to the project (citing Rule R865-19S-68(A), which treats the donor, not the donee, as the consumer). To use this path, the foundation needs its own Commission-issued charitable exemption number (apply on Form TC-160) and must include that number on the exemption certificates it gives its suppliers.

The response letter does not address the taxpayer's separate argument (citing Thorup Brothers, Arco Electric, and Brown Plumbing) about whether the project manager or contractors would owe tax on donated materials they merely install — that specific question isn't answered in the available response text, so don't assume it was resolved in the foundation's favor.

What this means for you

Charitable foundations funding construction for a university or other institution

If you want your organization's donated building materials to come in tax-free, pay the vendor directly yourself and get your own charitable exemption number (Form TC-160) — don't structure it as a purchase-then-assignment-to-the-institution, because that path doesn't qualify under the "materials converted to real property owned by the charity" prong of the rule. Direct payment plus a subsequent donation is the exemption path that actually works.

Universities and colleges

Don't assume your institution gets the same construction-materials exemption K-12 public schools get — Utah's constitutional "public education system" definition excludes higher education. Your only path to a tax-free materials purchase is the state-entity exemption, which requires your own employees (not outside contractors) to do the installation.

Accountants and tax professionals

This is a useful example of a ruling answering a narrower question than what was asked — the Commission worked through the university's and foundation's respective purchase paths but did not explicitly rule on the contractor-liability theory the request built on case law for. Don't read silence on that point as agreement.

Common questions

Q: Can a university buy construction materials tax-free like a K-12 public school can?
A: No — Utah's "public education system" exemption is limited to elementary and secondary schools by constitutional definition; universities are "higher education" and don't qualify. A university can only get a state-entity exemption if its own employees do the installation.

Q: Can a charity buy materials tax-free and then assign them to a university before they're built in?
A: Not under the charitable-institution exemption's "converted to real property owned by the charity" path, since the materials would be converted to real property owned by the university, not the charity.

Q: How can a charity actually get its donated construction materials tax-free?
A: By paying the vendor directly itself (not through an intermediary), obtaining its own Commission-issued exemption number (Form TC-160), and including that number on its exemption certificates — then donating the materials.

Q: Can I rely on this 1996 ruling today?
A: Not directly — it binds the Commission only for the taxpayer and facts it addressed, and Utah's rules have been renumbered and amended repeatedly since. Verify current law before relying on it.

Citations and references

Statutes:

• Utah Code Ann. § 59-12-104(3)(a) (construction materials exemption for the public education system, limited to K-12)
• Utah Code Ann. § 59-12-104(3)(b) (state-entity construction materials exemption, requires own-employee installation)
• Utah Code Ann. § 59-12-104(9) (charitable institution purchase exemption, cited in the request)

Rules:

• Utah Admin. Rule R865-19S-58 (charitable institution construction materials exemption — direct payment vs. materials converted to real property owned by the charity)
• Utah Admin. Rule R865-19S-68(A) (donor, not donee, is the consumer/user of donated property)

Case law (cited in the request; not explicitly addressed in the available response text):

• Thorup Brothers Construction, Inc. v. State Tax Comm'n, 860 P.2d 324 (Utah 1993)
• Arco Electric v. State Tax Comm'n, 860 P.2d 435 (Utah 1993)
• Brown Plumbing & Heating Co. v. State Tax Comm'n, 861 P.2d 453 (Utah 1993)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-149.htm

Original ruling text

96-149

Response November 6, 1996

Request

September 20, 1996

XXXXX

Tax Policy Analyst

Utah State Tax Commission

210 North 1950 West

Salt Lake City, UT 84134

Dear XXXXX

This letter is a request for an advisory opinion on
behalf of the XXXXX that the
transactions outlined below will not be subject to Utah sales and use taxes.

Facts

The XXXXX (the �Foundation�) is a charitable organization
under Section 501(c)(3) of the Internal Revenue Code. A copy of Certificate of Incorporation of the Foundation and the
exemption letter on the Foundation issued by the Internal Revenue Service is
enclosed.

The Foundation was organized to provide financial
support for a new center for cancer research, named the �XXXXX,� that has been
formed within the Health Science Center of the XXXXX. The XXXXX is part of the XXXXX and will be referred to as the
�Institute� in this letter.

The foundation was organized to support the
Institute's studies of the genetic and cellular process in connection with the
development of cancer and the efforts of the Institute to develop innovative
diagnostic and clinical tools to better attack this disease. The Foundation also has as its purpose to
facilitate and accelerate the transformation of discoveries in basic cancer
research into treatment of drugs that will benefit those who suffer from
cancer. A copy of the Support Agreement
Between XXXXX and XXXXX together with a draft First Amendment (the �Support
Agreement�) is enclosed.

To accomplish these purposes, the Foundation has
agreed in Section 1.2 of the Support Agreement to provide financial support for
the purposes of constructing, equipping and operating a research facility to
house the Institute (the �Building�).
The Building will be located on land owned by the University and at all
times will remain University property.

The Building is expected to cost $$$$$. The Foundation is expecting under the
Support Agreement to contribute slightly less than one-half of the cost of the
Building. The remaining contributions
will come from the University, the State of Utah and proceeds of tax exempt
bonds issued by the State of Utah. It
is expected that the Foundation may use up to approximately 8% of the floor
space of the Building for its activities.

In order for the Foundation to maximize the value of
its contribution toward the construction of the Building, the Foundation
proposes to make up approximately $$$$$ of its contribution to the University
in the form of building materials for the Building.

The University will enter into a contract with the
XXXXX pursuant to which XXXXX will act as project manager for the construction
of the Building. As project manager,
the XXXXX Company will enter into contracts with designers and contractors for
the design and construction of the Building.
Under the construction contracts, the University will specifically
reserve the right to provide construction materials to be used in the
construction process. Under these
contracts, the University will be credited for those materials.

The materials to be purchased by the Foundation will
be delivered by the vendors to the construction site where the materials will
be received, inspected and stored on behalf of the Foundation by
representatives of the XXXXX Company.
Vendors will send invoices for the materials to the XXXXX Company for
approval before sending them on to the Foundation, which will issue checks
directly to the vendors. The Foundation
will assign its ownership interest in those materials to the University. These materials will be used in the
construction of the Building. None of
the materials will be installed by the vendor selling those materials to the
Foundation.

Opinion Requested

Based on the foregoing, it is respectfully requested
that the following opinion be issued:

The Foundation's purchase of building materials for
the Building, the Foundation's assignments of ownership of those materials to the
University, the University's providing of those materials to those constructing
the Building, and the converting of those materials onto the Building in the
construction process will not subject the Foundation, the University, the XXXXX
Company or any of the contractors to Utah sales and use taxes.

Discussion

Section 59-12-104(9) of the Utah Code exempts
purchases of tangible personal property by a charitable institution in the
conduct of its charitable functions from Utah sales and use tax. The purchase of the building materials by
the Foundation is exempt from Utah sales taxes because it is a purchase by the
Foundation in connection with its charitable purpose to support the Institute.

The donors of tangible personal property, which is
given way, not the donees, are considered the users or consumers of the
property for purposes of Utah sales and use taxes. Utah State Tax commission Rule R865-19S-68. As a result, the University as the donee of
the materials given it by the Foundation would not be subject to sales or use
taxes.

Finally, the Utah Supreme Court has established that
the building contractor who uses building materials purchased by a government
subdivision or a tax-exempt organization in the construction of a building for
the government subdivision or a tax-exempt organization is not the owner of
those building materials for purposes of Utah sales and use taxes. See Thorup Brothers Construction, Inc. v.
State Tax Commission, 860 P.2d 324 (Utah 1993); Arco Electric v. State
Tax Commission, 860 P.2d 435 (Utah 1993); Brown Plumbing & Heating
Co. v. State Tax Commission, 861 P.2d 453 (Utah 1993)Under the principles
of these cases, the XXXXX Company and the contractors constructing the Building
are not the owners of the building materials given to the University by the
Foundation. Therefore neither the XXXXX
Company nor any of the other contractors are subject to sales tax on those
materials.

We therefore respectfully request that an advisory
opinion set forth above be issued. If
you have any questions, please contact me.

Very truly yours,

XXXXX

XXXXX

Advisory opinion - Application of sales tax to
purchases of construction materials

DearXXXXX,

We have
received your request for sales tax guidance pertaining to purchases of
construction materials that will be used to build the XXXXX facilities. We offer the following:

Purchases by the University.

In
section 59-12-104 (3) of the Utah Code, the legislature established a limited
sales tax exemption on purchases of construction materials by exempt
entities. Beginning January 1, 1996,
construction materials purchased by or on behalf of an entity of the public education
system are exempt if the materials are clearly identified to the contract and
installed on or converted to real property which is owned by the school. The exemption expressly limits this
exemption to schools with the public education system as defined by Article X,
Section 2 of the Utah State Constitution.
There, �public education system� is defined to include only elementary
and secondary schools. Public
universities and colleges are defined as part of the �higher education
system.� This exemption, then, applies
only to construction projects for elementary and secondary schools.

Your
letter and the accompanying materials indicate that the University reserves the
right to purchase construction materials.
These purchases are not exempt as purchases by or on behalf of an entity
in the public education system under section 59-12-104 (3) (a). As a state entity, the University may
purchase construction materials tax free under section

59-12-104 (3) (b) only if the materials are
converted to real property by its own employees.

Purchases by the Foundation.

Under
Utah Administrative Rule R865-19S-58, a qualified charitable organization may
purchase construction materials tax free 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
charitable institution and the materials are clearly identified and segregated
and installed or converted to real property owned by the charitable
institution. The purchases described in
your request do not appear to qualify for exemption under (b) above because
they are not converted to real property owned by the Foundation. However, the Foundation may purchase items
tax free directly from the vendor under (a) above, then donate them to the
project. See Utah
Administrative Rule R865-19S-68 (A).

To
claim an exemption as a charitable institution, the exempt entity must have an
exemption number issued by the Tax Commission.
If the Foundation has not already obtained its exemption number, it may
apply for a number using the enclosed form TC-160. The exemption number must be included on the exemption
certificates that the Foundation gives to the supplier.

Please
let us know if you need further assistance.

For
the Commission,

Joe
B. Pacheco,

Commissioner