Prepared July Georgia Law Provisions. Imposition of Tax and Exemptions

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1 NOTE: This document is provided free of charge to illustrate the type of material located in the document library. This document has been carefully prepared to outline the relevant facts and law to illustrate the attention to detail that we put into each of the documents prepared for the library. If this document was to be sold in the document library, it would sell for $125. Hiring a CPA or attorney to prepare this same analysis would likely cost your company between $1,000 and $2,000. Sales Tax Rules Related to Construction Contracts with Georgia Non-taxable Entities (state, counties, cities, certain educational institutions, and certain medical facilities) Prepared July 2007 Your company is a general contractor responsible for the construction of a manufacturing facility in City Georgia which, upon completion, will be leased by the City to manufacturer. The building is being constructed to the standards required by manufacturer. The agreement between the City and manufacturer is part of a tax incentive inducement agreement between the City and manufacturer. During the bid process and after to the bid was awarded to your company, City represented that the materials purchased by your company for the construction of the manufacturing facility could be purchased without the imposition of either sate or local sales tax. City even provided your company with a copy of the Georgia tax exemption Form ST-5 and a cover letter instructing vendors not to charge tax on sales made to your company. Your company provided these materials to its subcontractors and to its direct suppliers. In a series of s between your company, manufacturer, and City, in July 2007, a strategy was discussed whereby City would issue purchase orders (POs) for the materials needed to fulfill the contract and would pay the vendors directly for these materials. Further, the City Manager of City appears to believe this method will eliminate the liability for taxes due on the materials. Your company and its subcontractor have since learned that the issuance of the Form ST-5 is inappropriate and unauthorized under various provisions of Georgia law. City is also aware that it cannot purchase materials for use in this construction contract as a means to avoid the payment of tax by the contractor. You have asked for an independent analysis of the Georgia tax provisions that apply to your situation and guidance on how to manage the sales tax liability under the existing contract. The current sales tax rate at the construction location is 7.00 percent (4.00% state and 3% county). Georgia Law Provisions Imposition of Tax and Exemptions Section (a) imposes the 4% state sales tax on all sales of tangible personal property and on those services specifically enumerated in the law. Absent a specific tax exemption, all sales of property are taxable. Georgia law does provide two broad categories of exemptions. The first category of exemptions applies to the particular product being sold. This would include items such as food for home consumption, prescription medications, various items of manufacturing equipment, and many others. The second, and more limited - 1 -

2 category of exemption applies to the purchaser. This would include sales to federal, state, and local governmental agencies, food banks, school districts, and municipal housing authorities. More specifically, Georgia law at Section (1) provides a sales tax exemption for: Sales to the United States government, this state, any county or municipality of this state, or any bona fide department of such governments when paid for directly to the seller by warrant on appropriated government funds. Georgia Tax Regulation (1) also expresses the exemption for sales made directly to certain governmental agencies: The tax does not apply to sales to the Federal Government, the State of Georgia, or any county or municipality of the State of Georgia or any bona fide department of such government when paid for directly to the seller by warrant on appropriated government funds; provided that any hospital authority created by Chapter of the Code of Georgia is exempt from the tax. Contractor Issues Under Georgia law, contractors are deemed to be the user and consumer of all the property they purchase for use in real property construction projects. Contractors are not permitted to purchase items of property tax free under a claim that they are reselling the property to others. To this point, Georgia Regulation (1) states Any person who contracts to furnish tangible personal property and perform services hereunder in constructing, altering, repairing or improving real property in this State is deemed to be the consumer of all tangible personal property used or consumed in performing such contract and shall pay the tax thereon at the time of purchase, use, storage or consumption in this State, whichever occurs first. Georgia law at Section (b) specifically addresses the sales and use tax payment responsibility of nonresident contractors. This section states: Each person who orally, in writing, or by purchase order contracts to furnish tangible personal property and to perform services under the contract within this state shall be deemed to be the consumer of the tangible personal property and shall pay the sales tax imposed by this article at the time of the purchase. Any person so contracting who fails to pay the sales tax at the time of the purchase or at the time the sale is consummated outside the limits of this state shall be liable for the payment of the sales or use tax. This Code section shall not relieve the dealer who made the sale from such dealer's liability to collect and pay the tax on purchases by a contractor. Georgia law at Section (c) states: Each person who contracts to perform services in this state and who is furnished tangible personal property for use under the contract by the person, or such person's agent or representative, for whom the contract is to be performed, when a sales or use tax has not been paid to this state by the person supplying the tangible personal property, shall be deemed to be the consumer of the tangible personal property so used and shall pay a use tax based on the fair market value of the tangible personal property so used irrespective of whether any right, title, or interest in the tangible personal property becomes vested in the contractors

3 Department Interpretation In the Tax Guide for Georgia Citizens dated September 30, 2005 the Department of Revenue made the following representation in response to the following question: Should Contractors and Sub-Contractors Register for Sales Tax? A contractor is deemed to be the ultimate consumer of all material used in constructing, altering, or improving real property and therefore must pay sales tax on all materials used in the project including materials furnished by any tax exempt or government entity. Every business that contracts to furnish tangible personal property or perform services in constructing, altering, remodeling, or improving real property in Georgia must complete an application. One Sales and Use Tax registration number (prefix 214) covers all operations of the company throughout the state. This number is only for reporting contractual activities and paying use tax. It is not valid for purchasing tangible personal property tax exempt for resale. There are also bonding requirements for resident and nonresident contractors, which are outlined in O.C.G.A. Sections and For additional information, contact the Contract Section at Case Law The Georgia case of first impression on the application of Georgia sales tax to materials supplied to contractors for use in municipal construction contracts is J.W. Meadors & Company et al v. State of Georgia, 89 GA App 583, 80 SE2d (January 1, 30, 1954). This case discussed the application of Georgia sales tax to a set of facts very closely aligned with your company s arrangement with City. In Meadors, the city of Macon, Georgia hired Meadors to construct improvements to the waterworks system of the city. Meadors purchased the materials needed to fulfill the contract, paid sales tax under protest on the materials, and then filed a refund claim with the state to recover the taxes paid. The Georgia Court stated that a Meadors was an independent contractor and could not reasonably be said to have made a sale of any tangible property to the City of Macon. The City of Macon argued that no tax was due since the city would ultimately acquire the property at the completion of the contract. The Court held that Meadors was the user and consumer of the property purchased in completing the contract with the City of Macon. The Court reasoned that the terms user and consumer were synonymous with respect to the application of taxes on the materials purchased by Meadors. As such, even though the City of Macon would ultimately hold title to the completed water system improvements, the taxable moment for the application of the sales tax is when the title to the raw material passes to the user and not when the final project is complete. As the Court reasoned, if the City of Macon wanted to avoid the inclusion of sales tax on the materials consumed in the contract, it would be necessary for the City to purchase the materials directly and have city employees make the improvements directly. Because Meadors was an independent contractor, and not an instrumentality of the City of Macon, the tax benefits that would normally accrue to the City cannot apply to the purchases made by Meadors

4 In many respects, your company is similarly situated to Meadors in that they are both independent contractors with real property construction contracts paid for with city tax revenue. Analysis of your company Contract As outlined in the various statutory, regulatory, and judicial materials referenced above, the situation your company confronts is not new to Georgia law. The management of state and local sales tax on real property contracts with Georgia municipalities dates back at least 53 years. Although not specifically mentioned, the rules outlined above apply equally to subcontractors and to general contractors. There appears to be little doubt that the information concerning the application of the City tax exemption for materials purchased by your company and its subcontractor was erroneous. The issuance of the City s Form ST-5 to your company and to subcontractors was not in conformance with the provisions of Georgia sales tax law. As such, your company and its subcontractors are liable for any sales taxes that should have been paid on purchases but was not. Further, no sales tax benefit is gained by having City purchase the materials directly and then provide them to your company and its subcontractors. Under Georgia Code Section (c) mentioned above, the contractor is deemed to be the user of all property furnished to them by another party. If the furnished property was purchased tax free, the contractor must accrue use tax on the cost of the materials. Therefore, even if the POs were issued by City and were paid for directly by City, your company and its subcontractor would have the legal obligation to pay use tax on the City s cost of the material provided to the contractors. At the present time, your company and its subcontractors have a liability to the state for the 7% sales tax that was not paid to vendors at the time of purchase. This liability can be resolved by identifying the taxable purchases and submitting a Georgia use tax return to the state or by contacting the vendors from which untaxed purchases were made and requesting that they bill you for the taxes that should have been charged. On a going forward basis, there should be no use of Form ST-5 to purchase materials for the manufacturing project. All Georgia based vendors should charge sales tax on purchases made by your company and its subcontractors. If material is purchased outside of the state and consumed in Georgia, either your company or the subcontractor must report use tax on the purchase price of the property consumed. Possible Exemptions It is possible that certain items purchased by contractors and incorporated into the new manufacturing facility could be exempt from sales tax under the recently broadened exemption for manufacturing machinery and equipment. Georgia Regulation (6)(b) provides a listing of items that are often purchased and installed by contractors but could be eligible for a refund to the manufacturer. These items are: electrical parts, including transformers located between the motor control center and exempt machinery and between exempt machinery; process piping, exclusive of hangers and supports, between exempt machinery; - 4 -

5 computer hardware and software which control exempt machinery; compressors that power exempt machinery; boilers which produce steam to be used by exempt machinery; and testing or monitoring machinery which is a part of the continuous manufacturing operation and which tests or monitors all of the materials or work in process, provided that machinery. Machinery used in random or sample testing cannot qualify for the exemption. Unfortunately, the contractor must still pay tax on their purchase of the items listed above, but the manufacturer is entitled to claim a refund of the tax paid by the contractor on their purchase of the items. These items are the only exceptions to the general rue that only machinery used directly in the production of tangible personal property is exemption from sales tax