Ruling Request No. 96-02 Declaratory Rulings Ruling Request No. 96-02 RE: Request for Ruling Regarding the Application of The Exemption Provided by R.I.G.L. Code Section 42-64-20(c) for Purchases of Certain Personal Property Request for Ruling On behalf of your client, a corporation organized under the laws of the Commonwealth of Massachusetts ("CORP"), you request a ruling pursuant to the provisions of Section 42-35-8, Rhode Island General Laws, 1956 (as amended), as to the exemption from Rhode Island Sales and Use Tax of the building and construction materials, personal property, furniture, fixtures and equipment (including all computer hardware and software systems) and replacements, additions and enhancements thereof (the "Purchased Materials"), the legal title to, and use of, which will be in the name of CORP or an affiliate of CORP ("Subsidiary"), in connection with a project to be constructed on land in Smithfield, Rhode Island with respect to which the Rhode Island Economic Development Corporation created under Chapter 64 of Title 42, R.I.G.L. (the "EDC") is landlord and Subsidiary is the tenant. Facts CORP and EDC are parties to a development agreement dated December 12, 1995 pursuant to which the EDC will issue one or more series of taxable development revenue bonds (the "Bonds") to retire EDC's original mortgage note on certain lots, pay for the costs of the issuance of the Bonds, and finance the EDC's acquisition of land in Smithfield and certain infrastructure improvements to the land, and EDC's and Subsidiary's out-of-pocket costs in connection with investigating the land, acquiring title to the land and obtaining governmental approval for the Project to be constructed on the land. The project will consist of one or more office buildings (including all furniture, fixtures and equipment and replacements thereto), together with parking and related improvements (collectively, the "Improvements"), which are intended to be used as a Regional Service Center by Subsidiary, but may be used for any lawful commercial, office or industrial purpose, and certain infrastructure improvements to the land (collectively the "Project"). Generally, construction of the Project and payment of all Project related costs will be the responsibility of Subsidiary, except for EDC's obligations to finance a portion of the costs of the Project by issuing the Bonds, and the proceeds of which will be allocated to the infrastructure improvements which will be part of the property leased to Subsidiary under a ground lease ("Ground Lease") to be entered into between EDC and Subsidiary. Under the Ground Lease, Subsidiary will lease the land to be used in the Project from EDC. Subsidiary will then construct and equip the Project (including the Improvements) on the leased land. All Improvements of whatever kind which are constructed or installed by Subsidiary on the land, (other than certain infrastructure improvements, title to which will be held by EDC) will be owned by and remain the sole property of Subsidiary during the thirty (30) year term of the Ground Lease. 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, 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. Throughout the thirty year 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), including for example, computers and computer related hardware and software, will be replaced or enhanced ("Replacement Items"). The Replacement Items also constitute Purchased Materials. Subsidiary or its affiliates will use the Project as a service center and will not hold goods or accumulate inventory for sale in the ordinary course of business. Ruling Requested The Purchased Materials as set forth and described under the caption "Facts", 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 Section 42-64-3(p) of the R.I.G.L. Assuming the EDC makes the determinations required by Section 42-64-20(c), the Improvements and the Purchased Materials that will be acquired, installed and used at the Project, the legal title to which will be in the name of Subsidiary, 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 The pertinent provisions of the Rhode Island General Laws read as follows: 42-64-3(p). "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. (emphasis added) 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 such project, but such legal title may be held in the name of a lessee (including sublessees) from the corporation. Such 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 confirming use of such tax exemption for such project by such lessee. Such resolution shall include findings that (1) the project is a project of the corporation under Section 42-64-3(p) 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.1 Chapter 64 of Title 42 entitled "Economic Development Corporation" was enacted in 1974. Under subsection (b) of Section 42-64-20, EDC was granted an exemption from all state taxes except for estate, inheritance and gift taxes. R.I.G.L. Section 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 sublessee). 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 Section 42-64-3(P) and (2) that it is in the interest of the EDC and the project that legal title be held by the lessee (or sublessee) of the EDC. Since the Purchased Materials and Replacements used in the Project as that term is defined in R.I.G.L. Section 42-64-3(p), supra, would be exempt if the title vested in EDC, those same purchases would likewise be exempt if EDC adopts a resolution making the aforementioned findings thereby "assigning" its exemption to Subsidiary. Ruling Assuming that EDC adopts the resolution required by Section 42-64-20(c) and the contingencies noted herein occur, the Purchased Materials as set forth and described under the caption "Facts," 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 Section 42-64-3(p) of the R.I.G.L. The Improvements and the Purchased Materials that will be acquired, installed and used at the Project, the legal title to which will be in the name of Subsidiary, 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. The foregoing ruling will be subject to CORP complying with the following refund procedure. CORP shall pay or cause to be paid the sales and use tax on Purchased Materials and shall submit a written request for a refund of such tax to the Division of Taxation, such refund request to be in a form satisfactory to the Division of Taxation and shall be accompanied by (i) proof of payment of the Rhode Island sales and use tax, (ii) copy of supplier invoices for all Purchased Materials for which a refund is sought and (iii) a report executed by an independent consultant appointed by EDC verifying the Purchased Materials were installed at or delivered to the Project. This ruling may be relied upon by Subsidiary and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying situations described above change. R. Gary Clark Tax Administrator March 15, 1996 1This amendment became effective upon passage but the act provided that it shall be contingent upon the approval, execution and delivery by the Economic Development Corporation and the developer of (i) the Public Investment and HOV Agreement, (ii) the Agreement Regarding Providence Place Mall and (iii) the Ground Lease, and shall be repealed in its entirety upon the failure of such contingencies to occur. Therefore, this ruling shall be valid only if the three (3) contingencies occur.