The Michigan Department of Treasury recently issued Revenue Administrative Bulletin (RAB) 2019-15, revising its guidance regarding the application of several new sales and use tax laws to the construction industry.1
Over the past several years, the Michigan legislature has been active in addressing the Michigan sales and use tax consequences of property purchases by construction contractors for use in certain construction activities. Legislation enacted in 2016 created an exemption from sales and use tax on purchases of tangible personal property affixed to and made a structural part of county long-term medical care facilities, retroactive to tax years beginning after Dec. 31, 2012.2 Michigan then enacted a law in 2017 providing a sales and use tax exemption for the sale of tangible personal property to the extent affixed to and made a structural part of the real property or infrastructure improvements included within a transformational brownfield plan (TBP).3 Finally, legislation approved in 2018 specifies that a contractor is not liable for use tax on the storage, use or consumption of tangible personal property acquired from another person to the extent that: (i) the property was purchased by the other person; (ii) the person is not exempt from sales and use tax; and (iii) the property was acquired by the contractor for the sole purpose of affixing the property to real estate on behalf of the other person.4
Given the legislature’s activity in this area, it was not surprising to see the Department revise the administrative guidance that it had previously issued regarding application of the sales and use tax law to the construction industry in RAB 2016-18, in order to reflect the recently enacted exemptions along with additional specific examples.
The revised RAB is updated to address the installation of property by contractors on behalf of the customer, the purchase of property affixed to long-term medical care facilities, and property purchased or acquired for eligible activities in TBPs.
Exempt use of property by contractors
First, the RAB specifies that a contractor is not liable for use tax for storing, using or consuming property acquired from another person if the following three conditions are met: (i) the property was purchased by the other person; (ii) the other person is not exempt from sales and use tax; and (iii) the property was acquired by the contractor for the sole purpose of affixing the property to real estate on behalf of the other person.5
As an illustration of this exemption, the RAB provides the example of a retailer home improvement store that hires a contractor to install shelving in the store. The contractor acquires the shelving from the retailer for the sole purpose of affixing property to real estate. According to the RAB, the contractor is not liable for use tax, but the retailer is liable for use tax on the purchase price of the shelving used and consumed by the contractor unless Michigan sales tax is paid on the retail sale of the tangible personal property.6
County long-term medical care facility exemption
The RAB provides additional updates regarding examples of exempt sales of property to contractors to be affixed to and made a structural part of nonprofit hospitals. In the case of county long-term medical care facilities, the RAB clarifies that the term “affixed to and made a structural part of” means any physical connection to an existing county long-term medical care facility.7 As a result, the exemption does not include tools and equipment or supplies used and consumed in the construction that do not become affixed to and made a structural part of the hospital. Additionally, the RAB clarifies that the exemption extends to freestanding buildings qualifying as an “addition” to a county long-term medical care facility. In order for the freestanding building to qualify under the exemption, the building must be operated under the same license held by the county long-term medical care facility and offer the same medical services as the facility in that building.8
The RAB provides the example of ABC, a county long-term medical care facility that hires a contractor to construct a freestanding building on the facility’s existing campus. The new building will be used as an office and will not operate under ABC’s license or otherwise offer the same medical services as ABC. The RAB concludes that tangible personal property sold to the contractor for this project is ineligible for the exemption because the freestanding building will not be operated under the same license held by ABC, or continue to offer the same medical services as ABC. Similarly, tangible property sold to a contractor for the purpose of constructing a new campus of freestanding buildings with each building licensed and operated as a county long-term medical care facility will not qualify for the exemption where there is no existing county long-term medical care facility on the campus.
Property purchased or acquired for eligible activities in TBPs
Finally, the RAB clarifies that a real property contractor qualifies for a sales and use tax exemption for property purchased or acquired for use in eligible activities in TBPs.9 Eligible property is included to the extent that the tangible property will be affixed to and/or made a structural part of the real property or infrastructure improvements included within the TBP.10 Contractors seeking to purchase tangible personal property exempt from tax are required to contact the TBP developer to obtain Form 5555, Michigan Certificate of Exemption for Transformational Brownfield Plan, in order to claim the exemption.
The revised RAB follows the recent law changes to an often confusing area of Michigan sales and use tax law. Michigan provides some unique exemptions for construction contractors that are strictly construed by the Department. For example, Public Act 201 of 2018 was enacted in response to the Department’s practice of assessing use tax on contractors hired to install materials on behalf of the hiring company, where they were unable to provide documentation of sales tax paid by the hiring company. The practice placed a burden on construction contractors, who were often required to provide proof that their customer paid tax on the property. The RAB provides helpful examples of the application of this and other sales and use tax exemptions for construction contractors.
The release of the RAB also comes in conjunction with the Department’s launch of a new audit enforcement program, which is expected to be more aggressive than under previous administrations. As such, the revised RAB merits close examination in order to understand the specific sales and use tax application to both Michigan contractors and retailers doing business with contractors.
1 Revenue Administrative Bulletin 2019-15, Sales and Use Taxation of the Construction Industry (Excluding Manufacturers/Contractors), Michigan Department of Treasury, Nov. 12, 2019.
2 P.A. 372 (H.B. 5824), P.A. 373 (H.B. 5825), Laws 2016; MICH. COMP. LAWS § 205.94s.
3 P.A. 48 (S.B. 113), P.A. 49 (S.B. 114), Laws 2017; MICH. COMP. LAWS §§ 205.54d(n); 205.94dd.
4 P.A. 201 (S.B. 887), Laws 2018; MICH. COMP. LAWS § 205.94ee.
5 MICH. COMP. LAWS § 205.94ee.
6 See Andrie Inc. v. Michigan Department of Treasury, 853 N.W.2d 310 (Mich. 2014).
7 MICH. COMP. LAWS §§ 205.54w(1); 205.94s(1).
8 MICH. COMP. LAWS §§ 205.54w(3)(a)(iii); 205.94s(3)(a)(iii).
9 Eligible activities are described in the Brownfield Redevelopment Financing Act. P.A. 381 (Laws 1996), MICH. COMP. LAWS § 125.2652.
10 With respect to the sales tax law, the RAB clarifies that the tangible property must be affixed to and made a structural part of the “real property or infrastructure improvements included” within the TBP, while the use tax law requires the tangible property to be affixed to or made a structural part of the “improvements to real property” included within a TBP. MICH. COMP. LAWS §§ 205.54d(n); 205.94dd.