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The Department’s sales tax regulations for contractors include one section for contracts with exempt organizations and another for contracts with customers other than exempt organizations. The reasons for this division would seem obvious. One type of customer is an exempt organization, the other is not.  The regulation governing contracts with exempt organizations provides specific instructions on what constitutes proof of an exempt organization’s status and the proper exemption documents to be issued to and used by contractors and subcontractors. A non-governmental tax-exempt organization is authorized to issue an ST-119.1, Exempt Organization Exempt Purchase Certificate, to its prime contractor. The ST-119.1 evidences the tax-exempt nature of the project to be performed. The prime contractor should provide copies of the ST-119.1 to its subcontractors so that sales tax will not be charged on subcontractor services. Governmental entities do not issue ST-119.1 certificates since they do not have to prove their tax-exempt status. The governmental entity’s contract with its contractor is sufficient proof of the project’s tax-exempt status.  Contractors purchasing materials for incorporation into the real property of an exempt organization should provide their vendors with a properly completed ST-120.1, Contractor Exempt Purchase Certificate, checking off Box A.

In 1982, the Department issued a Technical Memorandum entitled, “Exempt Organization Contracts.” The Memorandum set forth Department policy for exempt organization construction projects that could be defined as either capital improvement or repair and maintenance.  The Memorandum mirrors the Department’s regulation for contracts with exempt organizations.  In other words, whether or not the work is capital improvement or repair and maintenance, the prime contractor must obtain an ST-119.1 from non-governmental exempt organizations and provide copies to its subcontractors.  For contracts with governmental entities, the contract documents provide the sufficient proof of exempt status. As recently as November 20, 2015, the Department issued an Advisory Opinion reinforcing the policy set forth in the Memorandum and the Department’s regulation for contracts with exempt organizations.

Neither the regulation for contracts with exempt organizations or the Department’s 1982 Exempt Organization Contracts’ Memorandum mention a requirement that an exempt organization issue an ST-124, Certificate of Capital Improvement.  The reason for this would seem obvious as well.  A customer other than an exempt organization would issue an ST-124, Certificate of Capital Improvement, to its contractor when it wishes to purchase construction services exempt from otherwise applicable sales tax. An exempt organization does not have to weigh whether the construction services it is purchasing satisfy the definition of capital improvement.  It can make its purchase exempt from sales tax regardless of whether the construction services are repair and maintenance or capital improvement.

What was once apparently clear, is not so clear anymore. The Department recently amended one of its Tax Bulletins (TB-ST-104, Capital Improvements) and the instructions to Form ST-124, Certificate of Capital Improvement, to state a requirement that exempt organizations issue Certificates of Capital Improvement. The instructions to the ST-124, reissued as of December, 2015, include new language regarding temporary facilities on construction sites.  The instructions specifically state that a primary contractor purchasing temporary facilities from a subcontractor must give the subcontractor a copy of the “Form ST-124 issued to the primary contractor by the customer (including a customer that is an exempt organization) to purchase the subcontractor’s services exempt from tax.” The Tax Bulletin also now includes two references to exempt organizations issuing Certificates of Capital Improvement to their contractors.  The Tax Bulletin is referenced in the amended instructions to Form ST-124.

Currently, I am not aware of any amendment to the governing regulation for contracts with exempt organizations.  The decisions regarding requirements that exempt organizations issue ST-124, Certificates of Capital Improvement, have been made on a policy level in the Department so it is arguable whether or not they have the force of law.  Unfortunately, because contractors assume all the risk of liability, it is advised that contractors begin obtaining ST-124 Certificates of Capital Improvement, from their exempt organization customers when the work may satisfy the definition of capital improvement, and especially where an exempt organization contract includes temporary facilities within the scope of work.  The ST-124 would be in addition to the ST-119.1, Exempt Organization Exempt Purchase Certificate, or contract documents described in the Department’s regulation governing contracts with exempt organizations.  Good luck getting your exempt organization customers to sign a Certificate of Capital Improvement that states that they will be responsible for sales tax, interest and penalties, or be required to pay sales tax.  It’s a square peg in a round hole, but who am I to say.