Construction Projects – Part 1

Church Law and Tax 1990-05-01 Recent Developments Construction Projects Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1990-05-01 Recent Developments

Construction Projects

The Minnesota Tax Court ruled that a Lutheran church had to pay sales taxes on the purchase of construction materials by its contractor. The church entered into a written contract with a contractor calling for the construction of a 10,000 square foot addition to the church for a fixed price of $522,000. The state assessed sales taxes on purchases of construction materials made by the contractor, citing the state sales tax law which exempts sales made directly to churches but which does not exempt “building, construction or reconstruction materials purchased by a contractor as a part of a lump-sum contract … with a guaranteed maximum price covering both labor and materials.” The church argued that the contractor was the “agent” of the church in making purchases of building materials and that the exemption of sales made to churches should apply. The state tax court rejected the church’s claim, and upheld the imposition of sales taxes on all sales of construction materials to the contractor. It noted that tax exemptions “should be strictly construed,” and that the sales clearly were to a contractor as part of a lump-sum contract (rather than to a church) and accordingly were taxable. This case illustrates the significance of addressing the question of sales taxes in church construction contracts. Are sales of construction materials exempt from sales tax in your state? If so, what conditions must be satisfied? Are there any exceptions that may apply (as in Minnesota)? If sales taxes are assessed, who is required to pay them (the church or the contractor)? Addressing such issues in the contract will help to avoid misunderstandings, and may avoid unexpected costs. Easter Lutheran Church v. Commissioner of Revenue (Minn. T.C. unpublished opinion 1989).

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