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Ohio Sales Tax: Exemptions Outside the Tax Code

author photo of Guy Nevers

As tax advisors, we train ourselves to search endlessly in the tax code for exemptions, deductions, caps and the like. But sometimes we find exemptions by looking outside the tax code into other areas of state law, as the following illustrates.

As I previously wrote, construction contractors are considered consumers of the materials they use when performing real property construction contracts - and for that reason pay the associated sales tax. However, materials intended for construction contracts performed on property owned or property that will be accepted for ownership by the US Government (or agency), the state of Ohio (or agency) - or an Ohio City - can be purchased sales tax exempt.

Basically if the property is owned, or will be accepted for ownership by such Government entities, the Government can provide an exemption certificate to the contractor. Most materials incorporated into that project will then be exempt from sales tax. However, note the emphasis on "will be accepted for ownership". That begs the question of when exactly does ownership of the property need to transfer to the Government. Consider the following case:

A contractor enters into an agreement with the Ohio Department of Transportation ("ODOT") to design, build, and maintain a stretch of highway. The agreement says the contractor will own and maintain the highway for a period of 20 years during which they will lease the highway to ODOT, after which title to that stretch of highway is transferred to ODOT. Can the contractor purchase materials to construct this highway tax free?

Under Ohio tax law, the answer is no. Title to the property must transfer immediately upon completion of the project. Case law is very harsh in that a period of 8 days between the time the contract was completed and title to the property transferred is enough to deny a sales tax exemption to the contractor. In our case, the property will be owned by the contractor pursuant to a 20 year lease meaning title to the highway will not immediately transfer to the state at the time of completion of the construction of the highway.

Introducing the Public-Private Agreement:

The fact pattern in our case above is an example of a Public-Private Agreement ("PPA"), and you won't find much mention of it in Ohio sales tax law. Enacted in 2011, the provisions are found in Title 55: Roads - Highways - Bridges of Ohio law. a PPA contemplates a partnership between ODOT and a private developer or group to plan, acquire, finance, develop, design, construct, reconstruct, replace, improve, maintain, manage, repair, lease, or operate a transportation facility (i.e. a road, bridge or highway). The law requires specific terms to be provided in the PPA, and terms which may be provided in the PPA.

Some of the more important specific terms which must be provided in the PPA are: planning for the acquisition, financing development, maintenance, management and other particulars of the project, the term of the agreement, the type of interest (i.e. ownership) the private entity will have in the facility, a specific plan to ensure maintenance of the facility, whether there will be user fees or charges to be collected for use of the facility and disposition of the property upon completion of the agreement.

While the term of the agreement is required in the PPA nothing in the statute or ODOT policy provides a maximum term limit for the agreement. Therefore, the contractor may own the property for a very long time before transferring it over to ODOT. The law specific to a PPA provides materials used in performing the construction of the transportation facility are exempt from Ohio sales and use taxes. As the contract is a PPA with ODOT the contractor is permitted to purchase materials which will be incorporated into the transportation facility exempt from sales tax with a properly executed exemption certificate.

The PPA concept is an example of thinking outside the box on how to fund highway construction and improvements. States are very hard pressed to raise taxes or incur additional debt to fund critical infrastructure projects. On the other hand, a sound highway system adds to the economic value a State can provide its citizens and businesses contemplating a location there. The PPA concept addresses both in a manner where both the State and private enterprise benefit. In a State which values its highway system like Ohio, it’s a true win-win.

Thinking outside the box can work for funding critical infrastructure projects, and it can work in looking out for our clients. What a novel concept!

Have a comment or question? Is there a topic you’d like to see discussed? Submit your question or comment below and we’ll be sure to get in touch!

Guy J. Nevers CPA MT is a member of the AICPA, Ohio Society of CPA's and a Sales Tax Affiliate member of the Institute for Professionals in Taxation.

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Comments

3 Responses to Ohio Sales Tax: Exemptions Outside the Tax Code

  • Posted by Linda on August 29, 2016 9:17am:

    Is service labor of security systems sales taxable in Ohio?

    • Posted by Author photo of Guy Neversguyneverscpa on August 29, 2016 6:37pm:

      Good evening Linda; thanks for stopping by!

      The maintenance of security systems is subject to sales tax in Ohio. The tax base includes all items used in the performance of the maintenance of the systems including labor. As such, the labor used to service the security system is subject to tax in Ohio.

      Let me know if this helps and if you have any other questions.

      • Posted by Linda on August 30, 2016 5:41am:

        Thank you. Your reply did help to clarify. I had a subcontractor that did not include tax on the labor portion of their invoice to us. Thanks again.

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