Lowering the Cost of Affordable Housing Construction Avoiding State Sales Taxes When the Contractor Purchases Construction Materials
In Florida virtually any 501(c)(3) exempt entity can to qualify for a state sales tax exemption. In affordable housing deals where an exempt nonprofit is involved a sales tax exemption can be used to lower the cost of construction.
Normally it is the non-exempt general contractor that purchases the building materials and not the exempt nonprofit. Below is the description of a mechansim for using the nonprofit's exemption to avoid payment of the sales tax.
Have the nonprofit and the general contractor enter into a Purchase Agency Agreement. CLICK HERE to download a sample. Under such an Agreement the following procedures would be used:
From time to time, the contractor would inform the nonprofit in writing of the names of the suppliers from which it desires that building materials be purchased. Upon receipt of such notices nonprofit would endeavor to establish accounts with the named suppliers so that, if possible, building materials may purchased on credit.
From time to time the contractor would submit purchase requests to the nonprofit. Each such written request shall specify the quantity and quality of the materials requested along with any other relevant specification. The contractor may in its discretion state a maximum price that nonprofit may pay in making the purchase. The would use its sales tax exemption with all such purchases.
If the items included in a particular request can not be purchased on credit nonprofit would inform the contractor of that fact. In which case the nonprofit would not be obligated to make the purchase until such time as the contractor provided it with sufficient funds.
If requested items were purchased on credit the nonprofit would deliver an invoice to the contractor stating the amount that is owed to the supplier. The contractor provide sufficient funds to nonprofit prior to the time that nonprofit is required to make the payment to the supplier. If the contractor had given funds to the nonprofit prior to a particular purchase the nonprofit shall return to the contractor any surplus funds that were not used for the requested purchase.
CAUTION. Use this mechanism only if the housing being developed is of the type that the IRS considers to be "charitable". CLICK HERE
for an article on the IRS affordable housing "safe harhor"