SALES AND USE TAX APPLICATION FOR REAL PROPERTY CONSTRUCTION CONTRACTS OFFERED/MADE BEFORE MARCH 15, 1994 AND ACCEPTED BEFORE JUNE 15, 1994, AND BONA FIDE SALES OR LEASE AGREEMENTS MADE BEFORE MARCH 15, 1994

RAB-94-3. This bulletin explains the applicable sales or use tax rate to be applied to certain real property construction contracts, and certain bona fide sales and lease agreements, pursuant to the provisions of Public Acts No. 325 and No. 326 of 1993. These Public Acts amended the General Sales Tax Act (MCL 205.51; MSA 7.522) and the Use Tax Act (MCL 205.91; MSA 7.555) to implement passage of a Constitutional amendment raising the applicable sales and use tax rates from four percent (4%) to six percent (6%) effective May 1, 1994.

LAW

Both amendatory acts contained specific provisions pertaining to real property construction contracts and bona fide sales and lease agreements. The sales tax provision under P.A. 325 is contained at section 4m (MCL 205.54m; MSA 7.525(m)). The use tax provision under P.A. No. 326 is contained at section 4e (MCL 205.94e; MSA 7.558(e)).

The content of these two sections is similar, and their application provides identical results. The following points are provided.

Exemption. The exemption is from the additional 2% tax rate that becomes effective May 1, 1994.

Material. For real property contracts, the affected material must be affixed and made a structural part of real estate or used and completely consumed in a single contract.

Contract. The partial exemption applies to the following:

1. A fixed price real estate contract offered before March 15, 1994, accepted before June 15, 1994, and which is not subject to change or modification, or
2. Other real estate contracts entered into pursuant to the obligation of a formal written bid made before March 15, 1994 and accepted before June 15, 1994 that cannot be altered or withdrawn, or
3. A bona fide sales or lease agreement made before March 15, 1994 if the agreement cannot be withdrawn or altered, or contains a fixed price not subject to change or modification of greater than 15%.

DISCUSSION

The exemption or exclusion provided is limited to the additional 2% tax rate. This is the difference between the old 4% rate and the new 6% rate.

Application to Real Estate Contracts

The items eligible for exemption or exclusion from the additional 2% tax rate are limited. Only material that is affixed and becomes a part of the real property, and material that is used and completely consumed in a single contract qualify for exemption. Materials such as sandpaper, welding gases, paint cleaning solvents, and similar items could be used and completely consumed on a single contract, and thereby qualify for exemption/exclusion. Items such as tools, equipment, and supplies used on more than one contract would not qualify for exemption/exclusion.

Contracts qualifying for exemption/exclusion are only those that consist of constructing, altering, repairing or improving real estate. Contracts for construction of machinery, for example, do not qualify for exemption/exclusion unless that equipment is considered a structural part of the real estate. To be considered a structural part of the real estate, the item must:

1. Be attached to the realty,
2. Serve the function to which that portion of the realty it is attached to is dedicated, and
3. Be intended to be a permanent attachment as long as the realty serves the function for which it is dedicated.

The contract or bid must be offered before March 15, 1994 and accepted before June 15, 1994. Only fixed price contracts and contracts entered into through formal written bids qualify. Advertisements for bids or requests for bids do not meet the statute's requirements for exemption. Qualification is limited to those fixed price real estate contracts which cannot be changed or modified, and other real estate contracts entered into pursuant to the obligation of a formal written bid which cannot be altered or withdrawn.

A time and material contract would not qualify for exemption/exclusion from the additional 2% tax rate. Similarly, contracts which can be changed or modified and bids which can be altered or withdrawn are not eligible for exemption/exclusion.

This should not be construed to mean that contracts, which allow for change orders to add or delete items, change the nature of the basic contract. A change order negotiated separately will not be interpreted as disqualifying from exemption/exclusion a basic fixed price contract which in itself is not open to re-negotiation of the price. The change order, however, would be subject to the additional 2% tax rate. The basic contract would remain not subject to the 2% additional tax rate. The change order represents a separately negotiated contract even though it may be considered part of the same overall job.

Both "fixed price contracts" and "formal written bids" are required to be "accepted" before June 15, 1994. The term "accepted" means that the contract or bid has been received by the owner (or general contractor), meets the customer's specifications, and is in its final form. If the contract or bid is altered in any way after the June 15, 1994 date, it will not qualify for the partial exemption. It is not necessary that the contracts be awarded to the winning bidder, but they must be accepted by the owner, before the June 15, 1994 date.

Application to Bona Fide Sales or Lease Agreements

Sales agreements or lease agreements of any kind made before March 15, 1994, which cannot be withdrawn or altered, are exempt from the additional 2% tax rate. Sales agreements or lease agreements of any kind made before March 15, 1994, which contain a fixed price not subject to change or modification of greater than 15%, are also exempt from the additional 2% tax rate.

These agreements would include but not be limited to sales or leases of machinery, equipment, and vehicles, and also sales of materials to persons engaged in the business of constructing, altering, repairing, improving real estate for use in fulfillment of real estate contracts. In all instances, the agreements must meet the limiting provisions discussed above to qualify for this partial exemption.

Questions concerning the application of these statutory provisions can be addressed by calling (517) 373-3190, or writing:

Sales, Use and Withholding Taxes Division
Michigan Department of Treasury
Treasury Building
Lansing, Michigan 48922

All pertinent facts must accompany any request for a ruling.