Generally, a construction contractor will pay sales or use tax on the purchase price of all property, including materials, equipment, components, and supplies, which it furnishes and installs in the performance of its construction contract, whether or not the items or services are transferred.
Some significant changes took effect July 1, 1998, concerning construction contractors that are under contract with a government agency or a purely public charity holding a sales tax exemption.
Under the changes in the law, the purchase of certain items - defined as building machinery and equipment - will be tax exempt, when the construction contractor buys the items for the government agency or purely public charity, (a tax-exempt organization). The contractor will issue an exemption certificate to the supplier, which will allow the contractor to purchase building machinery and equipment without paying the sales tax up front.
The tax is based upon the contractor’s purchase price including delivery charges paid to the supplier. The contractor does not charge sales tax on either the construction materials or labor to install the materials. Although the contractor may recoup the cost of sales tax paid on its purchase of materials or taxable services, the sales tax paid by the contractor should not be separately stated on the invoice to the contractor's customer.
A construction contractor may purchase certain items exempt from sales tax that it transfers to a government agency or certain tax-exempt organizations that qualify as institutions of purely public charity. These items are called "building machinery and equipment.”
An item qualifies as building machinery and equipment if it meets the following two-part test: (i) the item is either generation equipment, distribution equipment, conditioning equipment, storage equipment, or termination equipment AND (ii) it is used in one of the ten categories listed below. An item that meets this two-part test is building machinery and equipment, whether or not: (a) the item constitutes a fixture or is otherwise affixed to the real estate; (b) damage would be done to the item or its surroundings upon removal; (c) the item is physically located within a real estate structure.
The exemption is limited to generation equipment, distribution equipment, conditioning equipment, storage equipment, or termination equipment used in one of the following categories:
A. Air conditioning limited to heating, cooling, purification, humidification, dehumidification, and ventilation
B. Electrical (not including wire, conduit, receptacle and junction boxes);
C. Plumbing (not including pipes, fittings, pipe supports and hangers);
D. Communications limited to voice, video, data, and sound;
E. Alarms limited to fire, security, and detection;
F. Control systems limited to energy management, traffic, and parking lot and building access
G. Medical systems limited to diagnosis and treatment, medical gas, nurse call, and doctor paging
H. Laboratory system;
I. Cathodic protection system;
J. Furniture, cabinetry, and kitchen equipment.
The term "building machinery and equipment" shall include boilers, chillers, air cleaners, humidifiers, fans, switchgear, pumps, telephones, speakers, horns, motion detectors, dampers, actuators, grills, registers, traffic signals, sensors, card access devices, guardrails, medial devices, floor troughs and grates, and laundry equipment, together with integral coverings and enclosures.
The term "building machinery and equipment" shall not include guardrail posts, pipes, fittings, pipe supports and hangers, underground tanks, wire, conduit, receptacle and junction boxes, insulation, ductwork, and covering thereof.
Question: What if the construction contractor inadvertently paid the sales tax on items that qualify for the exemption?
Answer: The law now grants a tax refund to the person who has actually paid the tax, including the construction contractor.
Question: How does a construction contractor claim the exemption for building machinery and equipment?
Answer: A construction contractor may purchase building machinery and equipment and services thereto that will be transferred to a governmental agency or institution of purely public charity pursuant to a construction contract exempt from sales and use tax by tendering a Pennsylvania Exemption Certificate (form REV-1220) to the vendor. The exemption certificate should be properly executed, given to the vendor within sixty days of purchase, and should contain the following statement: property or services qualify as building machinery and equipment, and will be transferred pursuant to a construction contract to [name of tax-exempt entity] and, if an institution of purely public charity, "holding sales tax exemption #75-[tax-exempt number].”
A contractor, who in addition to his construction activities also sells tangible personal property, is required to register with the PA Department of Revenue for the collection and remittance of sales tax on the sale price of the tangible personal property.