State of Rhode Island - Division of Taxation
RULING REQUEST NO. 2008-01
Request for Ruling Regarding Amendment or Extension of Ruling No. 2003-01 dated March 23, 2003 Regarding the Application of the Exemption provided by RIGL §42-64-20(c) for the Purchase of Certain Personal Property
On behalf of your client, Company A, a Rhode Island corporation, you request, pursuant to RIGL §42-35-8, as amended, a declaratory ruling as to the amendment or extension of a previous declaratory ruling, Ruling No. 2003-01, issued by this agency and dated March 23, 2003. Ruling No. 2003-01 dealt with the exemption from the Rhode Island sales and use tax of building and construction material, personal property, furniture and equipment or replacements, additions and enhancements thereof, the legal title to, and/or contractual right to use of which will be in the name of, Company, in connection with a project developed on land in Johnston and Glocester, Rhode Island, with respect to which the Rhode Island Economic Development Corporation (EDC) is the landlord and Company A is the tenant.
The facts set forth in your request for ruling extension, dated December 20, 2007, and your client’s original request for a ruling, dated January 16, 2002, and the documents appended thereto are incorporated herein by reference. Such facts and documents form the basis for this ruling.
Company A is a worldwide casualty insurance company with its world headquarters located in Johnston, Rhode Island. Company A and the EDC are parties to a Development Agreement dated November 5, 1998, whereby Company A would develop land and buildings, including additions to existent structures, and make certain infrastructure improvements, such as parking facilities, (the Project) on land located in Johnston and Glocester, Rhode Island. (the Project Sites). The term of the Development Agreement is twenty (20) years from its effective date with the option to extend the Agreement for another five (5) years.
Construction and development of the Project plus payment of all Project related costs were the responsibility of Company A. The Project Site consisted of parcels of real estate owned by Company A who leased them pursuant Ground Leases effective November 5, 1998 to EDC who, in turn, sublet them back to Company A under Subleases also effective November 5, 1998. The terms of both Ground Leases and both Subleases are for twenty (20) years from the effective date with options to extend their terms for another five (5) years. It is expressly provided that the Ground Leases and Subleases shall expire upon expiration or other termination of the Development Agreement.
Critical to the existence of the Development Agreement is a Declaratory Ruling from the Tax Administrator recognizing the sales tax exempt status of all taxable property used in the development and construction of the Project. This exemption extends to Purchased Property which was defined, in the original request for a ruling, as:
All materials used in the construction, development and operation of the Project (other than office supplies or common office items which have a useful life less than one year), including without limitation all furniture fixtures, equipment, partitions, cabling, electronic hardware, and any other items of personal property acquired for use with respect to the Project.
Purchased Property also includes items of personalty that will be enhanced or replaced during the term of the Ground Lease and the operation of the Project but excludes any goods or inventory held for sale in the ordinary course of business.
Section 4.2 of the Development Agreement provided that sales tax exemption for the Project shall remain in effect for the lesser of (i) ten (10) years from the effective date of the Development Agreement or (ii) the date of the termination, voluntary or otherwise, of the Ground Lease or (iii) the date this tax exemption is no longer legally permitted. The sales tax benefits under the Development Agreement are subject to an Initial Investment Requirement, Section 5.4, and an Employment Requirement, Section 5.5, on the part of Company A. Under Section 5.4, after Company A meets the Initial Investment Requirement, the sales tax exemption is limited to otherwise taxable property purchases not exceeding the aggregate of Five Million Dollars ($5,000,000) per tax year.
October 21, 2001, the Board of Directors for the EDC made findings that the Project qualified as an EDC project under RIGL §42-64-3(20) and that it was in the interests of the EDC and the Project that legal title the Improvements and Purchased Materials be held by Company A or its subsidiaries rather than by the EDC. On January 14, 2002, Company A requested a declaratory ruling as to its sales tax exempt status for Purchased Property used on the Project. On March 26, 2002, the former Tax Administrator, R. Gary Clark, issued Ruling No. 2003-01 whereby the sales tax exemption for the Project was recognized to exist for ten (10) years from the effective date of the Development Agreement; said effective date being November 5, 1998.
On November 1, 2007, Company A advised the EDC that it was undertaking two new construction activities; an upgrade and expansion of its testing facilities in Glocester and the construction of a new corporate headquarters in Johnston. Company A sought confirmation that the two construction undertakings were part of the Project within the scope of the Development Agreement. On November 5, 2007, the EDC advised Company A that the two new activities appear to be on the Project Site and would be subject to the sales tax benefits under the Development Agreement.
On December 20, 2007, Company A submitted the instant request for extension or amendment of Ruling No. 2003-01. In doing so, Company A asserts that the Tax Administrator, in 2003, viewed Section 4.2 as a limitation on the term of tax exemption rather than a provision setting forth grounds for Company A to terminate the Development Agreement. It is contended that the original grant of exemption should have been for the term of the Development Agreement; specifically twenty (20) years from the effective date of November 5, 1998. There is no evidence that Company A disputed Ruling No. 2003-01 at the time it issued.
The EDC is “a public corporation of the state having a distinct legal existence from the state and not constituting a department of state government, which is a governmental agency and public instrumentality of the state, ….with…powers…set forth” by law. RIGL § 42-64-4 (a). The exercise of those conferred statutory powers by the EDC “shall be deemed…the performance of an essential governmental function of the state for public purposes.” RIGL § 42-64-4 (b). The EDC is tax exempt pursuant a provision that states, in part, that:
(a)…..[T]he corporation shall not be required to pay any taxes or assessments upon or in respect of any project or of any property or moneys of the…economic development corporation, levied by any municipality or political subdivision of the state; provided, that the corporation shall make payments in lieu of real property taxes and assessments to municipalities and political subdivisions with respect to projects of the corporation located in the municipalities and political subdivisions during those times that the corporation derives revenue from the lease or operation of the projects.
(b) The corporation shall not be required to pay state taxes of any kind, and the corporation, its projects, property, and moneys and, except for estate, inheritance, and gift taxes, any bonds or notes issued under the provisions of this chapter and the income (including gain from sale or exchange) from these shall at all times be free from taxation of every kind by the state and by the municipalities and all political subdivisions of the state.
(c) For purposes of the exemption from taxes and assessments upon or in respect of any project under subsections (a) or (b) of this section, the corporation shall not be required to hold legal title to any real or personal property, including any fixtures, furnishings or equipment which are acquired and used in the construction and development of the project, but the legal title may be held in the name of a lessee (including sublessees) from the corporation. This property, which shall not include any goods or inventory used in the project after completion of construction, shall be exempt from taxation to the same extent as if legal title of the property were in the name of the corporation; provided that the board of directors of the corporation adopts a resolution confirming use of the tax exemption for the project by the lessee. … The resolution shall include findings that: (1) the project is a project of the corporation under § 42-64-3(20), and (2) it is in the interest of the corporation and of the project that legal title be held by the lessee from the corporation. RIGL § 42-64-20. (Emphasis added).
A Project that can be under the auspices of the EDC is defined to include:
[T]he acquisition, ownership, operation, construction, reconstruction, rehabilitation, improvement, development, sale, lease, or other disposition of, or the provision of financing for, any real or personal property (by whomever owned) or any interests in real or personal property, including without limiting the generality of the foregoing, any port facility, recreational facility, industrial facility, airport facility, pollution control facility, utility facility, solid waste disposal facility, civic facility, residential facility, water supply facility, energy facility or renewable energy facility, or any other facility, or any combination of two (2) or more of the foregoing, or any other activity undertaken by the corporation. RIGL §42-64-3(20)
Company A seeks that Ruling No. 2003-01 amended so that the sales tax exempt status for the Purchased Materials that constitute part of an EDC Project, as set forth in §42-64-3(20), be extended from ten (10) years to twenty (20) years commencing from the effective date of the Development Agreement; said effective date being November 5, 1998.
The analysis of your request for extension of the sales tax exempt status in Ruling No. 2003-01 falls into two issues. The first is whether Company A’s claim that the Tax Division originally misconstrued Section 4.2 of the Development Agreement has merit, and if so, what should have been the term of the sales tax exemption. The pertinent provision of the Agreement states in part, that:
Section 4.2 Validation of Tax Exempt Status. Company A, in its sole discretion, shall have the right to terminate this Development Agreement….in the event that the Rhode Island Division of Taxation fails….to have issued a letter ruling satisfactory to Company A that no Sales Tax will be due and payable on taxable property used in the development and construction of the Project…which exemption shall remain in effect the lessor of (i) the ten (10) years from the Effective Date herein, or (ii) the date of termination of the Ground Lease, whether terminated by expiration…or otherwise, or (iii) the date this exemption is no longer legally permitted. (Emphasis added)
Section 4.2 is, at best, ambiguous. On one hand it is captioned as a provision whereby sales tax exempt status is to be validated and recognized. On the other hand, the text of the provision, and in particular, the opening clause, provides Company A with grounds for unilateral termination of the Development Agreement. The last portion of the text wherein it sets forth different time periods can also be construed in one of two ways. Either it is setting forth an absolute time limitation for the duration of sales tax exemption for the Project or it is setting forth the minimum period of sales tax exemption that the Tax Division must recognize in a Declaratory Ruling in order to obviate Company A’s right to unilaterally terminate the Agreement.
Rules of construction are of little or no assistance in this matter. Normally, ambiguities in a contract are construed against the drafter(s) of the instrument. Accordingly, Company A would normally be held to the original ten (10) year limitation on sales tax exemption due to the Tax Division’s reliance upon an ambiguous provision. However, Section 7.7 of the Development Agreement expressly states that it was a negotiated instrument and provides that “no provision of this Agreement shall be construed against any party by reason of such party having drafted such provision in the Agreement.” Thus, assuming Company A had drafted Section 4.2, that cannot prejudice its right to assert that the provision was ambiguous and misleading.
Similarly, while a caption or title to a contractual provision can be an interpretative aid, it is not controlling on the provision’s meaning and cannot vary the plain ordinary meaning of the provision’s language. In Section 7.11, the EDC and Company A expressly agreed that the captions of the Development Agreement were for “convenience of reference only” and were not to “define, limit or describe the scope or intent of the Agreement.” Thus, the caption to Section 4.2 suggesting that its provisions grant and limit the term sales tax exemption is substantively meaningless. The text of Section 4.2, read as a whole and without the caption, makes it clear it is a termination provision.
Although several sections within the Development Agreement allude to sale tax benefits and sales tax exemption, no other provision of the Agreement can be deemed an express grant of sales tax exemption. Furthermore, no other provision within the Agreement specifically sets forth what taxes and what items of taxable property would come within the ambit of referenced tax exemption. Accordingly, one has to look to the statutes enabling and authorizing state tax exemption for an EDC project.
The express grant of exemption from all state taxes for the EDC is set forth in § 42-64-20(b). Another provision, § 42-64-20(c), specifically empowers the EDC to assign or transfer its exempt status upon the lessees or sublessees of a project as long as the requisite two findings are made by the Board of Directors. The Board of Directors made such findings on October 21, 2001. The items of property specifically deemed exempt (and not exempt) under this tax exempt status are set forth in § 42-64-20(c). Company A’s definition of Purchased Material is consistent with the enumeration of exempt items under the statute. Under the statute, the term of tax exemption coincides with the term of the project. § 42-64-20 (b) & (c). In this particular case, the term of the Project also coincides with the terms of the Development Agreement and the Ground Lease as the EDC has recently indicated in its November 5, 2007 correspondence that it deems the Project to still be ongoing.
In sum on this first issue, the real source of Company A’s sales tax exemption was (and is) the statute; where the terms and scope of tax exemption are set forth with authority and particularity. The Development Agreement merely references this tax exemption and explains how it applies to this particular Project. The Agreement details the conditions that EDC made the grant of tax exemption are subject to and allows Company A to terminate the Agreement if its tax exempt status is not expressly recognized for a minimum number of years.
The raises the second issue. Would extension the tax exempt status recognized in Ruling 2003-01 contravene Tax Division policy and, in particular, the position the Tax Division has taken in other tax matters. Be advised that this agency adheres to a strict and narrow interpretation and application of RIGL §42-64-20 in light of recent claims of expansive and virtually limitless tax exemption under its provisions. Some EDC grantees have alleged that state tax exemption under §42-64-20 exists for the duration of a project, which in turn, is claimed to automatically coincide with the term of the underlying ground leases; some of which (with automatic extension) can exist for centuries. Other grantees have alleged that the tax exemption can be assigned or transferred, along with the developed properties, to unaffiliated third parties who were never involved in the original development and construction of the project or the original agreements. Finally, other grantees have alleged that §42-64-20 provides exemption from taxes that were never enumerated within its provisions and may never have existed at the time the statute was enacted.
Scrutiny of Company A’s current request for extension or amendment of its existing sales tax exemption discloses that it is distinguishable from the above situations on several grounds.
- First, under Section 4.2 of the Development Agreement, the Tax Administrator had to recognize sales tax exemption for at least ten (10) years from the effective date of the Development Agreement to obviate Company A’s right of unilateral termination. However, by statute, he had the option of recognizing tax exemption for the duration of the Project which happened to coincide with the term of the Development Agreement and the Ground Lease; both of which were effective on November 5, 1998. Thus, any extension or amendment of the existing tax exempt status up to twenty years after the effective date of the Development Agreement would be within the scope of the Project and justifiable under § 42-64-20.
- Second, Company A is not requesting that tax exemption be extended for an indeterminate or virtually limitless period of time. Rather it is requesting extension of an existing tax exempt status to a finite, reasonable and discrete term with a definite end date; specifically twenty (20) years after commencement of the Development Agreement.
- Third, the Development Agreement was effective as of November of 1998. The original request to validate and recognize sales tax exemption was not received until January of 2002 and declaratory ruling No. 2003-01 did not issue until March 26, 2003. By its express terms, the Declaratory Ruling recognized ten (10) yeas of sales tax exemption from the effective date of the Development Agreement; that date being November 5, 1998. Although the reasons for the delays are not proffered, it appears that Company A did not get the benefit of a full ten (10) years of sales tax exemption for undertaking various improvements to the Project Site as nearly five (5) years lapsed before the tax exempt status was validated and recognized. Thus, equitable reasons exist in this case for the extension of an existing tax exemption.
- Fourth, on the facts presented, any extension or amendment of the existing tax exemption would inure to the benefit of the original developer of the Project, Company A, and not to unaffiliated third parties who were not involved in the original development and construction of the Project Site. Thus, the requested extension of an existing tax exemption would not constitute an unauthorized assignment of the Agreement and the rights thereunder in violation of Section 7.2 of the Development Agreement.
- Fifth, the requested extension or amendment of the existing tax exemption is for two construction activities similar or comparable to the construction activities involved in the original January 2002 request for tax exempt status. These construction activities will be undertaken on properties originally declared to be part of the Project Site under the Development Agreement. Furthermore, by a letter dated November 5, 2007, the EDC has expressly confirmed these two activities to be within the scope of the Development Agreement and situated on the original Project Site. Accordingly, it would not be inconsistent for the Tax Administrator to deem the two new construction undertakings to be a continuation of the Project.
- Sixth, the requested extension or amendment of the existing tax exemption is for the same tax and same type of taxable items which were involved in the original January 2002 request for tax exempt status. Specifically, Company A is seeking Sales and Use Tax exemption for all Purchased Property (whose definition is consistent with the scope of exemption under § 42-64-20(b)) but excluding office supplies and common office items of personal property which have a useful life of less than one year and also excluding goods or inventory held for sale in the ordinary course of business. Thus, the requested extension does not represent an expansion as to the scope of the existing tax exemption.
- Seventh, pursuant to Section 5.4 of the Development Agreement, upon attainment of the Initial Investment Requirement, the sales tax exemption under the Development Agreement shall be limited to the otherwise taxable property purchase no exceeding the aggregate of Five Million Dollars ($5,000,000) per tax year. Thus, the requested extension does not represent an expansion as to the annual amount of the existing tax exemption.
In light of the above circumstances, unique and specific to Company A, there is no sound reason in law and fact why Ruling No. 2003-01 should not be extended or amended.
Based upon the facts presented and representations made in your request for ruling and accompanying documents, Ruling No. 2003-01 is hereby amended to read as follows:
The Purchased Materials (excluding office supplies or common office items which have a useful life of less than one year) as may be owned by Company A or an affiliate thereof, and provided further that they do not include good or inventory held for sale in the ordinary course of business but constitute a part of an EDC Project, as set forth in RIGL §42-64-3(20), are exempt under RIGL §42-64-20 from the Rhode Island Sales & Use Tax to the same extent as if legal title to the Purchased Material was in the name of the EDC. This exempt status is subject to the annual limitation set forth in Section 5.4 of the Development Agreement and compliance with all other pertinent provisions of the Development Agreement.
This amended ruling may be relied upon only by Company A and its affiliates, It shall remain in effect for the lesser of: (i) twenty (20) years from the effective date of the Development Agreement; said date being November 5, 1998; or (ii) the date of the termination of the Development Agreement, whether terminated by expiration, express determination or otherwise, or (iii) the date this tax exemption is no longer legally permitted.
David M. Sullivan
March 11, 2008