Lowering the Cost of Affordable Housing Construction
Avoiding State Sales Taxes
When the Contractor Purchases Construction Materials
legislature recently changed the law to allow virtually any 501(c)(3) exempt entity
to qualify for a state sales tax exemption. How can this type of exemption be used
to lower the cost of constructing affordable housing? Normally it is the non-exempt
general contractor that purchases building materials. What mechanisms can be set
up to avoid payment of the sales tax buy using the nonprofit's exemption? Here is
an outline of what one nonprofit is doing.
For all this to work, therefore, the Nonprofit Developer must have some working
capital on hand to pay the invoice in a timely manner and then await reimbursement
at a later date from the construction loan.
The General Contractor submits an order to a supplier on the Nonprofit Developer's
letterhead (in effect, the General Contractor will be acting as the Nonprofit Developer's
agent in the purchase of construction materials).
The supplier then submits the invoice to the Nonprofit Developer (through the General
The General Contractor then informs the Nonprofit Developer of the invoice and states
whether or not it is "ok" to pay it.
The General Contractor submits a draw request to the Nonprofit Developer for the
FULL AMOUNT owed under the general contractor agreement (with no reduction for any
savings that might have resulted from using the sales tax exemption). The draw request
is then submitted to the lender.
The Nonprofit Developer must pay the invoice within 30 days out of its own funds.
If the Nonprofit Developer fail to pay the invoice within the 30 day period, the
General Contractor will go ahead and pay it (because otherwise the supplier will
cease providing the General Contractor with credit).
Once the Nonprofit Developer has made the payment to the supplier the General Contractor
submits a "change order" to the Nonprofit Developer lowering the amount
that had been billed in the draw request.
The Nonprofit Developer then reimburses itself out of the disbursement of loan funds
made pursuant to a draw request.