IL: Tax Tribunal Rules Taxpayer Operating a Golf Club Qualified for Governmental Body Exemption

The Illinois Independent Tax Tribunal recently addressed whether a taxpayer that operated a golf club (Club) owned by an Illinois municipality could qualify for the state’s governmental body exemption on purchases the taxpayer made to operate the Club.  The taxpayer and municipality were parties to a management agreement under which the taxpayer would supervise the Club’s operations and procure inventory, merchandise, food and beverages, supplies, and equipment for the operation of the Club.  The Department of Revenue audited the taxpayer and assessed use tax, interest, and penalties on supplies and equipment purchased by the taxpayer for Club operations. The taxpayer protested.

The Illinois Use Tax Act provides an exemption for purchases by a governmental body. The term “governmental body” is not defined, and there is no separate exemption for government contractors.  The Department’s regulations expand on the exemption and provide that a government contractor’s purchases in fulfilling a contract with a governmental body are generally taxable, following the rule set forth in the U.S. Supreme Court case U.S. v. New Mexico, 455 U.S. 720 (1982).  The regulation, however, also provides an exception or alternative to this rule. If the contract with the governmental body explicitly requires the contractor to sell those items to the governmental body, the purchases can be structured to qualify as exempt sales for resale.  There are two conditions that must be met: (1) there must be a contract between the contractor and the governmental body that requires the contractor to provide the property to the governmental body; and (2) the contract must specify that the property is transferred to the governmental body.  The contract need not be item-specific, and the transfer may be immediate or subsequent to the completion of the contract.

In its analysis, the Tribunal first reflected on the importance of U.S. v. New Mexico to the matter at hand. It effectively said that New Mexico was not directly relevant because the Department’s regulation (duly adopted and within the bounds of the statute authorizing the exemption) had established an alternative method (i.e., the contractual method) of qualifying for the exemption that was, in fact, contradictory to New Mexico.

Under the Department’s regulation, purchases by a contractor on behalf of a governmental entity are exempt from tax if: (1) the contract between the parties requires the purchaser to provide tangible personal property to the governmental body, and (2) the property acquired must be transferred to the governmental body.  The regulation provides that the contract terms do not need to be item-specific, and the transfer may be made immediately upon purchase or subsequent to the completion of the contract.  Here, under the management agreement for the Club, the taxpayer was required to purchase property for the municipality that owned the Club.  The management agreement also specified that upon termination of the agreement, the taxpayer shall assign all Club accounts and inventory to the municipality.  The fact that the taxpayer could make shared purchases for other golf clubs did not negate the exemption; the regulation required only that the property distributed to the Club became property of the municipality.  Based on the parties’ management agreement, the Tribunal found that the taxpayer met the requirements of the regulation, and was entitled to the governmental body exemption.  Please contact Drew Olson at 312-665-2897 with questions on Water’s Edge Golf Management LLC v. Illinois Dep’t of Revenue.