TECHNICAL ASSISTANCE ADVISORY 88-004Re: CUT -- Whether the agent of a governmental entity may claim the consumers sales and use tax exemptions available to its principal when purchasing tangible personal property or taxable services from vendors on behalf of its principal; CUT -- whether the rental of real and tangible personal property directly used in manufacturing is exempt from consumers sales and use taxes; BFT/CNIT -- whether leased property may be excluded from the property factor of the business franchise tax and the corporation net income tax apportionment formulas until such time as annual rent becomes payable under an operating lease? A Technical Assistance Advisory has been requested concerning the position of this Office on the West Virginia consumers sales, the West Virginia use tax, the West Virginia corporation net income tax, and the West Virginia business franchise tax consequences of certain features of the following transaction. XYZ Corporation intends to enter into an agreement with the West Virginia Industry and Jobs Development Corporation (hereinafter WVIJDC) under which XYZ Corporation will function as WVIJDC's general contractor and development agent in the construction of a manufacturing facility located in this State. In this role, XYZ Corporation will purchase, as the agent of WVIJDC, the real property on which the manufacturing facility will be constructed as well as the materials and equipment that XYZ Corporation will incorporate into the manufacturing facility. WVIJDC will at all times hold title to all of the real and personal property located at the manufacturing facility. After construction of the manufacturing facility has been completed, XYZ Corporation will lease the manufacturing facility from WVIJDC under an operating lease. This lease will have a negotiated option to purchase the manufacturing facility at its fair market value. This Office was asked to confirm, conditioned upon the accuracy of the factual representations made by XYZ Corporation, that: (1) The purchase of tangible personal property or taxable services in West Virginia by XYZ Corporation, as agent of WVIJDC, will be exempt from West Virginia's consumers sales tax. (2) The use in West Virginia by XYZ Corporation, as the agent of WVIJDC, of tangible personal property or taxable services purchased from out=of-state vendors is exempt from West Virginia use tax. (3) XYZ Corporation's renting from WVIJDC of tangible personal property that will be directly used in XYZ Corporation's manufacturing activity is exempt from West Virginia consumers sales tax. (4) The use in West Virginia by XYZ Corporation of tangible personal property which it leases from WVIJDC and will directly use in its manufacturing activity is exempt from West Virginia use tax. (5) The property of WVIJDC that is subject to the lease agreement with XYZ Corporation will not be included in either: (a) The property factor used to apportion XYZ Corporation's business income from West Virginia corporation net income tax purposes; or (b) The property factor used to apportion XYZ Corporation's tax base for West Virginia business franchise tax purposes, until the date upon which XYZ Corporation is obligated to pay WVIJDC rent with regard to such property. After such date, such property will be treated for purposes of both property factors as rented property and will be included in such factors if such property is used by XYZ Corporation in this State during the taxable year.DISCUSSION The first issue is whether XYZ Corporation must pay consumers sales and use taxes when it purchases, on behalf of its principal, tangible personal property or taxable services for use or consumption in or at the proposed manufacturing facility. The West Virginia Industry and Jobs Development Corporation (WVIJDC) "is created and established as a governmental instrumentality of the state of West Virginia to serve a public corporate purpose, to act for the public benefit and to act on the behalf of the state and its people in improving their economic welfare and prosperity." W. Va. Code § 5C-1-3(b). Sales of property or services to the State of West Virginia, its institutions or subdivisions, are exempt from consumers sales and use taxes under the provisions of W. Va. Code § 11-15-9(c) and 11-15A-3(a)(2) and (4). This exemption may be claimed by presenting a properly executed exemption certificate to the vendor of tangible personal property or taxable services who is required to collect consumers sales or use taxes. W. Va. Code § 11-15-9c and 11-15A-3c. Under the facts presented, legal title to all tangible personal property and the results of all taxable services purchased by XYZ Corporation as agent for WVIJDC will immediately vest in WVIJDC. We, therefore, conclude that purchases of tangible personal property and taxable services by XYZ Corporation in its capacity as agent for WVIJDC are exempt from consumers sales and use taxes under W. Va. Code § 11-15-9(c) and 11-15A-3c. To claim this exemption XYZ Corporation may either present to the vendor a properly executed exemption certificate in the name of WVIJDC signed by XYZ Corporation as agent for WVIJDC, or present XYZ Corporation's West Virginia direct pay permit number. We note that even if the agency relationship did not exist, XYZ Corporation would be exempt from consumers sales tax on purchases of tangible personal property or taxable services "directly used or consumed" in the activity of manufacturing, or contracting, as defined in W. Va. Code § 11-15-2(n). These are refundable exemptions, W. Va. Code §§ 11-15-9b and 11-15A-3b, unless a West Virginia direct pay permit number is given the vendor as provided in W. Va. Code § 11-15-9d and 11-15A-3d. The second issue is whether XYZ Corporation's leasing of real and tangible personal property from WVIJDC is exempt from consumers sales and use taxes. Under the agreements between XYZ Corporation and WVIJDC there are two different legal relationships between the parties. In the first relationship XYZ Corporation is the general contractor as well as agent of WVIJDC for purposes of constructing and equipping a specific manufacturing facility. In the second relationship, XYZ Corporation is the lessee of the finished manufacturing facility obligated to pay periodic rent to WVIJDC, the lessor of the facility. XYZ Corporation's lease of real property from WVIJDC is exempt from West Virginia consumers sales and use taxes, since the rental of real property is not embodied within the scope of either statute. See W. Va. Code §§ 11-15-3 and 11-15A-2. XYZ Corporation's lease of tangible personal property from WVIJDC is exempt from consumers sales and tax if the leased property is directly used or consumed in contracting or manufacturing activity. W. Va. Code § 11-15-9(g). This is a refundable exemption unless XYZ Corporation has a West Virginia direct pay permit number which it gives to WVIJDC. W. Va. Code §§ 11-19-9b and 11-15-9d. The third issue involves when XYZ Corporation should include the leased manufacturing facility in the property factor of its apportionment formula for purposes of the business franchise tax and the corporation net income tax. XYZ Corporation does business in more than one state and is subject to income taxes imposed by more than one state. Consequently, it is required to apportion its tax base as provided in W. Va. Code § 11-23-5, for purposes of the business franchise tax, and to allocate and apportion its adjusted federal taxable income as provided in W. Va. Code § 11-24-7, for purposes of the corporate net income tax. Both W. Va. Code §§ 11-23-5 and 11-24-7 specify that apportionment is to be made by using a three-factor formula (property, payroll and sales) in which the sales factor is double-weighted, unless the taxpayer either petitions for and receives approval to use another method of the Tax Commissioner requires use of another method. The property factor for purposes of the West Virginia business franchise tax and the West Virginia corporate net income tax is defined in W. Va. Code §§ 11-23-5(b) and 11-24-7(e)(1) which read as follows: Property factor. -- The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used by it in this state during the taxable year, and denominator of which is the average value of all real and tangible personal property owned or rented by the taxpayer and used by it during the taxable year, which is reported on Schedule L of Federal Form 1120, plus the average value of all real and tangible personal property leased and used by the taxpayer during the taxable year. (Emphasis added.) The operative word in the above quotation is the word "used." We conclude that the real and tangible personal property which is the subject of the lease will not be "used" until the date upon which XYZ Corporation begins to use the property under the lease agreement and becomes obligated to pay to WVIJDC rent with regard to the use of such property. Beginning on such date the leased real and tangible personal property must be included in the numerator and denominator of the property factor as provided in W. Va. Code §§ 11-23-5(c) and 11-24-7(e)(1). In summary, this Office confirms disposition of the five issues for which confirmation was requested. This Technical Assistance Advisory is issued under W. Va. Code § 11-10-5r and is subject to the accuracy of the representations contained in the request for its issuance. The conclusions of law reached in this Advisory are based on existing statutory law as interpreted by applicable administrative regulations or administrative decisions of this Office and any applicable case law decisions. Should the material facts or controlling law change in any manner, you may wish to seek clarification of this Advisory. Michael E. Caryl State Tax Commissioner Issued: May 31, 1988