11­15­8a(b)(3) to capital improvement for which certificate of need was issued by West Virginia Health Care Cost Review Authority This technical assistance advisory, issued pursuant to W. Va. Code § 11-10-5r, concerns the application of the consumers sales and service tax and use tax (collectively "consumers sales and use taxes") transition rules in W. Va. Code § 11-15-8a to a capital improvement for which a Certificate of Need was issued by the West Virginia Health Care Cost Review Authority. This advisory is based upon the following facts: A nonstock, nonprofit corporation operates an acute health care facility located in West Virginia. In 1988, the corporation received a Certificate of Need from the West Virginia Health Care Cost Review Authority ("HCCRA") approving a proposed surgery addition and renovation project for the primary purpose of upgrading and modernizing its surgical suite and central sterile facilities (hereinafter the "Project"). The Project will involve the construction of a new operating suite in a new building addition to an existing hospital building; renovation of existing operating room space in the hospital building into a surgical support space (i.e., the post anesthesia care unit, pre-operative area, outpatient surgery, anesthesia, minor procedures rooms, locker rooms, and lunges); the addition of mechanical support systems to service the new suite and support space; construction of new shell space on the first floor of the hospital building; and the renovation and addition of space in the basement of the hospital building for central sterile and storage/receiving. West Virginia's "Certificate of Need" law, W. Va. Code §§

16­2d-1 to 16-2d-15, provides that a "new institutional health service may not be acquired, offered or developed within this state except upon application for and receipt of a certificate of need...." W. Va. Code § 16-2d-3. A "new institutional health service" includes "[a]ny obligation for a capital expenditure incurred by or on behalf of a health care facility in excess of the expenditure minimum" established by HCCRA. Id. Because the cost of the Project is in excess of the expenditure minimum, the corporation was required to obtain HCCRA's approval of the Project through the certificate of need process before incurring in the obligation to construct the Project. The corporation intends to complete the Project by contracting with a "construction manager" (hereafter the "Construction Manager") who will guarantee construction of the Project for a maximum price. The Construction Manaer will enter into subcontracts for various portions of the Project. These subcontracts will be between the Construction Manager and subcontractors, and the Construction Manager will not be acting as the corporation's agent in entering into such subcontracts. If the Project is completed at a cost less than the guaranteed maximum price set forth in the construction management agreement, the corporation realizes a cost savings. If the maximum price is exceed, the Construction Manager is responsible for payment of the excess cost. The corporation anticipates that the contract with the Construction Manager will be executed prior to September 1, 1989. However, it is anticipated that not all of the subcontracts will be executed prior to September 1, 1989. The issues presented for ruling are as follows: (1) Whether amounts paid the Construction Manager pursuant to the construction management agreement will be exempt from consumers sales and service tax and use tax (collectively "consumers sales and use taxes") because the contract is for the providing for tax exempt contracting services? (2) Whether, assuming the construction management contract is executed prior to September 1, 1989, the Construction Manager's purchase of tangible personal property or taxable services directly used or consumed in a contracting activity resulting in the construction of the Project will be exempt from consumers sales and use taxes under the transition rules set forth in W. Va. Code § 11-15-8a? (3) Whether tangible personal property or taxable services purchased by a subcontractor in fulfillment of a written subcontract with the Construction Manager relating to the construction of the Project will be exempt from consumers sales and use taxes under the transition rules set forth in W. Va. Code § 11-15-8a provided they are directly used or consumed in a contracting activity in the fulfillment of such a subcontract? (4) Whether such purchases by a subcontractor will be exempt regardless of whether the subcontract is executed after August 31, 1989. This ruling is sought because Committee Substitute for Senate Bill No. 1, which was enacted January 31, 1989, and effective March

1, 1989, repealed the former exemption from consumers sales and use taxes for purchases of tangible personal property and taxable services directly used or consumed in a contracting activity. A number of transition rules were provided in W. Va. Code § 11-15-8a which effectively preserved the pre-March 1, 1989, exemption with respect to certain contracts. The corporation asserts that transition rule 11-15-8a(b)(3) applies to the Project. This transition rule reads: Tangible personal property or taxable services purchased by a contractor for use in fulfillment of a written contract entered into before the first day of September, one thousand nine hundred eighty-nine, when such contract is for the construction of anew improvement to real property the construction or operation of which was approved by a federal or state regulatory body prior to the first day of February, one thousand nine hundred eighty-nine. The definition of "contracting" in W. Va. Code § 11-15-3 (o), as well as the transition rules in W. Va. Code § 11-15-8a, were amended by Committee Substitute for Senate Bill No. 303, which took effect July 1, 1989. The amendment to section 11-15-8a does not affect or apply to the facts and issues presented for ruling. The amendments to the definition of contracting apply to contracts for contracting services entered in on or after July 1, 1989. The effect of these amendments was threefold. First, whether an activity is contracting now turns on what is being done, not how the activity is billed. Second, work that does not result in a capital improvement to a building, structure or real property is not contracting. Third, by specific statutory exception, the sale of certain types of tangible personal property from the inventory of a retail merchant coupled with the incidental installation thereof by the retail merchant or his subcontractor is not contracting. To illustrate, although the sale and installation of wall-to-wall carpeting results in a capital improvement, the sale and installation of wall-to-wall carpeting by a retail merchant of carpeting is never contracting, even when the carpeting and its installation by the retail merchant are purchased by a contractor in fulfillment of his contract for a capital improvement to a building. On July 5, 1989, the West Virginia Department of Tax and Revenue filed emergency consumers sales and use tax regulations reflecting the 1989 legislative amendments to those laws. We believe these emergency legislative regulations, which took effect when they were filed in the State Register, address all of the issues raised in your letter. General rules relating to contracting are found in 110 C.S.R. 15, § 107, at pages 134 - 151. Other rules relating to contracting are found in 110 C.S.R. 15, §§ 8a, 8b, and 108 through 117. Under the facts presented, the Project is to be constructed by a person who is denominated a "construction manager." That work falls squarely within the definition of "contracting," 110 C.S.R. 15, § 107.2.1, at page 135. (The term "capital improvement" is defined in 110 C.S.R. 15, § 107.3.3, at page 141-142.) The denominated construction manager's responsibilities make him a contractor for consumers sales and use tax purposes, see 110 C.S.R. 15, § 107.2.2 at page 135, rather than a "construction manager" as that term is defined in 110 C.S.R. 15, § 107.3.8, at page 144. The terms "general contractor," "prime contractor" and "subcontractor" are defined, respectively, in 110 C.S.R. 15, § 107.3.16, at page 147; § 107.3.22, at page 148; and § 107.3.27, at page 149. If the contract between the contractor (denominated construction manager in the facts presented) and the corporation is executed before September 1, 1989, it will fall within the transition rules resulting in taxability being determined under pre-March 1, 1989, rules. See 110 C.S.R. 15, § 108.5.4, at page 155, which specifically grandfathers construction projects approved prior to February 1, 1989, by the West Virginia Health Care Cost Review Authority when the construction contract is executed before September 1, 1989. Purchases of tangible personal property or taxable services by a subcontractor will be treated for consumers sales and use tax purposes in the same manner as purchases of the prime contractor will be treated for a particular contract. In other words, if the purchases of the contractor are grandfathered under 110 C.S.R. 15, § 108.5.4, purchases of the subcontractor will also be grandfathered. This result applies even where the subcontract is executed after August 31, 1989, provided the prime contract was executed prior to September 1, 1989. In summary, all of the questions raised are answered in the affirmative. Charles O. Lorensen State Tax Commissioner Issued: July 31, 1989