The Minnesota Department of Revenue released guidance on when contractors can make exempt purchases on behalf of exempt entities.
Minnesota generally requires contractors to pay tax on all materials used to fulfill a construction contract. However, if an exempt entity makes the contractor its purchasing agent for a contract, the contractor can make these purchases exempt from tax. Exempt entities include governments and nonprofit organizations. For a contractor to be a purchasing agent, (1) the contract cannot be lump sum and (2) the building they alter or construct must be principally for the exempt entity"s use.
To make a contractor a purchasing agent, an exempt entity must (1) have initially advertised for separate bids for materials and labor, (2) have the option to accept bids for materials and labor separately, and (3) issue separate contracts for materials and labor. In addition, the contract must contain certain provisions on ownership of materials and risk of loss.
Contractors making exempt purchases must let vendors know that the exempt entity is responsible for making payments.