Construction Contracts with Designated Exempt Entities
Designated exempt entities awarding construction contracts may issue special exemption certificates to contractors and subcontractors, allowing them to purchase, or withdraw from inventory, building materials for the contract free from sales tax.
Nonprofit hospitals are NOT designated exempt entities for this purpose.
This special exemption certificate will also allow a manufacturer of building materials to consume materials in the performance of a construction contract with a designated exempt entity, without owing tax on the fabricated cost of those materials.
The exemption certificate process works as follows:
Designated exempt entities register contracts, including information on contractors and subcontractors, through an online application developed by the Iowa Department of Revenue.
Designated exempt entities provide each contractor/subcontractor with an exemption certificate/authorization letter developed exclusively for this purpose. These are printed directly from the online application. The letter/certificate can be obtained only through this application.
Contractors and subcontractors give a copy of the certificate to each of their material suppliers. This allows them to purchase building materials for the contract free from sales tax.
Suppliers should retain this certificate in their records for at least three years.
The exemption certificate option benefits designated exempt entities in several ways:
Contracts with exempt entities will not include Iowa sales tax, which will lower the dollar amount of bids.
Designated exempt entities will not need to obtain Contractor Statements after the project is completed.
Designated exempt entities will not need to apply to the Iowa Department of Revenue for a refund of Iowa sales tax.
This online service is for use by designated exempt entities only. It will generate exemption certificates to be distributed by the exempt entity to contractors and subcontractors.
Designated exempt entities who wish to use the exemption certificate option but do not have Internet access may want to consider a convenient local site such as a library.
The exemption certificate process is an option; exempt entities may also use the claim for refund process.
The claim for refund process works as follows:
The contractor pays Iowa sales tax on all building materials and includes that cost in the bid.
The contractor then submits a "Contractors Statement" (form 35-002pdf) to the exempt entity documenting the amount of Iowa sales/use tax paid on the contract materials incorporated into real property.
The exempt entity applies to the Iowa Department of Revenue for a refund of that tax by using the "Construction Contract Claim for Refund" (form 35-003 pdf).
Note: The claim for refund process must be used when the contract is with businesses in economic development areas or rural water districts organized under Iowa Code Chapter 504A. They do not qualify as "designated exempt entities".
Designated exempt entities should notify all potential bidders which option they are using, so contractors can make bids with or without sales tax included.
In addition, anyone interested in tax information relevant to contractors and exempt entities should sign up to receive news by email.