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February 23, 2019 1:13pm

Senate Bill 147 cuts red tape for contractors and nonprofits

An important piece of legislation in the State Senate would make a slight adjustment to state law but have a big, positive impact on the construction industry and nonprofit tax-exempt organizations.

Senate Bill 147, sponsored Senate Appropriations & Revenue Chairman Chris McDaniel, would allow a nonprofit’s exemption from the state sales tax to pass through to a contractor when the contractor goes to purchase construction materials for the nonprofit’s project. It would also apply to projects for exempt federal, state, and local government agencies. This would cut red tape and remove a costly administrative burden for both contractors and tax-exempt organizations.

Under current Kentucky law, if a construction contractor has a contract with a charitable, educational, or religious organization, any construction materials directly purchased by the contractor would be subject to the state sales tax. That tax would then be passed onto the customer, indirectly subjecting a tax-exempt entity to the sales tax.

A commonly-used workaround is for the tax-exempt organization to purchase materials directly from a supplier, but this results in an unnecessary and costly administrative burden for both the contractor and the customer. It requires the nonprofit to establish new accounts with new suppliers, review and approve multiple invoices, and ultimately take time away from its core mission. At the same time, it requires the contractor to track invoices and manage multiple supplier accounts, effectively forcing the contractor to play the role of a middleman in addition to running their business and ensuring the fulfillment of their contract.  


In many other states, this process is much simpler. The exempt status of the tax-exempt organization is allowed to pass through to the contractor for the purposes of the project. This is the case, for example, in Indiana, Ohio, and Missouri. In fact, around 20 states throughout the country handle construction projects for tax-exempt organizations in this manner.

Senate Bill 147 would simply follow the lead of these states in allowing the exempt status of a tax-exempt organization to pass through to a contractor for purchasing materials to be incorporated into their project. In doing so, the bill removes an anti-business administrative burden and reinforces Kentucky laws exempting eligible nonprofits and governmental agencies from the state sales tax.

The Greater Louisville business community strongly support passage of Senate Bill 147 in the 2019 Regular Session.