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, supplies, equipment, and services for the contract free from sales tax.

This special exemption certificate will also allow a manufacturer of building materials, supplies, and equipment 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:

1. Designated exempt entities register contracts, including information on contractors and subcontractors, through an online application developed by the Iowa Department of Revenue.
2. 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.
3. Contractors and subcontractors give a copy of the certificate to each of their material suppliers. This allows them to purchase building materials, supplies, equipment, and services for the contract free from sales tax.
4. 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.

To register as a Designated Exempt Entity, you will need an active GovConnectIowa web logon and be connected to your tax account. 

After creating a web logon and connecting to your tax account, use the following instructions to submit your Designated Exempt Entity registration application:

1. Log in to your GovConnectIowa account
2. Click Register as an Exempt Entity located on the I Want To… tab
3. Click Submit

Applications will be submitted to the Department for review. The Department may request additional information or documentation before making a determination about designated exempt entity status. GovConnectIowa will notify you of the Department’s decision via the Action Center tab. If approved, the I Want To… tab will be updated with the following options: 

• Add Exempt Project
• View/Update Projects & Print Certificates

Access GovConnectIowa

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:

1. The contractor pays Iowa sales tax on all building materials and includes that cost in the bid.
2. The contractor then submits a "Contractors Statement" Iowa Contractor's Statement (35-002)  to the exempt entity documenting the amount of Iowa sales/use tax paid on the contract materials incorporated into real property.
3. The exempt entity applies to the Iowa Department of Revenue for a refund of that tax by using the "Construction Contract Claim for Refund" Construction Contract Claim for Refund (35-003)

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.

Contractors Will Continue to Pay Sales Tax On Items that Do Not Become Part of the Realty Being Constructed.

Examples include:

• Barricades
• Building equipment*
• Compressors
• Cranes
• Drill press
• Dynamite
• Electric generators
• Forms
• Fuel
• Hand tools
• Lathes
• Lodging
• Machinery*
• Pile drivers
• Replacement parts for equipment
• Scaffolds
• Stakes
• Tools
• Utilities
• Vehicles, including grading, lifting and excavating vehicles
• Warning lights

* Machinery or other equipment that remains tangible personal property rather than becoming part of real property may be purchased by the contractor tax free for resale. However, it must be separately itemized and transferred to the exempt entity.

Certain construction-related equipment purchased by contractors is not subject to local option tax but is subject to a state 5% excise tax.

Rental of Construction Equipment

The contractor must pay sales tax on any building equipment that is purchased by them but may rent certain building equipment exempt from sales tax if conditions are met.

Rental of the following is exempt when used in new construction, reconstruction, alteration, expansion, or remodeling:

• Self-propelled building equipment (does not include vehicles subject to registration)
• Self-constructed cranes
• Pile drivers
• Structural concrete forms
• Regular and motorized scaffolding
• Generators
• Attachments customarily drawn or attached to the above
• Auxiliary attachments which improve the performance, safety, operation or efficiency of the equipment and replacement parts
• Compressors
• Drill presses
• Forms other than structural concrete forms
• Tools, including hand tools
• Lathes