The tax benefits related to some Keystone Opportunity Zones (KOZ), Keystone Opportunity Expansion Zones (KOEZ), and Keystone Opportunity Improvement Zones (KOIZ) are set to expire on December 31, 2010. Recently, the Pennsylvania Department of Revenue provided some guidance regarding sales and use tax issues related to KOZ exit dates and the termination of sales and use tax exemptions in a Tax Update newsletter.
Construction Contracts with a Business Located within a KOZ
Contractors entering into and bidding on contracts where the expiration date of the KOZ occurs before the completion of the project must be aware that the KOZ exemption applies only to those purchases that are both completed and consumed within the KOZ prior to the expiration date of December 31, 2010.
The exemption will not apply to any purchases consumed after the expiration date regardless of when the contract was signed or when the materials were purchased. Even if the contract was signed and all the required materials were purchased prior to the expiration date, the exemption will only apply to those purchases that are consumed before the expiration date. All materials purchased prior to but consumed after the KOZ expiration date will be subject to use tax.
Thus, contractors, when bidding on projects that are beginning before but concluding after the KOZ expiration date, must be mindful of the materials that will be consumed before and after the expiration date and calculate the tax accordingly.
Purchase Contracts and Post Expiration Date Use
Businesses located within a KOZ that have purchase contracts must notify their vendors of their KOZ expiration date. Surplus materials stored on site in the zone after the expiration date are subject to use tax, even if they are purchased prior to the expiration date. Failure to notify vendors of the expiration date and the continued use of the certificate beyond the expiration date could result in civil penalties along with repayment of the tax and a possible business audit.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.