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Sales & Use Tax Tips for June 2009
WHAT CONSTRUCTION CONTRACTORS AND SUBS NEED TO KNOW
Is it a capital improvement? When do we pay tax? Do we charge tax?
Many states provide sales and use tax exemptions for capital improvements. However, depending on the state, a contractor may be required to pay sales tax when purchasing materials. Alternatively, they may be allowed to use a resale or similar exemption certificate and then collect tax from their customers on materials. Further, labor charges may or may not be taxable, and it may depend on the type of project the construction contractor is completing.
A capital improvement generally occurs when the installation of tangible personal property (TPP) loses its identity as such and becomes real property. This can occur when the property is intended to be permanent and removal would cause substantial damage. However, each state�s definition may vary.
Be aware, that there�s also a recent push to treat even traditional capital improvements such as kitchen cabinets as TPP and thus deem them as taxable. This can lead to assessments for tax, interest and penalties for both contractors and subcontractors. Even if the contractor paid use tax when obtaining a building permit, they may not have covered what they thought was real property. The subcontractor may get hit for their whole invoice amount if labor and materials were lump summed vs. being separately stated. Contractors should also be aware that their customer�s tax exempt status does not generally flow to the contractor when making purchases for their customer.
Many states treat construction contractors as the end consumer of materials when the contractor is performing a capital improvement for a customer and will only allow the contractor to use a resale certificate under certain circumstances. For example, if a contractor is also a manufacturer of a product which it sells and installs (i.e. kitchen cabinets) the contractor should be able to purchase materials to manufacture the cabinets as a sale for resale using a resale certificate, but should self-assess use tax if installing the cabinets for a customer or collect tax from the customer if selling the cabinets at retail without installation.
Other states may treat the contractor as the end consumer of materials when completing a construction contract which results in the installation of tangible personal property or real property. In this type of state the contractor should pay tax to their vendor regardless if the job is classified as a capital improvement. Lastly, some states may require the contractor to collect tax from the customer regardless of the type of job being completed. Therefore, in order to limit any potential liability a contractor should know how each state the company does business in treats capital improvements. This proactive action could save a business from future tax assessments, penalties and interest.
For more on sales and use tax issues impacting contractors, please see the Construction Industry section under Who We Serve.
If you are concerned about how your company�s sales and use tax issues have been handled in the past, we suggest performing a Diagnostic Review to identify, quantify and fix problems going forward. Exposure Resolution options can be explored to resolve past hidden liabilities.
Click here for more Sales Tax Tips or visit our website www.oatax.com. For additional insight on common sales tax concerns, please see the Did You Know? section of our website.
Should you have questions or require assistance please Contact us today or call 1-888-466-2829 to speak with an Olivier &
Associates Sales and Use Tax professional for a no-obligation consultation about your Sales & Use Tax issues.
* This tip is intended to provide general information only and is not to be considered as a substitute for professional advice.
