Multi-State Sales Tax Considerations for Construction Companies Protect your business from varying tax laws

Transcription

1 Multi-State Sales Tax Considerations for Construction Companies Protect your business from varying tax laws

2 According to the U.S. census department s annual state tax collections report, 47.5% of total state government collections across the United States during 2014 came from general and selective sales and use tax and gross receipts taxes. In comparison, corporation net income taxes generated 5.3% of state tax collections and individual income tax generated 35.9%. This makes sales and use tax one of the bigger state tax obligations for many businesses. When construction companies are operating throughout multiple states, it is important to avoid the trap of trying to apply the company s home state sales tax rules to out-of-state sales and use tax compliance. Each state has its own set of sales and use tax rules and regulations. For sales tax purposes, there are certain instances in which it may be advantageous for the company to structure construction contracts differently or adjust their practices to minimize sales tax liability. Some of these benefits can easily be overlooked by Minnesota companies, for example, because Minnesota s rules do not apply distinctions to contract types in the same manner as other states do. Most states do not require the contractor to charge sales tax on construction services, or they only require sales tax to be charged on specific types of construction services. Construction Contracts: Contractor as Consumer vs. Retailer Contractors can be taxed as either consumers or retailers with respect to sales tax on the materials consumed and incorporated into the real property construction and/or improvements. Most states tax contractors as consumers of materials incorporated into their jobs. This means that contractors must generally pay sales tax when they purchase the materials. In such cases, no sales tax is required to be remitted or charged to the customers on the sales price of those materials. In addition, most states do not require the contractor to charge sales tax on construction services, or they only require sales tax to be charged on specific types of construction services. A small amount of states tax contractors like retailers where the contractors buy materials for the job tax-free and generally must charge sales tax to the customers on such materials. Other states may consider one contractor to be a retailer and another construction contractor to be a consumer. That determination can be based on various factors. For example, in Mississippi, contractors are generally treated as retailers with respect to a project if the consideration for the contract exceeds $10,000. In Nebraska, contractors make an election to be taxed either as a consumer or as a retailer. In some states, the determination of whether the construction contractor is considered to be a retailer or a consumer can vary based upon the type of the contract. In Colorado, when engaging in a lump-sum contract, a contractor is deemed to be the consumer of the materials incorporated into the realty. When engaging in a time and materials contract, the contractor is deemed to be a retailer of the materials, and must charge tax on the billing price for such materials. Redpath and Company Multi-State Sales Tax Considerations for Construction Companies Page 2

3 In some states, the determination of whether the construction contractor is considered to be a retailer or a consumer can vary based upon the type of the contract. Though there may be some variation in how a state defines and uses these terms, in general a lump-sum contract provides a single stated lump sum price for materials, supplies, and labor. Time and materials contracts list and provide a cost for the materials (and/or fixtures) and labor separately. Florida only considers contractors to be retailers when they are engaging in what they term a retail sale plus installation contract. A retail sale plus installation contract is for improvements to real property in which the subcontractor or contractor agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and completes the work either for an additional agreed upon price or on the basis of time consumed. If any portion of the materials used are not itemized, then the contract is not considered a retail sales plus installation contract. To minimize the amount of sales tax incurred on a job, it is generally more advantageous for the contractor to be taxed as a consumer of materials. When a contractor is taxed as a retailer, they must remit the sales tax on the contract price for materials, which will include markups on those materials, and may also include overhead, supplies, and labor. Whereas when a contractor is taxed as a consumer of materials, they are only required to pay sales tax on the cost at which they acquire the materials consumed and incorporated into the job. It can be beneficial to review a state s rules on this to determine whether there are opportunities to cut costs and make lower, more competitive bids using a lumpsum, cost-plus, or guaranteed-price contract. State Exemptions There are some instances in which a customer may be exempt from sales tax. For instance, most states have exceptions for government or certain non-profit organizations. When performing work for an exempt customer, a contractor taxed as a retailer may not have to charge the customer sales tax, provided they obtain a valid exemption certificate from the customer. Generally the taxexempt customer is able to purchase materials and possibly supplies and equipment for the job tax-free. However, in many states when a construction contractor is treated as a consumer with respect to a contract with an exempt customer, the construction contractor is unable to buy the materials and supplies to be used in the project tax-free. In these states, it can be advantageous to have the exempt customer buy the materials directly. Generally the tax-exempt customer is able to purchase materials and possibly supplies and equipment for the job tax-free. A few states do allow the contractor to purchase the materials tax-free subject to certain exceptions and limitations. For example, Iowa will allow a contractor or subcontractor to purchase materials, supplies, and equipment for use in the performance of a construction contract with a designated exempt entity without tax liability provided they obtain a purchasing agent authorization letter and exemption certificate from the designated exempt entity. Redpath and Company Multi-State Sales Tax Considerations for Construction Companies Page 3

4 In most of the states where construction contractors are taxed as retailers, subcontractors may be able to obtain exemptions (such as resale exemptions). Subcontractors In most states, the definition of a construction contractor includes both a prime contractor and a subcontractor. Each party is responsible for collecting sales tax, or paying sales or use tax, on the portion of the project they are responsible for. In most of the states where construction contractors are taxed as retailers, subcontractors may be able to obtain exemptions (such as resale exemptions). Where the contractor is a consumer, the subcontractor is generally considered the same and taxed as the ultimate user or consumer of all materials or supplies incorporated into the real property. There are some states where the subcontractor and the prime may be treated differently depending on the differences in the contracts between the two parties, as well differences in contracts between the prime and the customer. Tangible Personal Property vs. Real Property The classification of retailer vs. consumer can vary based on the type of property being installed or constructed, as well as the type of construction being performed. When dealing with tangible personal property installed under a construction contract, in many instances if the property retains its character as tangible personal property after the construction, this can cause the contractor to be liable for sales tax as a retailer. The rules and definitions vary by state and are beyond the scope of this article. It is important to take a look at the rules of the state in which you are operating to determine the taxability of such items. When evaluating sales tax compliance and best practices, it can be very beneficial to consult a trusted sales tax advisor or sales tax consultant, especially if you are unfamiliar with the rules and regulations of states in which you are operating in. For many companies, their state sales tax obligations can actually exceed their state income tax obligations. Penalties in the sales tax area are high and staying compliant with each states rules is key. In addition, there are several ways companies can work to minimize these obligations, only a few of which were discussed in this article. The information provided in this document does not constitute legal, accounting, or financial advice and is offered as a source of information only. Those seeking specific advice should contact a professional advisor. Laws, rules, and regulations can vary widely based on the specific facts involved. Given the changing nature of laws, rules, and regulations, the information in this document is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. It should not be used as a substitute for consultation with professional accounting, tax, legal, or other professional advisors. Redpath and Company is not responsible for any errors or omissions, or for the results obtained from the use of this information. Redpath and Company Multi-State Sales Tax Considerations for Construction Companies Page 4

5 For more information, contact Christina Brooks at or call Christina Brooks has been working as a tax advisor to closely held businesses and their owners in the construction industry as well as other industries for over 8 years. She works in the Business Tax Service Area at Redpath and Company in White Bear Lake, Minnesota. CHRISTINA M. BROOKS, MBT, CPA BUSINESS TAX SERVICES P: E: CBROOKS@REDPATHCPAS.COM Redpath and Company is 100% employee-owned (ESOP) and a leading accounting firm providing proactive, innovative, and value driven CPA services for closely held businesses. The firm started operations in 1971 and has steadily grown ever since with 100% of firm growth being organic. Redpath and Company provides audit, tax, benefits and compensation administration, international consulting, mergers & acquisitions, succession and estate planning, and valuation services. With headquarters in downtown St. Paul, Minnesota, and over 145 employees, the firm ranks as one of the top CPA firms in the Twin Cities area. 55 East Fifth St., Suite Redpath and Company. All Rights Reserved. Redpath and Company Multi-State Sales Tax Considerations for Construction Companies Page 5