CONSTRUCTION Accounting ARTICLE - Sales and Use Tax Rules Are More Strict Than Ever

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

Paying taxes is never fun. For contractors who cross state lines, however, it can be a particularly confusing process. Sales and use taxes for construction projects differ from state to state, and states require companies to track what they owe. Perhaps it’s enough to make you ignore the issue entirely and let the chips fall where they may when it comes to settling up with state tax authorities.

That’s probably not a good idea. With states searching for extra revenue to plug their growing budget gaps, some are enforcing their sales and use tax rules more strictly than ever. So it’s critical to get and stay up-to-date on sales and use taxes to avoid getting tangled in the web so often spun by out-of-state jobs.

Review the basics

Contractors generally owe sales tax. It’s paid to an item’s seller at the time of purchase, for the cost of materials, supplies, equipment and services that are bought, rented or used on a job. This is because states consider materials used in construction to be tangible personal property, which is taxable, and the contractor to be the final user who converts that tangible property into real property.

In contrast, contractors typically don’t charge sales tax on completed projects because some states consider a completed building or renovation to be nontaxable real property, not tangible personal property. If you provide real estate repairs or maintenance services, however, some states may require you to collect sales tax from customers for materials and parts, because those repairs may be considered tangible personal property and taxable.

If you charge sales tax for materials used in your services, some states require a seller’s permit. Check into whether this prerequisite may apply to any out-of-state job you’re considering.

Be consistent

Contractors may have to pay use taxes directly to the government when buying equipment or materials from an out-of-state vendor that isn’t required to charge sales tax or that charges a lower sales tax. Sometimes use taxes come up for contractors when crossing state lines for a construction project as well.

Like sales taxes, use taxes are generally due on any materials or supplies used on the job. If you pay sales tax on an item and the item is used in a project elsewhere, you’re still responsible for paying use tax but you may be entitled to a credit for the amount of the original sales tax paid.

Sales and use taxes aren’t cumulative, though. So if you pay use tax on an item, you generally can get your sales tax back for it. Say you buy drywall materials in State A and use them on a job site in State B. In this case, you’d have to pay State B’s use tax, but you’d generally receive a credit for the sales tax you already paid in State A on the items.

Contractors are responsible for calculating and submitting their use taxes to the right place, so work with your tax advisor to make sure your numbers are accurate and your documentation is going to the proper parties.

Know your exemptions

Sales and use tax exemptions can translate into huge savings for you. One that every contractor should look for is the exemption for government or nonprofit work.

States can’t impose taxes on the federal government, and some states allow exemptions for themselves, local municipalities and nonprofit organizations. Contractors who act as agents for government agencies or nonprofit organizations can often be exempt from sales and use taxes on their projects’ materials and supplies. The definition of “agency” is specific in most cases and not all states allow an exemption for an agent, so check into this matter before you bid.

In addition, some states offer exemptions on other types of purchases, such as items destined for inventory and capital equipment. Your CPA can help you identify these exemption opportunities.

Stay on top

Staying on top of your tax responsibilities remains a critical way of ensuring that any job you undertake is as profitable as it can be. That said, sales and use taxes are an extremely complex area, and this article only touches on some of the many issues that affect it and your specific liability on any given project. Consult with a tax advisor who knows the sales and use tax laws in the states where you operate to ensure you’re fulfilling your obligations yet not paying more than is required.

3 tips for easing your sales and use tax burden

1. Design your invoices in a way that reduces the taxable part of a purchase. For example, some states don’t tax delivery charges when they’re invoiced separately from other taxable charges. Reach out to your suppliers and ask them how they handle sales and use taxes and whether they might have some advice for you.

2. Retain resale or exemption certificates. These allow you to avoid paying or charging sales or use tax on related purchases. If you’re audited and haven’t paid taxes for some transactions, you’ll need to prove you weren’t required to do so.

3. Ask your tax advisor to double-check your work. He or she can point out possible exemptions you may have missed out on. Some states, for instance, will provide refunds for up to four years after a qualifying purchase. Your tax advisor may also be able to assist you in determining how to account for sales and use tax liability in your bids.

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