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In "What is a sales tax" we defined a sales tax as being a tax on the sale of tangible personal property at retail. Therefore the sale of real property is not subject to a sales or use tax. However, all the materials that go into building real property is tangible personal property before it's installed. Therefore, building materials are subject to sales and use tax law.
Materials: The issue is who is the end user of the building materials? Is it the contractor who constructs the real property or is it the property owner who owns the real property once it's built? Of course the answer depends on the state where the construction is taking place. This is a very important issue because it affects the taxable measure, or taxable basis, of the building materials. The difference in the tax basis can result in a substantial difference in tax dollars. In certain states the contractor is considered to be a retailer and therefore buys the materials using a resale certificate and charges tax to the property owner on the full contract amount. In these states they are not only taxing the contractor's cost of the materials but also the labor to install them and the contractor's profit.
In other states, contractors are considered the end user of the building materials and pay tax when they purchase the materials. This cost will be passed on to the property owner as part of the bid, but these states are taxing the materials based on the contractors' cost without taxing installation and profit. In yet other states, the taxable party is determined by the structure of the contract between the contractor and the property owner. If the contract is a lump sum contract, the contractor is considered the end user. But if the contract is a time & materials, or "cost plus" contract, the property owner is considered the end user. This is a very important distinction. If the contractor is the end user, the taxable basis of the materials is the contractor's cost. If the property owner is the end user, then the taxable basis is the contractors' cost plus mark-ups (and sometimes installation charges). The result is significant when it comes to the ultimate cost of a project. Consider the tax consequences related to the type of contracts you enter into.
In the states where the contractor is the end user, remember they pay the tax when they buy the materials. Therefore, the property owner "should not" accrue and pay the use tax on the materials. Installation of real estate Vs installation of personal property: The contractor is only considered the end user of materials that, once installed, become real property. If the materials remain tangible personal property once installed, then the contractor is considered a retailer and must charge his/her customer tax on the full retail value of the installed items. Real property is generally defined as any property that is relatively permanently affixed to land. Personal property is any property that is not real property. States will evaluate the status of installed property. They will look at issues such as how much damage would be done by removing the property. If substantial damage would be done to the remaining real property then the item being removed would also be considered real property. They also consider the usability of the real estate should the property be removed. For example, a light fixture in a ballroom might not be considered essential to the use of the facility as a ballroom and thus the fixture may be characterized as tangible property even after it is hung from the ceiling.
Installation labor: The labor to install the materials into real property, in most states, is non-taxable. However, in some states the labor to repair, renovate, or remodel real property is a taxable service. Labor to install materials into new or original construction is generally not taxable. Careful research must be done to determine what they mean by "new" or "original" construction. Companies may be able to recover thousands of tax dollars overpaid on their construction activities. As you navigate this minefield keep us in mind as a resource to help you minimize your tax liability and risk.
Feel free to call or e-mail us to discuss any tax issues you may have.
Sales Tax Advisors, Inc.
|Last modified on Sun May 17 2015 01:02:37 MST.|
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