Welcome to “Construction Contractor Issues.” My goal for this blog is to bring some clarity to the varying tangles of multi-state sales and use tax rules that afflict the construction industry.
Although the wording may differ in each state’s statutes, virtually all sales tax administrative agencies define construction contractors as businesses that convert tangible personal property into real property. Unfortunately, everything starts to diverge
from that point forward. Even some of the criteria that define tangible personal property, real property, and tangible property in general may be inconsistent from state to state, and that’s only the beginning.
In most states, construction contractors are considered consumers (end users) of materials they install, but in a few states (Arizona, Hawaii, New Mexico, and Washington) they
are regarded as retail sellers. In addition, at least half of the states that treat contractors as consumers have exceptions to that rule. The exceptions may relate to the nature of the property installed (fixtures versus materials, subject to varying definitions), the type of improvement to realty (capital improvement versus repair or remodel), the structure of the contract (lump-sum versus time and materials, etc.), and a host of other factors.
A majority of the states exempt construction-related services (installation, project management, engineering, architecture, site clean-up and trash removal, maintenance, and storage), but a significant minority taxes one or more of these activities. As with installed property, the taxability may vary with the type of improvement, the nature of the property installed, the structure of the contract, and other particulars.
Here are some of the issues we’ll be looking at:
- When, where, and to what extent are contractors regarded as consumers of the fixtures and materials they install? When, where, and to what extent are they regarded as retailers? What difference does it make, anyway? (Hint – a big difference.)
- In which states does installation create nexus? (Easy answer: in all states that have enacted sales and use tax laws.)
- When and where are construction-related services subject to sales and use tax? Which services are taxable in the applicable states, and to what extent?
- What exemptions and exclusions are available to contractors, and in which states? What are the requirements for exemption?
- How does the form and wording of a contract affect sales and use tax liability, and how do the effects differ from state to state?
- Where and how are subcontractors treated differently from prime contractors?
- How does the tax apply to contractors whomanufacture the materials or fixtures they install, and how does the treatment differ from state to state?
- When are projects that are performed for nonprofit and/or government agencies exempt? Which agencies qualify, and in what states? What are the requirements for exemption?
- How are construction contractors audited for sales and use tax purposes? How do you prepare for an audit, and what are the hot-button issues?
These are just a few of the topics that I plan on covering in this blog. (BTW - How does that list look to you? Let me know if you have any items to add...)
I’m always open to your input, suggestions and comments. I look forward to your participation.
Other recent “Construction / Contractor Tax” posts by Dan Davis:
- Arizona's New Contractor Tax Rules: Watch for Misleading Terminology!
- Contractors: Watch Out for Arizona Tax Changes
- Construction Contracts with Exempt Entities (State Breakdown)
- Supporting Your Exemptions: Acceptable Documentation
- Common Construction Exclusions and Exemptions