(Under R.C. 5739.01(B)(5), construction services are not subject to sales tax in Ohio. Not all improvements to real property constitute construction services, however. As the following “Three Little Pigs” story shows, a contractor is required to charge Ohio sales tax on the sale and installation of carpet and “business fixtures,” which is defined in R.C. 5701.03(B).
Once upon a time, in a fairytale land located within the jurisdiction of the Ohio Tax Department, three little pigs—Heimlich, Horst, and Dieter—each were contemplating new locations for their respective offices. Heimlich decided “Ya, new construction is the way to go,” so he bought some land and contracted with a developer to construct an office building. For flooring, Heimlich selected slate tile for the entry way and off-white shag carpeting for the remainder (think long-haired mountain goat).
Horst decided “Ya, I also want new construction,” but he wanted a more rustic look. He had oak-patterned laminate flooring installed. He knew the sound of hoofs on such a hard surface would create a lot of noise, though, so he also had thin, suede-like acoustical fabric installed on the walls to absorb the sound. It was a black and white cow pattern. Moo.
Dieter owned his current location and decided “Ya, I shall stay where I am,” but he had new carpet installed. Nothing fancy. For his employees, he also installed a basketball hoop at the back edge of the parking lot.
None of the contractors charged Heimlich, Horst, or Dieter sales tax. Two years later, they each were audited for use tax by the same auditor. When the auditor completed the initial findings, he called the three together...
Before I provide the results, I’ll cover the law regarding improvements to real property (called a construction contract). R.C. 5739.01(B)(5) says the contractor is the consumer of the materials, so the contractor has to pay sales tax, and you don’t. The contractor undoubtedly passes this cost on to you, but if the contractor fails to pay the sales tax, you’re not liable for it.
There are two exceptions to this general rule:
1) The first is for carpet. Under R.C. 5739.01(B)(5), Ohio generally considers the purchase and installation of carpet not to be a construction contract. So, in this situation the contractor is the seller, not the consumer, and has to charge you sales tax, and if the contractor doesn’t, you’re both on the hook. When the contractor buys the carpet, the contractor can hand the carpet seller a resale certificate and won’t be charged tax.
There’s an exception to this exception, however. If you’ve contracted to have a home or building built that will have carpet in it, and neither the contract nor the contractor’s billing separately states a charge for the carpet and installation, Ohio generally considers the contract to be solely a construction contract. Had the carpet and installation been separately stated, however, that charge would have been subject to tax.
This carpet exception doesn’t apply to any other flooring. (I guess the carpet lobby slept in that day.) So, tile, linoleum, wood, cork, laminate . . . the sale and installation of any other flooring is considered a construction contract.
2) The second exception is business fixtures.
As we return to this tax tale, the auditor explains his findings to Heimlich, Horst and Dieter.
Under R.C. 5701.03(B), business fixtures are things attached to real property that benefit the business more than they benefit the land. Think of a gun store with an indoor shooting range. The range is attached to the building, which is attached to the land, but the range has no use to any business other than a shooting range, so it’s a business fixture. Other examples include machinery and equipment, signs, storage bins and tanks, and broadcasting systems.
Business fixtures are considered tangible personal property even after they’re attached to the real property, so the contractor should charge tax on them.
The same exception with carpet applies here too. If the construction contract or billing statement doesn’t separately state the business fixtures, then the whole thing is considered a construction contract, and tax shouldn’t be charged.
Heimlich again: “Ya, just get to the assessments. How much do we owe?”
“You don’t owe anything, Heimlich,” said the auditor. “Neither your contract nor billing statements referenced the carpet, so despite R.C. 5739.01(B)(5) you’re off the hook.” [Heimlich pumped his hoof excitedly.]
“Horst, you owe tax on the acoustic material on the walls and installation. That was separately billed by the contractor, and the Commissioner’s position is that it constitutes carpet and is also a business fixture.
Horst responded: “Ya, that’s ridiculous. You’ll be hearing from my sales tax consultant. If it’s not carpet, it’s not carpet, and any business that uses this space benefits from it.”
“Dieter,” the auditor continued, “you owe tax on the carpet.”
Dieter remained quiet.
The auditor handed out the assessments and left. Across the street a timber wolf eyed the auditor through a thicket of bushes and licked his lips.
And the moral of the story is...
Identifying taxable business fixtures under R.C. 5739.01(B)(5) and 5701.03 can be a tricky, especially for when large construction contracts are involved. If you’re renovating or constructing a new building, getting assistance to identify business fixtures and report use tax if sales tax isn’t charged could save you interest and penalties later on.
Other recent “Ohio (OH)” posts by Steve Estelle, Esq.:
- South Dakota v. Wayfair Threatens Ohio On-Line Guitar Purchase!
- Ohio's True Object Test and Bundled Transactions Explained
- Ohio Construction Tax Traps: Deadlines, Liens & Business Fixtures
- Sales Tax on Ohio Leases - Accelerated Payment & Sourcing
- Construction, Business Fixtures & Ohio’s Carpet Fixation: A Taxing Tale