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Ohio Construction Tax Traps: Deadlines, Liens & Business Fixtures

author photo of Steve Estelle

Five years after starting her own electrician’s business, Jody finally felt like she had a handle on the business side of things. Over the years, she’d learned (the hard way) all about Ohio’s mechanic’s lien law under Revised Code Chapter 1311—after you begin work, you need to serve your Notice of Furnishing, and you can’t put this off because there’s a deadline. Same thing after you finish the job if you don’t get paid—file your Affidavit of Mechanic’s Lien, and don’t put this off because there’s a deadline.

She also learned that neither of these activities matter if you didn’t read the contract you signed, and there’s a lien waiver in it. Never agree to a pay-if-paid provision—she learned that too. She learned what can happen if you don’t condition your bid on acceptable contract language, and what happens when things go bad, there’s litigation, and the contract says the lawsuit can be filed only in a court that’s three hours away from where you live. Finally, she learned how to deal effectively with bid shoppers—a short deadline on accepting her bid.

After all of this and lots of other stuff, Jody felt like there couldn’t possibly be anything more to learn the hard way—that is, until the Ohio sales/use tax auditor showed up.

At the beginning of the audit, Jody wasn’t too concerned. She knew that under R.C. 5739.01(B)(5) as a construction contractor she was required to pay sales tax on her materials, and she generally kept an eye on the invoices she received to make sure tax was charged. She also knew that none of the exceptions in R.C. 5739.01(B)(5) applied to her—she didn’t install carpeting, agricultural land tile (i.e., drainage systems), or portable grain bins, and she didn’t provide landscaping or lawn care services, so she thought she was ok.

At the end of the initial review, however, the auditor asked to see the invoices Jody issued on three contracts—wiring for signage, a server room, and a beer cooler. Jody was puzzled, and asked the auditor why, in particular, were these three contracts special. Here’s what the auditor said:

“You’re correct that, when tangible personal property is incorporated into a building, structure, or other improvement, the contract is generally a construction contract, and that means the contractor must pay sales tax on the materials incorporated. If, however, after the item is incorporated it becomes a “business fixture” under R.C. 5701.03(B), then the contract is not a construction contract, but instead a sale for resale. In that case, the contractor may purchase the materials exempt from sales tax but is required to charge sales tax to the property owner on both the materials and the labor.”

“What’s a business fixture?” Jody asked.

“Under R.C. 5701.03(B), a business fixture is tangible personal property that has been permanently attached to a building or other real property and is generally useful only to the business that occupies the premises or businesses similar to it. It can be anything like machinery, special signs, or storage tanks. It doesn’t include things that are common to buildings, like HVAC, plumbing, and electrical, which generally benefit the realty. But, if those things are installed to support a business fixture, they become business fixtures too, and that’s why I’ve asked about the contracts for the signage, server room, and walk-in beer cooler.

I’ve viewed pictures of the signage, and there’s no way any other business could use it because it spells out the current business’s name. So, while the sign is definitely permanently affixed to the realty, it benefits only the current business. No other business would have use for it. It’s therefore a business fixture, and that means the electrical work is a business fixture too. If you didn’t charge sales tax to the owner, you’re liable for it.”

Jody groaned.

“The server room takes up an entire floor of a building, and I understand the electrical requirements are different and far beyond what would ordinarily be wired for a typical floor in an office building. Because of those unique requirements, the wiring generally benefits data centers but no other businesses, which means it’s a business fixture, and you should’ve charged tax on that too.

The walk-in beer cooler is similar. Only a business that requires refrigeration would benefit from a walk-in cooler. Now, if the cooler had been used to refrigerate food, milk, or fruit juice, then the cooler, the wiring, and installation all would have been exempt under R.C. 5739.02(B)(27)(b) as equipment use to preserve food for human consumption. But by definition beer isn’t food, so the cooler and the wiring are still taxable as a business fixture. I assume you didn’t charge sales tax on that either."

“What about the tax I paid to my vendors on those projects? Do I get credit for that, and doesn’t that make us pretty much even?”

“Well, you can request a refund, but we don’t permit you to offset the amounts.”

“Why is that?” Jody asked. You can determine the amount I paid by looking at the invoices, and you’ve already calculated the amount I should have charged. If you were concerned, you could check to make sure the vendor hadn’t requested a refund for the same amount and actually submitted a return for the relevant time period.”

“I’m sorry. We just don’t permit an offset.”

“But why?” Jody asked again.

“Because,” responded the auditor.

“WHY BECAUSE,” Jody shouted.

And with that, the auditor handed Jody the bill for uncollected sales tax, interest, and penalties and walked out the door slowly singing “They call it stormy Monday … but Tooooooooooooosday’s just as bad …

About the Author: Steve’s Ohio tax experience began in 2006 at the Ohio General Assembly where he drafted the State’s tax legislation. Steve quickly became a expert on Ohio’s manufacturing, restaurant, oil and gas, R&D, and other sales tax exemptions and on the taxability of data processing, cloud computing, employment, and other services. In 2011, Steve joined Big 4 firm pwc and gained experience on a national level. Steve also worked for a global software development company where he was responsible for sales, use & other tax compliance.
Comments or questions may be submitted to this sales tax specialist by using the on-page "Comment" feature which follows a post, subject to disclaimer on page. You may also send a question or request directly to Steve by using the orange REQUEST link on his Firm Profile page.

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