A contractor is generally defined as someone who provides improvements to real property on a lump sum contract basis. From a sales and use tax perspective, there isn’t much of a difference between a subcontractor and a prime or general contractor.
At first glance, the sales and use tax requirements for a contractor seem quite simple. Contractors are typically considered the end-user/consumer of all tangible personal property purchased and used by them in conjunction with the performance of a contract to improve real property. As such, all purchases by a contractor are usually subject to sales and use tax. Since contractors are considered service providers, charges by them for real property improvement services are typically exempt from sales and use tax. Sounds simple, but there are a number of exceptions to these sales tax rules for contractors, and we highlight a few of them below.
Many contractors, in addition to providing real property improvements are also involved in the sale and installation of tangible personal property. One of the difficulties faced by many contractors is determining when tangible personal property becomes real property vs. retaining its character as tangible personal property.
This is a critical distinction for sales and use tax purposes as the sale of tangible personal property is subject to sales and use tax while the sale of real property is generally not taxable.
For example – a contractor performs an installation of a hot water heater. Is this considered a real property improvement? Does the hot water heater become affixed to real property and change form from tangible personal property? Or, is this a taxable sale and installation of tangible personal property?
Generally, we would consider the installation of a hot water heater an improvement to real property and the contractor would be deemed the end- user/consumer – required to pay sales or use tax on the purchase price of the water heater. However, this isn’t the case in every state or situation.
What about carpeting, cabinets, or an oven? And what about industrial machinery that is cemented into the ground or affixed to a wall? How do states treat these
types of transactions for sales and use tax purposes. The short answer is – it depends on the state.
Understanding the taxability of your products and/or services is one of the first steps in understanding your sales tax obligation, and yet, even that is complex when it comes to the construction industry. If you’re looking for help in managing your sales tax obligation, look to a sales tax expert. TaxConnex provides on-going compliance services for many construction businesses, ensuring they remain compliant and have a better grasp on when and where their sales are taxable. Get in touch to learn more about TaxConnex services.
This blog is an excerpt from a longer eBook, Sales & Use Tax for Contractors. Ready to learn more? Download it now!