Sales Tax in Construction: How to Keep Risk Low and Profits High (Part 2)

In our previous article, we discussed the basic concepts of sales tax law in construction and how different scenarios in your projects might affect the collection of sales tax. This article will explain a few more concepts and delve into what is subject to sales tax in construction and which party is responsible for payment.

To maximize profits, a builder should avoid responsibility for sales tax where possible and include accommodations for unavoidable sales tax obligations in any bid or contract for a project. Here are some things to consider regarding what is subject to sales tax in construction.

Contracting for Payment of Sales Tax in Construction

Construction contracts sometimes require the customer to reimburse the builder for sales and use taxes paid by the builder. Nevertheless, if the builder is legally responsible for paying the state for any unpaid taxes, the state will ignore the contract and hold the builder liable. Also, if the contract price for materials include sales tax, the bid or contract should state, “sales and use tax included.” Without this exact phrase, the total amount is presumed to be the taxable item’s sales price excluding tax, which results in a higher tax liability to the builder.

Real Property Services/Consumable

It is important to know that “real property services” (RPS) means:

1. landscaping;
2. the care and maintenance of lawns and yards;
3. removal or collection of garbage;
4. building or grounds cleaning or custodial services;
5. structural pest control service; and
6. surveying of real property;

A “consumable” is certain tangible personal property that is not physically incorporated into the customer’s property and that is completely used up or destroyed after use.  Some examples of consumables are non-reusable concrete forms and drop cloths, survey stakes, flags, and sandpaper. 

Repair, Remodel, Restoration versus Maintenance

Charges for maintenance of real property are not taxable.  Maintenance is defined as scheduled, periodic work on operational and functioning improvements to real property that is necessary to sustain or support safe, efficient, continuous operations or to prevent the decline, failure, lapse, or deterioration of the improvement.  An example of such maintenance is regularly scheduled work on a functioning HVAC system.   

Taxation of New Construction and Repair, Remodel and Restoration of Residential Property

For new construction pursuant to a lump-sum contract or when the construction is for the repair, remodel or restoration of residential property pursuant to a lump-sum contract, the following sales tax rules apply: 

• Materials: builder pays tax to vendor
• Consumable: builder pays tax to vendor

• Equip/machinery: builder pays tax to vendor
• Labor: not taxable
• RPS: if Residential Property, RPS is a nontaxable service to contractors, otherwise, builder pays tax to vendor

When a separated or cost-plus-a-fee contract is used for new construction or to repair, remodel or restore residential property the following sales tax rules apply: 

• Materials: builder gives resale certificate to the vendor
• Consumable: builder pays tax to the vendor
• Equip/machinery: builder pays tax to the vendor
• Labor: not taxable
• RPS: For residential – issue resale certificate to pass on material costs on contract or if used by builder, then pay tax to vendor.  For nonresidential – if listed as a separate item in the contract, issue a resale certificate; If NOT listed as a separate item in the contract, pay the tax to the vendor; If used by builder, then pay tax to vendor.

Taxation of Repair, Remodel, and Restoration of Nonresidential Property

For repair, remodel, and restoration of nonresidential property, the following sales tax rules apply: 

• Materials: builder gives resale certificate to vendor
• Consumable: builder pays tax to vendor
• Equip/machinery: builder pays tax to vendor
• Labor: builder gives resale certificate to vendor

• RPS: builder gives resale certificate to vendor

Real Property Repair and Remodeling Contracts with Sales Tax Exempt Organizations

Builders do not charge tax when performing a job for a governmental agency and for some nonprofit organizations when the real property improvement relates to the exempt purpose of the organization.  Even when the work is considered “exempt” from taxes on tangible personal property, tax is still due on all machinery and equipment and accessories, repair and replacement parts used at the job site, office supplies, furniture, and computers. 

Mishandling sales and use taxes can result in an expensive surprise if the comptroller’s office audits a project.  While this is a complicated area of law, once a builder has its accounting, contracts, and bids set up properly, a builder should be able to avoid any such unpleasant surprises.  Let Brackett & Ellis, P.C. assist you in getting your business set up properly and avoiding any big surprises! Give us a call at 817-338-1700.