Co-authored by David Harrison, Senior Accountant, CPA
In June of 2018, the US Supreme Court decided a case, South Dakota vs. Wayfair, Inc., commonly referred to as ‘the Wayfair case.’ The Court’s decision changed the rules that dictate when a taxing jurisdiction can expect a remote seller to collect and remit sales tax. The legislatures of the states, and some cities, have responded to the case by enacting economic nexus standards, which are now clearly enforceable for sales tax purposes. In addition, many taxing jurisdictions have also been emboldened to enact economic nexus standards, or simply enforce existing standards that apply to other types of taxes: 1) gross receipts, 2) franchise, and 3) income taxes.
The construction industry has unique concerns when it comes to the changes brought about by these new standards. Construction contractors usually do have a physical presence in all of the locations where they are completing construction contracts. However, their suppliers often do not. As more suppliers begin to collect and remit sales tax due to Wayfair, a contractor’s need to self-assess use tax should diminish. The taxes charged by suppliers should have been included in bid packages, but confirming the amounts are reasonable will assist the contractor in catching any errors and protect their profit margins. Construction sites often have uncertain addresses, so rate issues are common.
Another concern for contractors is the correct use of exemption certificates. As more suppliers begin charging tax, construction companies will need to know when to issue a resale certificate and when to pay the tax to the supplier. The answer lies in what the construction company is ultimately selling to their customer: tangible personal property or real property.
Construction companies also need to correctly use any exemption certificate provided to them by their customer. For example, some states allow the exemption for purchases made by exempt entities (hospitals, schools, non-profit organizations, etc.) to flow through to the contractor when they are buying material on behalf of that exempt entity (OH). Other states do not allow this flow through, and the purchases must be made by the exempt entity to obtain the tax benefit (KY). Regardless, contractors need to know the rules of the state in which they are operating and collect and/or issue any exemption certificates or other documentation to reinforce that the material purchases are not subject to the tax.
Also, if a full or partial exemption is tied to the job site being located in a particular place, rather than to the type of entity, documentation may be needed to support the purchase of materials with reduced or no tax. Since a construction contractor cannot recover any tax charged to it via a line item on their invoice to the purchaser of the real estate sold, it is important to make sure the correct exemption certificates are issued to suppliers and the correct tax is paid on the material.
Another concern in the construction industry is the increased scrutiny of their sales activity, especially if they sell items (wiring harnesses, trusses, prefab concrete, etc.) to other contractors who install them or provide services remotely (engineering, design services, etc.). Sales that did not create a tax obligation in the past due to a lack of physical presence are now clearly able to do so, so an accurate state breakdown of sales is necessary. Sales will need to be attributed to the correct jurisdiction (“sitused”) based upon the rules of each state. Total sales by state should be monitored to see if sales thresholds are exceeded that may require the collection of sales tax and potentially increased filing and tax obligations for income, franchise and gross receipts taxes in jurisdictions where the construction company does not have a physical presence.
In the current environment, where so many construction industry employees are working from home rather than the company offices or customer jobsite, the situsing of those sales of services (engineering, design services, project management, etc.) does not change because they generally are sitused to the jobsite regardless of where the employee does the work.
These are examples of taxes for which jurisdictions are already reporting increased enforcement of economic nexus standards for income, franchise and gross receipts taxes:
Tennessee Excise – Tennessee imposes a corporate income tax on businesses doing business in Tennessee. Public Law 86-272 still applies to this tax, but those protections only apply to tangible property sales.
- Economic Nexus: This is defined as having gross receipts over $500,000 (or 25% of total receipts), average property of $50,000 (or 25% of total property), or payroll of $50,000 (or 25% of total).
Texas Margins – Texas imposes a franchise tax on the “taxable margin” – defined as gross receipts reduced by certain factors – of taxable entities that do business in the state. Until 2019, taxpayers were required to have a physical presence in Texas in order to be subject to this tax. That is no longer the case.
- Economic Nexus: $500,000 in Texas gross receipts.
Washington Business & Occupations (“B&O”) Tax – Washington imposes a business and occupation (B&O) tax on every person that has substantial nexus with the state for the privilege of engaging in business activities in the state.
- Economic Nexus: $100,000 in Washington gross receipts (slightly higher than this in prior years).
Oregon CAT – Oregon imposes a corporate activity tax (CAT) for the privilege of doing business in Oregon, effective as of January 1, 2020. The first estimated payment will be due April 30.
- Economic Nexus: $750,000 in Oregon gross receipts.
Philadelphia, PA BIRT – Yes, even cities are enacting economic nexus. The Business Income & Receipts Tax (BIRT) applies to both gross receipts and net income.
- Economic Nexus: $100,000 in Philadelphia gross receipts.
Keep in mind, the historical protections from income taxes when the physical presence activities within a jurisdiction are limited to the general solicitation of sales still exist. However, the protection only applies to a specific list of protected activities by a seller of tangible personal property that otherwise has no other physical presence in the jurisdiction. It would be unusual for a construction company to be protected under these provisions. Also, these provisions do not protect from the taxes listed above as they are not income taxes.
The laws and regulations surrounding the Wayfair case and the resulting fallout are complex – VonLehman can help you navigate these complexities and understand the risks and implications to your business. Contact our State and Local Tax experts, Robin Teeters at rteeters@vlcpa.com or David Harrison at dharrison@vlcpa.com, for guidance related to these regulations. Both Robin and David can be reached via the firm’s general phone number 800.887.0437.
