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Location, Location, Location - Why it Matters to Contractors for Sales and Use Tax Purposes

12/5/16 – Robin Teeters

Background: Case decided in Indiana

A large home improvement retailer was involved in litigation over the interpretation of Indiana law by the Department of Revenue regarding the amount of sales tax owed to the state when their products were installed by employees and/or subcontractors of the store. The retailer ultimately won that case, but the state legislature has changed Indiana law to retroactively put in place the Department of Revenue’s interpretation of the law. Word is that the retroactive law is only intended to prevent refund claims as a result of the case and will not be used punitively to assess tax against those that were following the same interpretation as the retailer, so no need to lose any sleep about that. However, taxpayers are now on notice that they need to implement processes to follow the state’s interpretation. Lowe’s Home Centers, LLC v. Indiana Department of Revenue, 23 N.E.3d 52 (2014).

Indiana – How am I billing my customer?

The new law and related guidance from the Indiana Department of Revenue, still in draft form, attempts to define “construction material,” “contractor,” and “time and material contract” more clearly. At its simplest, Indiana sees the sale of construction material and the installation of it as two separate transactions when the customer is billed on a Time and Material (T&M) basis. The construction material is sold prior to its installation so sales tax is due on the full price charged to the customer for the material. No tax is due on the installation labor.

However, when contractors bill their customers in a lump sum for construction material and its installation, there is no need to charge the customer sales tax even if the exact same items are installed. The lump sum contract is deemed to involve only one transaction which is the sale of a real property improvement service. Therefore, the construction contractor pays tax on its cost of the construction material at the time of purchase, or if purchased without tax, at the time of use.

Kentucky – Is what I do deemed “construction” in KY?

Kentucky takes the simplest approach of the three states. As long as the contractor is engaged in a building trade (such as carpentry, bricklaying, wall-to-wall carpeting, cement work, steel work, plastering, sheet metal work, roofing, tile and terrazzo work, cabinet work, electrical work, plumbing, central heating and air conditioning, painting, interior decorating , storm windows, etc.) the method of billing does not matter. The contractor is deemed to be doing “construction” and pays tax at the time of purchase on the cost of building materials. No tax needs to be charged on customer invoices.

Ohio – How will what I am installing be used by the customer?

Customers in Ohio need to assist contractors in determining if sales tax should be charged. The use of the item installed needs to be communicated to the contractor in order for the correct tax to be charged to the customer. The contractor cannot simply look to what they are selling to determine the correct tax to be paid to the state.

Ohio draws a line between items that are for the benefit of the business (for example, HVAC for a data center = tangible personal property) and items that are installed for the benefit of a building (for example, HVAC for the comfort of building occupants = real property). Contractors installing items for the benefit of the business are installing “business fixtures” and sales tax should be charged to the customer on the total price paid for the business fixture including material, installation labor, delivery, etc. Contractors installing items for the benefit of a building or other real property pay tax on their cost of the construction material at the time of purchase, or if purchased without tax, at the time of use. No tax should be charged to the customer. Customers and contractors are encouraged to reach an agreement and document if a business fixture or real property is being installed.