Once a document is gone, it’s difficult to get a replacement! With year-end approaching and the beginning of another Tax season upon us, we are frequently asked about record retention. What records should be retained for reference and which can be purged? While individual situations can vary, taxpayers can generally apply the below guidelines.
What to retain?
What does not need to be retained?
As a practical matter, you may find it helpful to scan all supporting tax documentation and store it electronically. The IRS typically accepts electronic images or printed versions of documents, without requiring the original.
When in doubt, don’t throw out – ask your tax advisor. For more information and individual questions, please contact Aronson’s Tax Controversy Practice Lead Larry Rubin at 301-222-8212.
Q. How do you file for a refund in Maryland for sales tax paid on purchases for exempt jobs in the District of Columbia?
A. Maryland requires contractors to pay sales tax on all purchases of materials that will be incorporated into real property as part of a construction contract. However, Maryland allows contractors to apply for a refund if the materials will be used for a contract in another jurisdiction where the same purchase would not have been subject to tax (e.g., a contract with a government agency in the District of Columbia). Virginia has a similar rule; however, the contractor can prequalify for an exemption from tax, rather than having to pay the tax upfront and apply for a refund after the fact.
Maryland has a standard refund application that is required when claiming a refund of sales and/or use tax; claimants are required to describe the reason for the claimed refund, including exemptions. Claimants must provide substantiation for the requested refund by attaching the receipts/invoices reflecting the tax paid, the contract to perform the work in the exempt area, and support for the exemption (e.g., sales tax exemption certificate of the customer).
Q. Where can I download the Maryland application for refund?
A. Maryland’s sales and use tax refund application (Form ST205) can be found on the Comptroller’s website.
Q. What are the time limitations on claiming a refund?
A. Every state has rules that limit the time for the filing of a refund claim. Typically, states allow refund claims to be filed for taxes paid within a three to four year period, depending on the state. Maryland, Virginia, and the District of Columbia all have three year limitation periods for the filing of a claim for refund. It’s important to keep in mind that if you have not paid use tax in a state and have never filed a use tax return that it is likely that there will be limitations on the years for which they can issue an assessment. The period of limitation for assessment purposes is only triggered once a return is filed.
Q. Does sales tax apply to repair services in Virginia and Maryland?
A. Most states only impose sales tax on services that are specifically listed as a service subject to tax. Neither Virginia nor Maryland imposes sales tax on repair services performed on real property. For repairs to tangible personal property, Maryland does not impose a tax on the labor. However, if separate charges are made for the materials incorporated in the property being repaired, Maryland requires that sales tax be collected on the charges for the materials. Under these circumstances, purchases of materials transferred to customers in connection with the repair work can be purchased tax-free by presenting the supplier a resale certificate.
Similarly, Virginia does not tax repair services. However, sales tax must be collected for materials and parts used to perform the repair. In order for the labor charges to remain exempt from tax, the contractor needs to separately itemize such charges on the customer’s invoice. If the contractor does not separately state the labor, then Virginia requires sales tax to be collected on the entire charge.
Q. Does sales tax apply to freight/shipping charges?
A. The taxability of freight varies from state to state. A number of states base the taxability of an item on the tax rules of its final destination. In these states, the shipping charge is considered part of the price of the taxable item. Further, many states do not tax shipping charges when the service is provided by a third party (i.e., not the seller of the items being shipping). Contractors are typically considered the consumer of goods purchased for incorporation in their construction projects.
Aronson recently held a webinar on sales and use tax for construction companies, highlighting the above topics and more. To view a recording of the webinar and ask more questions, please click here and fill out the brief registration form for instant access. For a review and analysis of your specific situation, contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200 or firstname.lastname@example.org.
State sales tax rules vary significantly for construction contractors doing business in the DC region, and can substantially affect the final cost on a contract. For instance, a Virginia-based contractor bids on two separate construction contracts for a federal government agency. Both of the contracts are for the construction of a building, one contract will be performed in the District of Columbia and the other in Maryland. If all necessary materials and supplies for each contract are purchased in Virginia and subsequently transferred to the job site, a number of potential sales and use tax implications may arise.
First, the contractor should recognize that it may be eligible for exemptions because the customers are both government entities, which are relieved from state sales tax. However, just because a contractor’s customer can make tax-free purchases does not necessarily mean that the contractor can do the same when incorporating the materials into that customer’s real property. The sales tax rules in this area vary significantly from state-to-state.
The potential sales tax exemption for government construction contracts create an exception to the general rule followed in most states (including DC, MD, and VA), which is that a construction contractor is considered the consumer of materials that will be incorporated into real property. Thus, a contractor generally pays sales tax when purchasing those materials.
In our example, the Virginia contractor will temporarily store the materials at its Virginia location but use them at job sites in the District and Maryland. Our fictitious contractor should be aware that Virginia’s regulations allows the purchase of materials tax-free from Virginia if those materials are stored temporarily to be used in an exempt construction project in another state. Thus, the contractor will need to refer to the sales tax rules in DC and Maryland when determining if it can purchase the materials free from Virginia sales tax.
The District allows a contractor to make tax-free purchases of materials that will be incorporated in and become part of the real property of the United States or DC government. Therefore, the contractor can claim the Virginia exemption for the materials temporarily stored in Virginia that will be used in the contract in the District. However, in order to do so, it must make a written request to the Department of Taxation for a certificate of exemption.
Maryland also has an exemption for construction materials purchased for contracts performed for certain tax exempt entities, but the exemption is limited to private charitable, educational, and religious nonprofit organizations. The exemption does not apply to materials purchased for a government construction contract. Therefore, our contractor should factor in Virginia sales tax when bidding on the Maryland contract.
Further, the contractor has a potential use tax liability on the materials that will be used in Maryland. Maryland will not require use tax to be paid if the contractor paid at least a 6% sales tax in the state where the materials were purchased. Differing sales tax rates throughout Virginia locales adds another dimension to this complex issue, so contractors should pay special attention to these details when making its bid.
Contractors face myriad issues when dealing with sales tax. In addition to the example above other challenges may include bonding requirements, rules regarding fabricated materials, and varying treatment of time and materials contracts.
To learn more about the intricacies of sales and use tax laws, please join us on Thursday, July 24th for a complimentary webinar that addresses these important issues in greater detail. To register, click here.
For a review and analysis of your specific situation, contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
On June 24, 2014, the District of Columbia Council will have its second vote on the District’s fiscal year 2015 budget (Fiscal Year 2015 Budget Support Act of 2014, B20-0750), which includes tax rate decreases for both individuals and businesses. The reduced tax rates, and a number of other tax reform items, were last minute amendments to the budget that passed the initial vote on May 28th by an 11-2 margin. The last minute changes to the budget implemented many of the proposals recommended to the Council in December 2013 by the D.C. Tax Revision Commission. The tax reform items are aimed at making the District’s tax system more competitive with its neighbors.
Some of the noteworthy tax changes in the proposed budget include the following:
Many taxpayers in the District could be paying less tax in years to come if the tax reform proposals of the D.C. Tax Revision Commission are ultimately enacted. The recommendations include reductions in tax rates for both individual and business taxpayers.
The Commission, which finalized its recommendations on December 18, 2013, is an 11-member independent body appointed by the Mayor and the Chairman of the D.C. Council in 2011 in order to make recommendations that would broaden the District’s tax base, make the District more competitive with surrounding jurisdictions, encourage business growth and job creation, and simplify the District’s tax code.
The final recommendations attempt to address the most pressing issues with the District’s current tax regime – relatively high