Dealing with sales and use tax (SUT) is unavoidable when conducting business activity, and all contractors need to be aware of its potential impact on operations. Depending on where you conduct business, there are different rules based on the state and its localities. The lack of uniformity can be seen merely by focusing on the Washington Metro area, which includes Maryland, Virginia, and the District of Columbia. Before getting into some of the specific differences, let’s cover the basics.
First, what is sales and use tax? The main difference between a sales tax and a use tax pertains to the burden of collection and remittance of the tax. A sales tax is imposed at the point of sale on goods and services, and is collected and remitted to the appropriate state or local tax jurisdiction by the seller. Conversely, a use tax typically needs to be remitted by a purchaser buying goods from a seller that is not required to collect the sales tax in the purchaser’s state. Thus, purchasers using out-of-state vendors need to accrue use tax on their purchases, and then remit the tax to the appropriate taxing authority within their state. Now that we’ve established the fundamentals of SUT, we’ll look at some specific considerations for contractors.
Where is the project located?
As mentioned above, the location of the project will dictate the applicable rules. For example, purchases of materials for a time & materials contract are treated differently in the District of Columbia compared to Maryland and Virginia. In the District of Columbia, a contractor is treated as the retailer of the materials, and must charge the customer sales tax for the materials purchased. Conversely, in Maryland and Virginia, contractors are generally required to pay sales tax on materials purchases regardless of the contract type.
Are the materials and supplies purchased in one state but used in another?
When engaged in interstate commerce, contractors need to take into account both the rules in the state of purchase and the state where the project is located. Some states in which the purchase of materials takes place allow for a refund or an exemption from tax for materials that will be used in another state. For example, the District of Columbia allows an exemption from sales and use tax when a contractor purchases materials and temporarily stores them within the District of Columbia prior to use in another state.
Is the customer claiming an exemption?
When performing a contract for a tax-exempt organization, a contractor’s purchases of materials may be exempt from tax. In regard to our three geographical areas of focus, each one has their own stance on utilizing a SUT exemption for contractors working with exempt customers. In Maryland, a contractor has the ability to use the nonprofit organization’s exemption certificate to make tax-free purchases of materials for that specific job. The District of Columbia has a similar exemption, but the District of Columbia requires the contractor to complete a Contractor’s Exempt Purchase Certificate to make tax-free purchases. Although both territories have a similar exemption in substance, the administrative requirements are different. Virginia, on the other hand, generally requires contractors to pay sales tax on purchases of materials regardless of whether the end customer is exempt from sales tax.
Additional issues a contractor should consider include:
SUT can be a difficult area for contractors. In addition to the rules varying from state-to-state, states often change their laws or issue other guidance that impacts contractors. It is also important for contractors to be proactive when dealing with SUT. This will allow you to prepare for any future changes in business operations, and ensure that your bids are accurate.
For more information or to learn more about SUT, please contact Aronson Manager, Brian Ballard, CPA, at firstname.lastname@example.org.
My Customer’s Exempt from Sales Tax, but is my Construction Contract? Construction contractors in the region face anything but uniformity when it comes to dealing with the rules addressing sales tax as it applies to projects for tax exempt customers (e.g., government entities and not-for-profits). Not only does the scope of the exemptions offered in the region (i.e., the District, Maryland, and Virginia) differ, the compliance requirements vary as well.
Generally, construction contractors are considered the consumers of the materials and supplies they purchase for use in their projects. This is because the contractor is providing a service, not reselling tangible personal property. Thus, contractors are generally required to pay sales tax when purchasing their materials and supplies. Contractors can at least be rest assured that the local jurisdictions all follow this foundational sales tax principle. Unfortunately, that’s where the similarities end and the differences begin; especially when it comes to construction contracts with customers that are tax exempt entities.
Virginia is somewhat simple in that there is no exemption from tax for contractor purchases that will be incorporated in to the real property of a tax exempt entity. The only options for avoiding sales or use tax on such purchases for projects in Virginia are for the contractor to be named as an authorized purchasing agent by the exempt entity or simply have the tax exempt customer make the purchases directly. Complications can arise when materials are temporarily stored in Virginia for a project in another jurisdiction. In this case, Virginia will allow, by Department of Taxation preapproval, construction contractors to make purchases tax-free if the same purchases could have been made tax-free in the jurisdiction where the project is located. Thus, applicability of Virginia’s temporary storage exemption hinges on whether there is an available exemption in the other jurisdiction.
In contrast to Virginia, Maryland and the District both have sales and use tax exemptions for purchases of materials to be incorporated into the real property of certain tax exempt customers. However, the scope of the exemptions is different. Maryland’s exemption applies to purchases of materials for projects for not-for-profit organizations as well volunteer fire, ambulance, or rescue squads. Notably absent from Maryland’s exemption are material purchases for projects with government organizations. The District’s exemption applies to not-for-profits (i.e., “semipublic institutions”) as well as federal or District of Columbia government entities.
It’s important for contractors to realize that the exemptions in Maryland and the District only apply to materials and supplies that will become part of the real property of the tax-exempt customer. A contractor must still pay tax on tools and supplies purchased for use on a contract for a tax-exempt organization.
The regional rules for purchases of materials by construction contractors are a fair reflection of the nation as a whole in terms of the wide variance in available exemptions. Whenever contractors are venturing into unchartered jurisdictions, it’s critical to understand the applicable sales tax rules upfront. A proactive approach will facilitate accurate bidding on jobs, and allow for compliance on the front-end as opposed to potential penalties and interest on the back-end of a project.
If you have any questions regarding how sales and use tax applies to your industry, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301-231-6200.
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 email@example.com.
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.
Construction contractors conducting business in multiples states face no small task when it comes to complying with the varying sales and use tax rules applicable to the construction industry. Although most states do not impose sales tax on construction services, contractors need to be aware of the rules pertaining to how sales tax applies to the purchases they make of materials and supplies used in performing contracts.
Generally, purchases by construction contractors of tangible personal property that are furnished in connection with a construction contract are deemed to be used and consumed by the contractor, as opposed to such purchases being treated as purchase for resale to the contractor’s customer. Thus, sales tax is payable by the contractor upon purchase of the property. This general rule is easy enough to remember.
However, difficulties arise when a contractor is performing contracts in various states that each has their own exceptions to this rule. Now, layer on