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.
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
Keeping track of Virginia’s sales tax rules applicable to construction contractors is no easy task, especially if your business installs or affixes items to real property. There are various factors that must be considered in determining whether purchases and sales engaged in by such businesses are subject to sales tax. The Virginia Tax Commissioner recently issued a ruling addressing when certain “contractors” are considered to be retailers, allowing the property that will be installed to be purchased by the contractor without the addition of sales tax. Va. Public Doc. No. 13-204, 11/1/2013.
Generally, Virginia requires that contractors pay sales and use tax on purchases of
Virginia’s increased sales tax rates took effect on July 1, 2013, and complying with the new rates will not be as easy as hard coding a new rate into your sales tax compliance system. Not only will the general rate increase from 5% to 5.3% (this rate includes the local 1% tax), an additional 0.7% tax will apply for all sales sourced to the Northern Virginia or Hampton Roads regions (resulting in a 6% total tax rate for sales in these regions).
Determining how to properly source a sale within or outside the Northern Virginia and Hampton Roads regions will be a concern for businesses that have a sales and use tax collection obligation in Virginia. Typically, when a multi-state business makes an interstate sale, the tax that applies is based on the destination state. Thus, if a customer in Virginia orders a product from a retailer in Maryland and the product is shipped to Virginia, Virginia sales or use tax applies to sale. The same rule must apply for an intrastate sale within Virginia – right? Wrong.
The local sales tax rate that applies in Virginia is based on