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.
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
The world of worker classification is still fraught with great uncertainty. The distinguishing factors between an employee and an independent contractor are different between the federal and state agencies. Thus, it is possible for a worker to be considered an independent contractor by one agency, but be deemed an employee by another. Because companies that choose to reclassify their workers to employee status can face large taxes due, many adopt the strategy of closing one’s eyes and hoping for the best.
In an attempt to address the issue and to encourage companies to take a hard look at the classification of their workers, the Internal Revenue Service introduced its Voluntary Classification Settlement Program (VCSP) in 2011, and modestly liberalized it in 2012. The benefit of this program is that the tax cost is very low – 1% of the reclassified worker’s compensation, with no interest or penalties. However, this program is not binding to any states, nor does it provide any clarity to existing laws.
To enter this program,
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
On May 17, 2013, the Maryland Court of Appeals denied the Comptroller’s motion for reconsideration of the Court’s taxpayer-favorable decision issued earlier this year in Comptroller v. Wynne. The Court held the resident credit for taxes paid to other states must include the local tax in addition to the state portion of the tax. Specifically, the decision ruled that the failure to allow a credit for the county tax for out-of-state taxes paid to other states on “pass-through” income earned in those states unconstitutionally discriminates against interstate commerce.
Maryland’s income tax has a state portion with a maximum rate of 5.75% and a county portion with rates that range from 1.25% to