STATE & LOCAL TAX SOLUTIONS: Understanding Sales & Use Taxes for Construction, Real Estate & Manufacturing Industries

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1 STATE & LOCAL TAX SOLUTIONS: Understanding Sales & Use Taxes for Construction, Real Estate & Manufacturing Industries November 8, 2017 PRESENTED BY: KENNETH TAYLOR, SENIOR MANAGING CONSULTANT, STATE & LOCAL TAX SCOTT SIEGEL, MANAGING CONSULTANT, STATE & LOCAL TAX TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar

2 Learning Objectives Understand the differences between the terms sales tax & use tax Understand the difference between an exemption certificate & a direct pay permit Be able to identify applicable sales & use tax exemptions applicable to your specific industry Be able to identify potential sales & use tax challenges within your business Understand the potential impact to overall profitability of not being compliant with your sales & use tax obligations Agenda Discuss basic terminology Discuss potential exemptions, tests & relevant case law that specifically apply to the construction, real estate & manufacturing industries Discuss potential challenges that may be encountered regarding sales & use tax compliance Discuss potential consequences of noncompliance in regards to sales & use tax

3 Sales Tax vs. Use Tax Sales Tax Required to Be Separately Stated Triggered by a discrete event Transfer of possession of tangible personal property or performance of a service Consideration given Seller Allowed to Absorb Tax Tax Type Imposition Person Liable for this Tax Tax Recoverable from Buyer Seller Privilege Seller Seller No Yes Optional Transaction Transaction Seller or Purchaser Yes No Mostly Mandatory Consumer Levy Consumer Purchaser & Seller Yes No Mandatory Gross Receipts Gross Receipts of Transaction Seller Optional Optional Optional Sales Tax vs. Use Tax Use Tax Complementary to a sales (type) tax Paid by purchaser/end-user Self-reported Purchases made out of state When seller isn t registered Exemption certificate issued, item later used in a taxable manner Direct payment permit issued

4 Exemptions vs. Exclusions Exemptions Transaction that is within the general scope of a state s tax statutes but is the subject of a special provision removing it from taxation Purchaser must provide documentation to support exemption Type of buyer Type of item Manner of use Exception/Exclusions Transaction outside the general scope of the tax statutes An amount that is not included in the measure of sales & use tax Purchaser is not required to provide documentation Exemption Certificate vs. Direct Pay Permit Exemption Certificate Issued by the purchaser to the seller documenting that a purchase qualifies for a provision removing it from taxation, enabling them to make tax-free purchases that normally would be subject to sales tax Resale Manufacturing usage Interstate commerce Requirements vary greatly among states Direct Pay Permit Issued by a purchaser to the vendor relieving the vendor of the liability to collect tax Allows a purchaser to directly remit use tax on purchases to the state when the purchaser is uncertain as to the use of the purchased product or service Some states do not offer a direct pay permit or similar program

5 Construction Contract Definitions Tangible Personal Property Any property that can be held, smelled, touched, seen, tasted, or that is perceptible to the senses & not permanently affixed to real estate Real Property Land Buildings Tangible personal property that is incorporated into real property Construction Contract Definitions Fixed Price/Lump Sum Contract value is set as a single price Fixed Price Contract The price is fixed & cannot change. If the contract goes over budget, the contractor is responsible for overruns Lump-Sum Contract The price can increase during the course of the contract through a change order Cost Plus Includes the cost of labor, materials & fee as a percentage of cost Time & Material Value separately states amounts for materials & labor

6 Construction Contract Definitions Agency Clause A clause or section of the contract that gives the contractor the authority to act as an agent of the buyer Grandfather Clause This clause generally refers to a provision of the law that creates an exception from the law for something that existed before the law s effective date Tax Clause Generally, there is a tax clause in construction contracts. This clause may address who is responsible for franchise & excise taxes (F&E), income taxes, gross receipts taxes & withholding taxes, as well as sales & use taxes Construction Contract Concepts Qualification to do business in the state State may require deposit or bond for nonresident contractor As part of payment application (AIA Form G702), state may require sworn affidavits that all sales/use taxes have been paid Liability of subcontract or could transfer to general contractor

7 Construction Contract Sales/Use Tax Treatment Fixed Price/Lump Sum Contractors are typically considered end-users Generally, direct pay permit cannot be issued Exempt customer Contractor may be able to step into the shoes & purchase materials exempt from tax Manufacturer Contractor may be able to step into the shoes & purchase materials used in manufacturing exempt from tax Extra concrete for machinery foundations Utility distribution Construction Contract Sales/Use Tax Treatment Time & Materials/Cost Plus Contractor issues resale certificate for materials States may treat contractors as a retailer Must collect tax from purchaser on cost of materials Exempt customers may provide an exemption certificate Labor associated with realty improvements generally not subject to tax

8 Construction Contract Sales/Use Tax Treatment Sales Generally, the type of contract determines the method of taxation Resale exemption normally does not apply to the sale of real property construction Fixtures Most states treat as a sale of tangible personal property, not an improvement to realty. The fixture is considered an accessory & does not lose its identity when installed Machinery & equipment (M&E) Most states treat this as a sale of tangible personal property under a separated contract Usually intended for administration, production, research & development, etc. Not essential to the building or structure, nor does it lose its identity as tangible personal property A few states classify M&E as real property once installed Construction Contract Sales/Use Tax Treatment Purchases Resale Collect Sales Tax Retail sales of materials & fixtures (cost plus contract or time & materials contract) Self-Assess Use Tax Consume materials (fixed price contract or lump-sum contract) M&E Taxable Hand tools Taxable

9 Construction & Real Estate Exemptions Industry-Specific Can an exemption flow through? Tangible personal property vs. real property Sales to Governmental/Nonprofit Entities Federal Supremacy clause State statutes Enterprise Zones/Economic Development Locations Construction Contractors: Nuances by State California Construction contractors are consumers of materials that they furnish & install, but retailers of fixtures & machinery & equipment. Contractors are deemed to be the retailer of materials if the contract provides that title to the materials passes to the customer before installation & the contract separates the charge for materials from installation charges [Cal. Admin. Code (a)(1)(A)] Florida Contractors who furnish materials/suppliers/services on a lump-sum basis are the consumers of materials & supplies. Contractors who agree to sell itemized materials at an agreed price or at regular retail price & agree to complete work for an additional price or on a time basis are sellers of tangible personal property & must collect sales tax from the purchaser [Fla. Admin. Code 12A-1.051(4)] Louisiana Sales of tangible personal property to contractors for use in construction or repair of immovable property are sales to consumers or users, not sales for resale [LAC 61:I.4372]

10 Construction Contractors: Nuances by State Mississippi A contractor is assessed a 3.5% tax of the total contract price or compensation & is imposed on the prime contractor & is due on all nonresidential, commercial contracts regardless of whether or not the owner is exempt when the total contract price exceeds $10,000 [Miss Code ] New York Sales tax is imposed on the installation of tangible personal property except charges for installing property which, when installed, will constitute an addition or capital improvement to real property [NY Tax Law 1105(c)(3)] Texas Sales tax is imposed on real property repair & remodeling as well as real property services [Tex. Tax Code (a)(11)] Sales Tax on Commercial Real Estate Rental Florida Taxation on Rent/Lease Payments of Commercial Property Only state to tax rent (6% sales tax, plus local if applicable) on commercial property, storefronts, offices, warehouses Rent The total amount of rent paid for the right to use or occupy commercial real property, including payments for separately stated services that are required under the lease or license Exemptions Rentals of commercial real property assessed as agricultural Rentals to federal/state/county agencies Commercial rentals to nonprofit organizations that hold a Florida consumer s certificate of exemption

11 Sales Tax on Commercial Real Estate Rental New York City Commercial Rent Tax (CRT) CRT is a tax charged to tenants in a portion of Manhattan Rent Amount paid or required to be paid for the use or occupancy of a space Annual or annualized gross rent is at least $250,000 Charges for real estate tax, water charge & insurance are classified as rent Charges for improving, repairing or maintaining the tenant s leased premises are not rent Rate 6% Exemptions may apply Reduction in tax base Sales Tax on Commercial Real Estate Rental Arizona Local tax on real estate rentals County & city Rates vary by taxing jurisdiction Definition of rent All amounts paid by the renter to or on behalf of the owner are taxable Examples include nonrefundable deposits, property taxes, repairs &/or tenant improvements, association fees, utilities, landscape maintenance Deductions City/county tax collected, bad debts, refundable security deposits

12 Manufacturing Basics Manufacturing is the process of taking raw materials or parts & creating a new product, which has a different form, with a change in its physical &/or chemical properties, & which has a greater value than in its previous form States have different beginning & end points related to what constitutes the manufacturing process Ancillary processes Necessary auxiliary or adjunct to the manufacturing process One step removed Intra-plant movement Quality control/testing Pollution control General Manufacturing Exemptions Raw Materials or Component Parts (Inputs) Manufacturing Machinery/Equipment Repair Parts Quality Control Pollution Control Packaging Consumables Lubricants Chemicals & Catalysts Packaging Materials Pallets, Shrink Wrap Utilities Distribution Research & Development Enterprise Zones/Special Incentive Programs

13 Manufacturing Process Start/End Points Machine feeding first processing machine Movement of finished goods from last packaging/processing machine SC, AL Raw materials first acted upon Product packaged & ready for sale AR, TX, PA Receiving & handling of raw materials Product packaged & ready for sale FL Transfer of raw materials to production line Product packaged & ready for sale MS Unloading, testing, handling raw materials Product packaged & ready for sale NY Transfer of raw materials from storage on site to production line Conveying finished goods to storage on the plant site NC Handling & storage of raw materials Conveying finished goods to storage on the plant site VA Tests to Define Use of Machinery & Equipment States have various definitions of how M&E must be used in order to qualify for a manufacturing exemption Qualifies Directly Exclusively (100%) Predominantly (>50%) Examples Used Directly Arkansas, Missouri Double Direct Essential & Integral: Indiana Used Directly or Predominantly Wyoming Necessary & Integral to Georgia

14 Flow of Taxation Manufactured Goods Resale Certificate Resale Certificate Raw Materials Manufacturing Plant Distributor Retailer Collects Sales Tax from End-User Retailer Remits Sales Tax to State Sales & Use Tax Challenges Industry-Specific Construction/Real Estate How sales tax is charged/paid Taxability of Capital Improvements Taxability of Repairs/Maintenance Manufacturing Understand where manufacturing begins & ends Impacts exemptions Use Tax Accrual on Direct Pay Permit Updated Percentages? Taxability of Real Property Improvements Within Manufacturing

15 Sales & Use Tax Noncompliance Issues State Notice or Audit Failure to respond/provide information Jeopardy Assessment Inability to recover assessed tax, penalty & interest from customers Above-the-Line Impact Questions?

16 BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only and is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. CPE Credit CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please BKD Learning & Development Department at training@bkd.com

17 Thank You! Kenneth Taylor Scott Siegel BKD Thoughtware Sign up for articles & event announcements based on your specific industry or service needs Sign up at bkd.com/subscribe

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