Common Sales Tax Pitfalls for Contractors Rob Wollfarth, Esq. Baker, Donelson, Bearman, Caldwell & Berkowitz, PC 201 St. Charles Avenue, Suite 3600 New Orleans, LA 70170 Direct: 504.566.8623 E-mail: rwollfarth@bakerdonelson.com Gary Dressler, CPA Postlethwaite & Netterville One Galleria Blvd. Suite 2100 Metairie, LA 70001 Direct: 504.335.3251 E-mail: gdressler@pncpa.com http://pncpa.com/ POSTLETHWAITE & NETTERVILLE &
Exemption Certificates Obtained from the applicable tax collector. Furnished to the dealer at the time of purchase. Relieves dealer from collecting sales tax on purchases that are either exempt or when collection of sales tax is properly deferred. Most have no stated expiration; some must be renewed annually; and others are automatically renewed. 2
Subcontracts versus Taxable Purchases Subcontractor is one who constructs a part of the immovable property, such as the foundation of a building, the electrical, plumbing, HVAC system or drywall installer. The billings to the prime contractor would not be subject to sales tax, just as the prime contractor s billing is not subject to sales tax when presented to the owner. Fabrication work purchased by either the prime contractor or the subcontractor is a taxable sale. Fabrication means a transaction where the customer furnishes the materials and the seller provides the labor to turn those materials into an article of tangible personal property. 3
Cross Border Purchases Purchases Outside Louisiana Situs of taxation generally depends on where title or possession passes. How delivery is made is often a key factor. Dealer may have obligation to collect Louisiana use tax but insufficient nexus. Purchases that Cross Parish Borders Import and temporary storage in a parish does not give rise to tax. Generally, every sale of tangible personal property is taxable in the parish of purchase if the purchaser picks up the property in the parish of purchase or the seller delivers to the purchaser in the parish of purchase. 4
Manufacturer s/governmental Entity's Designation of Mandate A tax exempt government entity or a certified manufacturer can appoint the contractor as its agent for purpose of purchasing exempt tangible personal property for the construction project. The manufacturing exemption is generally a state only exclusion, so the certificate will generally not apply to local taxes on the equipment purchases. The manufacturing machinery and equipment exclusion has been partially suspended. Such purchases were subject to 2% sales tax from April 1, 2016 through June 30, 2016 and are subject to 1% sales tax from July 1, 2016 through June 30, 2018. The exclusion for governmental entities was maintained and remains in effect. 5
Shipping, Packaging and Handling Charges Shipping and freight costs cannot be excluded from the sales price, even if separately stated, unless they are not related to costs incurred by the seller to bring the product to market; the seller separately states the charges for the actual delivery or transportation from the place of the sale to the destination designated by the purchaser; and on the invoices for the sale and transportation, the place of the sale and the fact that the transportation is rendered subsequent to the sale and for the buyer's account, must be clearly determinable. Charges for packaging and handling are generally taxable. 6
Software Purchases Canned software, regardless of how delivered, is taxable and custom software is not. Custom Computer Software" means computer software prepared, created, adapted, or modified to the special order of a particular purchaser, licensee, or user; or to meet the specific needs or requirements of a particular purchaser, licensee, or user, regardless of the means by or through which such computer software is furnished, delivered, or transmitted, and regardless of whether such software incorporates or consists of preexisting routines, utilities, or other computer software components. Software Maintenance Agreements usually include a combination of services including: bug fixes provided at no charge, which would not be taxable; consultation services provided to software licensee, which would not be taxable; new or enhanced canned software, which would be taxable; and updating, enhancing, or reformatting of canned software, which would be taxable If a package of products and services consists of both taxable and non-taxable components, the entire package is taxable at the highest rate applicable to any component of the package, unless the non-taxable or lower percentage taxable components can be purchased separately from those that are taxable at higher rates and are separately priced. 7
Intercompany Transactions Arms-length intercompany sales are generally subject to sales tax. However, intercompany sales that are intentionally not arms-length can avoid sales tax. Advantages of limiting non-tax liability must be weighed against tax cost in connection with structuring intercompany sales. 8
Rentals v. Services Whether the transaction is a nontaxable service or a taxable rental depends on whether the essence of the transaction is a transfer of services or a transfer of tangible personal property. If the owner s contact is continuous and for the purpose of providing a service to customers that cannot be accomplished for any period of time without the presence of the service personnel, the transaction is generally a nontaxable service. If the owner's personnel contact the property only periodically while the property is in service to their customers, such as for the purpose of servicing or maintaining the property, the transaction is generally a taxable lease or rental transaction. In this case, sales tax is collected on the gross proceeds from leasing or renting, without deduction for operating expenses or maintenance costs, even when separately stated. Separate charges to the customer by the owner or lessor for the delivery and setup of the property would not be taxable. 9
Purchases of Earthen Materials When a contractor purchases sand or gravel from a third party who delivers it to a construction site, a taxable sale has occurred, because: the material is tangible personal property; and title or possession has transferred from the third party to the contractor; and there was consideration for the transfer in the form of the price paid to the third party. It is important to remember that a construction contractor is considered to be the end user of all tangible personal property that becomes an immovable. 10
Good Audit Defense Practices Among others, below are some good audit defense practices: Designate a single person to be the auditor s contact during the review process. Designated auditor contact should begin and maintain an audit log: Note the dates, times and issues discussed for all conversations with the auditor. Review of all documentation that will be presented to the auditor to determine relevance to the final transaction. Understand all laws, regulations, administrative interpretations and jurisprudence that are applicable to your business and situation. Document, document, document: Have all information requests and questions put in writing. Put all of your responses in writing. Keep a record of all documents, records and other information provided to the auditor. Keep a separate copy of all documents that the auditor takes a copy of. Maintain all of this in the Audit file for future reference. Timely respond to auditor requests for information and documents. Protect possible refund claims and point out overpayments to auditor. Treat the auditor cordially and expect the same treatment in return. Resolve as many issues as possible during the review process. Agree to disagree on truly disputed items and issues and move the discussion to the next level. 11
Effect of Change in Sales/Use Tax Rates on Existing Contracts/Contracts Bid On but not Awarded The state sales tax rate went from 4% on March 31, 2016 to 5% on April 1, 2106 and it will remain at 5% until June 30, 2018. Under existing statute, lump sum or unit price construction contracts are not impacted if entered into and reduced to writing prior to the effective date of the new tax; or entered into and reduced to writing within ninety days thereafter, if such contracts involve contractual obligations undertaken prior to such effective date and were computed and bid on the basis of sales taxes at the rates effective and existing prior to such effective date. Cost Plus and Fixed Fee contracts do not qualify for exemption. Application must be made to the Secretary to approve the exemption. 12
Other Constructions This issue is a nightmare for contractors and customers alike and the Department of Revenue seems unwilling to provide any guidance for the issue. There are far more questions than answers. 13