|
Sales Tax Advice for Contractors Who Improve Real PropertyAs of October 1, 2008, if a contractor charges a customer sales tax on improvements to real property, the Idaho State Tax Commission will no longer accept sales tax collected from a customer as a substitute for the tax the contractor owes on the purchase of contract materials.
Types of improvements:Many types of contractors improve real property, each making changes or additions to land or buildings. Here are some types of improvements:
When to pay tax on purchases:All contractors are considered the consumers or users of building materials they buy and must pay a tax on the purchase price. The following scenarios are two examples of when a contractor owes tax on the purchase price of building materials: Scenario 1: A carpet layer buys carpet tax-free and installs it in a home under construction at the direction of a home builder. The carpet layer then can’t charge the home builder sales tax on the retail sales price of the carpet material because the carpet layer is improving real property. Since the carpet layer didn’t pay sales tax, the carpet layer must pay a use tax to the state on the purchase price of the carpet. Scenario 2: When a carpet vendor agrees to sell carpet to a customer and arranges for a subcontractor to install the carpet in the customer’s home, the vendor can’t charge the customer sales tax on the retail sales price of the carpet because the vendor is improving real property. The vendor must pay a use tax to the state on the vendor’s cost for the carpet. Retail sales vs. improvements to real property:Idaho sales tax law distinguishes between retail sales and improvements to real property. A retail sale is taxable to the purchaser. Whether a homeowner buys carpet to install at home, or a contractor buys carpet to install in a customer’s home, the buyer owes tax on the carpet price. While retail sales are taxable, improvements to real estate, such as carpet installation, are not. A home builder or a homeowner can rightly refuse to pay sales tax on the price of materials in a real property improvement or can request a refund from the contractor or the state for a tax paid in error. However, even sales tax collected in error is the state’s property, held in trust by the business that collected it. The sales tax collected can only be used as a refund to the customer or remain as property of the state. How to pay tax on purchases:Contractors should pay their vendors the tax on the purchase price of the building materials, or when the vendor isn’t registered in Idaho, pay a use tax directly to the Tax Commission. Contractors who also have a retail business can buy materials for resale tax-exempt and then pay a use tax to the state when they withdraw material from their retail inventory for an installation contract. Or they can pay a tax on all purchases and take a credit for the tax paid on the cost of materials they later sell at retail. How to bill customers:All contractors who improve real property can bill home builders or other customers for materials, markup, labor, profit, and other costs of doing business (including sales taxes paid on purchases). The contractor should not charge sales tax to customers on real property contracts. Using the correct billing method lowers the cost for the customer. The sales or use tax on a contractor’s purchase price of building materials is lower than the sales tax on the marked-up retail sales price. Since a contractor wants to recover all costs in a billing, using the method described above can make the contract price more competitive. Resources:Brochures: Rules:
Code: Contact us if you have more questions about how sales and use tax applies to real property contracts. NOTE: The information on this Web page provides general information only and is not intended to offer comprehensive explanations of Idaho tax laws and rules.
|
|||||||||||||||||||||||||||||||||
