Construction contractors operating in Ohio can be caught in the middle for sales and use tax

Ohio law deems contractors the "consumer" of tangible personal property installed into real property if it remains real property after installation.^[1]  As the consumer, the contractor would pay sales tax to their supplier (or accrue Ohio use tax if no tax is charged by the supplier) based on the cost of the tangible personal property. For example, if a contractor is hired to replace a load bearing wall in a building, the contractor would be the consumer of the materials used in completing that project.

However, Ohio law considers contractors the "vendor" when they install tangible personal property into real property that retains its status as tangible personal property after installation (a “business fixture”). As a vendor, the contractor would collect sales tax from the contractee based on the amount charged (including the cost of the property, mark-up/profit, and labor to install). For example, if a contractor is hired to construct a business’ sign (includes the company name and/or logo) on the front of the building, the contractor should collect sales tax on the installed price of the sign including mark-up and labor.

To further complicate matters, some contractees are exempt from sales and use tax, which can make the contractors’ purchases of materials exempt from sales and use tax. Those same contractees would also be exempt from sales and use tax if the contractor is required to collect sales tax (i.e., business fixture) as a vendor.

Impact to contractors

If contractors fail to make the proper determinations, they could be held liable for any unpaid sales or use tax. Contractors have the burden to determine the answers to the following questions:

• Is the contractee exempt from sales and use tax for their project?
• What is the proper classification (real v. business fixture) for the items to be constructed?
• Is the contract a mixed contract (both real and business fixtures)?
• Should they purchase the materials for the project exempt from sales and use tax or pay tax to their supplier for all or a part of the purchases?
• Should they charge sales tax on all or a part of the sales price of the contract?
• What documentation should they maintain to support any decisions made in case they are audited by the Ohio Department of Taxation?

Knowing the proper sales or use tax treatment for each project allows contractors to include the appropriate amount of sales or use tax in the bid to the contractee.

Contractors should analyze their activity in Ohio to determine if any potential exposure or refund opportunities exist.

Should contractors wait to be contacted by the Department?

No, contractors can be proactive in addressing this issue in three ways:

1. Consumer’s Use Tax Amnesty­ (CUT Amnesty)—Contractors can apply for CUT Amnesty (October 1, 2011 through May 1, 2013, see Multistate Tax Services Alert for more detail) and remit the use tax liability for periods back to January 1, 2009 with no interest or penalty. A payment plan may also be available.
2. Voluntary Disclosure—Contractors can apply for a voluntary disclosure agreement for sales tax (possibly use tax if a contractor does not qualify for CUT Amnesty) and remit the past three years plus full interest (no penalty would apply) [we can assist contractors with determining if Amnesty or Voluntary Disclosure is the better option]; or
3. Managed Audit—Contractors can request a managed audit from the Department’s Audit Division and remit the tax liability plus full interest for the audit period, which is typically three years for registered taxpayers (no penalty would apply). This type of audit involves the Department and the contractor planning the audit together and allows the contractor to complete part of the actual work, which minimizes the involvement of the Department in the audit process. Contractors are often more comfortable with this audit approach and feel more in control of the audit.

Our Multistate Tax professionals have considerable experience assisting companies in understanding the complicated sales and use tax statutes, rules and information releases and helping quantify potential exposure or refund opportunities. Further, our Multistate Tax professionals are very experienced with conducting and defending sales and use tax audits if a business has already been contacted.

_________________________

^[1] The sale and installation of carpeting and landscaping are always treated as retail sales and contractors should collect tax (or an exemption certificate) when selling these items. 

If you would like to discuss this sales and use tax issue or how McDonald Hopkins can help you resolve potential sales and use tax liabilities, please contact: 

John R. Trippier

(non-attorney professional)

614.458.0042

jtrippier@mcdonaldhopkins.com

Adam L. Garn

614.458.0032

agarn@mcdonaldhopkins.com

or any of our Multistate Tax Group by clicking on the link below:

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. This can be a daunting task. We provide a broad range of state and local tax services including tax planning, tax controversy, real estate tax abatement and exemption, and tax policy advocacy. With professionals who have worked both inside and outside government agencies, the multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.