State Taxation of Construction Contractors provides an overview of state taxation issues facing construction contractors. The Portfolio addresses the manner in which states impose both sales and use tax and gross receipts tax against contractors. General considerations regarding income and property taxes are also addressed. Written by Lynn A. Gandhi, Esq., of the law firm Honigman Miller Schwartz and Cohn LLP, this Portfolio provides practical insights and planning opportunities for construction contractors serving private sector, government, or nonprofit clients. The author describes the various forms of construction contracts that are commonly used and explains the state tax implications of each form of agreement. 

State Taxation of Construction Contractors analyzes such topics as:

• Income and property tax issues,
• Types of incentives, including industrial bonds, financing programs, and abatement/refund programs,
• Elements and nature of lump-sum (fixed price) construction contracts, separate or split contracts, time and material contracts, and cost-plus contracts,
• Tax treatment of contractors that manufacture materials,
• The taxation of freight, leased equipment, and supplies,
• Warranty and repair contracts, and
• Exemptions related to contractors’ activities. 

In addition, this Portfolio addresses the various methodologies used by specific states such as California, Illinois, and New York to impose and assess tax against construction contractors.

State Taxation of Construction Contractors allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Plain-English guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

Detailed Analysis

1840.01. INTRODUCTION

A. Overview

B. General Contractor Issues

1. Who is the Contractor

2. Moment of Taxable Use

a. “Used” or “Consumed” or “Attached to Real Property”

b. The “Exercise of Any Right or Power”

c. “Stored” or “Intended for Use” Within the State

1840.02. APPLICATION OF SALES AND USE TAXES TO CONTRACTORS

A. Application of Sales Taxes

B. Application of Use Taxes

C. Treating the Contractor as the Consumer

D. Distinguishing Between Improvements to Realty and Tangible Personal Property

1. Improvements to Realty

2. Tangible Personal Property

3. State-by-State Analysis

a. In General

b. Specific States

(1) California

(2) Illinois

(3) New York

(4) Ohio

(5) Pennsylvania

(6) Wisconsin

E. Contracts with the Federal Government and Agencies

1. Framework of Federal Government Contracts

2. Federal Regulations Regarding Contractors

3. Right to Receive a Refund

F. Contracts with State Agencies and Non-Profit Organizations

1. State and Municipal Governments

2. Governing Requirements

a. Acting Within Governmental Capacity

b. Direct Payment by Governmental Unit

c. Use of Prescribed Forms

d. Use of an Agency Agreement

e. Verification of Tax Registration and Compliance

3. Projects for Non-Profit Organizations

G. Direct Pay Permits

H. Nonresident and Subcontractor Issues

1. Use of Nonresident Contractors

2. Subcontractors

1840.03. APPLICATION OF GROSS RECEIPTS TAXES

A. Gross Receipts Taxes

B. States Imposing Gross Receipts Tax

1. Arizona

2. Indiana

3. Mississippi

4. Washington

C. Local Jurisdictions Imposing a Gross Receipts Tax or Excise Tax

1. Home Rule Jurisdictions

2. North Dakota Local Taxes

1840.04. OVERVIEW OF INCOME AND PROPERTY TAX ISSUES

Introductory Material

A. Income Tax Issues

1. Apportionment and Sourcing Issues – The “Cost of Performance”

2. Title Transfer Issues

B. Property Tax Issues

1840.05. CREDIT AND INCENTIVE PROGRAMS

A. Types of Incentives

1. Enterprise Zones

2. Industrial Bonds

3. Financing Programs

4. Abatement/Refund Programs

B. The Role of the Contractor

1. Working With the Customer

2. Incorporation in the Work Plan

3. Cost-Segregation Analysis

4. Applications and Incentive Compliance

1840.06. THE NATURE AND ELEMENTS OF CONSTRUCTION CONTRACTS

A. Types of Contracts

1. Lump-sum (Fixed Price) Contracts

a. Turnkey Projects – Material Costs

b. Tools, Consumables and Supplies

2. Separated or Split Contracts

a. Effect of Split Contracts

b. Elements of Separated Contacts

3. Other Contract Types

a. Time and Material Contracts

b. Cost-Plus Contracts

1840.07. THE CONTRACTOR AS A MANUFACTURER OF FABRICATED MATERIALS

Introductory Material

A. Application of the Manufacturing Exemption

B. Self Use of Fabricated Materials

1. In General

2. The “Morton Building” Cases – Not a “Purchase at Retail”

a. Connecticut

b. Missouri

c. New York

C. Sales of Fabricated Materials

D. Contracts With Affiliated Companies

E. Direct Purchase Opportunities

1. Ownership of Raw Materials

2. Written Contract

3. Reserves

F. Scrap Materials

1. Inclusion of Scrap Materials in the Tax Base

2. Valuation

3. Affect on Apportionment Factors

1840.08. EXEMPTIONS RELATED TO CONTRACTORS' ACTIVITIES

A. Machinery and Equipment Exemption

1. Manufacturing Machinery and Equipment

a. The Direct Use Test

b. The Integrated Plant Theory

2. Specific Types of Machinery and Equipment

a. Transportation Equipment

b. Packaging Equipment

c. Pollution Control Equipment

d. Research and Development Facilities

e. Computer Systems and Equipment

B. Preserving Exemptions Upon Audit and Review

1. Preferred Contract Structure

2. Obtaining Exemption Certification

a. Properly Executed Certificate

b. Proper Basis for Exemption

c. Retention of Certificate

3. Operations Assistance

a. Clarifying the Scope of the Exemption

b. Advising on Equipment Usage

c. Written Records

4. Audit Defense

1840.09. FREIGHT, LEASED EQUIPMENT AND SUPPLIES

A. Freight

1. Inbound Freight or “Freight In”

2. Outbound Freight or “Freight Out”

B. Equipment Leasing

1. When No Operator is Provided

2. When an Operator is Provided

3. Segregated Leasing Company

a. Advantages

b. Disadvantages

4. Transient Construction Property

C. Supplies

1840.10. REPAIR AND WARRANTY CONTRACTS

A. Repair Contracts

1. Repairs to Tangible Personal Property Versus Repairs to Improvements to Realty

a. General Rule

b. Improvements to Realty

2. Repair Parts and Supplies

a. Types of Repair Parts and Materials

b. Insignificant to Total Cost

c. Capital Parts and Expense Items

d. Exemptions for Repair Parts

3. Inventory Items

a. Prepayments of Tax

b. Owner Furnished Parts and Materials

B. Maintenance Contracts

1. Periodic and/or Regular Maintenance

2. Occasional and/or Sporadic Maintenance Contracts

C. Warranty Contracts

1. Warranty Guarantees and “Purchased Warranties”

a. Definition

b. Scope of Work

2. “Purchased Warranties”

a. Definition

b. Scope of Work

1840.11. TAX CLAUSES AND INDEMNIFICATION AGREEMENTS

Introductory Material

A. Tax Clauses

1. Tax Clauses in Separated Contracts

2. Professional Review

B. Indemnification Agreements

1. Use of a Letter Agreement

2. Legal Review

Working Papers

Item Description Sheet

Worksheet 1 Cal. State Bd. of Equal., Audit Manual Chapter 12- Construction Contractors

Worksheet 2 Cal. State Bd. of Equal., Tax Tips for Construction and Building Contractors, Pub. No. 9 (12/02)

Worksheet 3 Colo. Dept. of Rev., Contractors and Retailer Contractors, FYI Sales 6 (10/04)

Worksheet 4 N.J. Div. of Taxn., Contractors and New Jersey Taxes, Tax Topic Bulletin S& U-3 (Rev. 4/04)

Worksheet 5 N.J. Div. of Taxn., Sales Tax and Home Improvements, Tax Topic Bulletin S& U-2 (Rev. 3/04)

Worksheet 6 Sample Indemnification Agreement

Bibliography

Bibliography