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State Taxation of Construction Contractors (Portfolio 1840)

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DESCRIPTION

The State Taxation of Construction Contractors Portfolioaddresses the manner in which states impose sales and use tax and gross receipts tax against contractors, while general considerations regarding income and property taxes are also addressed.

 

 

 

Readers will receive practical insights and planning opportunities for construction contractors serving private sector, government, or nonprofit clients and understand the state tax implications of each type of commonly-used construction contracts.

 

 

 

This Portfolio also sheds light on the various methodologies used by specific states such as California, Illinois, and New York to impose and assess tax against construction contractors.

 


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AUTHORS

LYNN A. GANDHI, ESQ.

Lynn A. Gandhi, Esq., is a partner in the state and local tax practice group of Honigman Miller Schwartz and Cohn LLP in Detroit. She has an extensive background in multi-state tax structuring and transactional planning. Her specializations include corporate income, net worth and franchise taxes, including single business tax, sales and use tax, gross receipts taxes, excise taxes, captive insurance company taxes, and investment incentives. She advises clients nationwide on multistate tax strategies, resolving tax disputes and litigating state tax cases. Lynn is a member of the American Bar Association Section of Taxation (Committee on State and Local Taxes), Tax Executives Institute (State and Local Tax Committee), Michigan Bar Association, and the Michigan Manufacturers Association Tax Advisory Committee. She is a member of the board of the Council On State Taxation and the Hartman Tax Institute, and chairs the State & Local Committee of the Detroit Chapter of TEI. She has served as a speaker and moderator at numerous tax conferences and seminars.

 

Credentials / B.A. degree, cum laude, Kalamazoo College; J.D., Wayne State University Law School; LL.M. in Taxation, New York University School of Law. Lynn is admitted to practice in Illinois and Michigan, and is also a Certified Public Accountant.

 


TABLE OF CONTENTS

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

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