In the wake of Superstorm Sandy, businesses, homeowners, and governments from the Mid-Atlantic to New England are facing an enormous task of cleaning up, repairing, and rebuilding property. The state tax implications reach many different tax types, but one area in particular that frequently causes confusion is the application of sales and use tax to repair and installation services, and construction materials and services, especially for transactions involving contractors and subcontractors.
The states have provided specific rules for the application of sales and use tax to these and related types of transactions, which will be prevalent as impacted areas continue to mobilize recovery efforts. To avoid tax headaches later, it is important is to make sure that, whether you are the purchaser or provider of materials and services, tax is applied to the property and services in the appropriate manner.
With respect to repair and installation services, states frequently impose tax on the services but distinguish between services to tangible personal property and real property. Connecticut even distinguishes between repair and maintenance services to industrial, commercial, income-producing, and other real property. In New Jersey and New York, sales tax is generally imposed on repair and installation services to both tangible personal property and real property, but the states allow an exemption for installing property that will constitute an addition or capital improvement to real property.
Complications for repair and installation service contracts, as well as construction service contracts, frequently arise when tangible personal property is provided in conjunction with the service. Most states, including New Jersey, New York, and Massachusetts, consider sales of materials and supplies to contractors for improving, altering, repairing, or maintaining real property, retail sales subject to tax. Contractors are generally considered the end users of the property, and their purchases are taxable accordingly, but tax does not apply when the property is transferred to the purchaser of the contractor's services.
However, the states allow an exemption when a contractor purchases property for use in contracts with exempt entities and other exempt purchasers. For example, the Massachusetts Department of Revenue recently issued Letter Ruling 12-12, in which the department ruled that a subcontractor's sales of construction progress photographs to a general contractor on a public works project were exempt from sales and use tax. In this situation, the general contractor was acting as the agent of an exempt governmental body in acquiring the photographs from the subcontractor and was obligated to provide them to the governmental body, and the photographs became the property of the governmental body.
For additional discussion of the application of sales and use tax to construction materials and contractor services, and repair and installation services, see Bloomberg BNA Sales and Use Tax Navigator, Sections 5.10 and 6.5, and Portfolios 1310 and 1840.
By Christine Boeckel
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