The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
The newest trend in real estate is tiny homes—very small, often movable houses that are much less expensive than a traditional home. In this article, Bloomberg BNA's Ernst Hunter discusses the sales tax treatment of these homes.
Ernst Hunter is a state tax law editor at Bloomberg BNA.
An increasing number of Americans have come to view tiny homes as a legitimate solution to high housing costs. These diminutive dwellings often are constructed on a moveable chassis and comprise less than 200 square feet of living space. Their small size distinguishes them from typical mobile homes, and for this and other reasons, tiny homes frequently defy categorization under existing zoning and building codes.1 This distinction between tiny homes and mobile homes may have tax consequences as well.
Many jurisdictions have adopted tax base rules for mobile homes that apply sales tax to a fixed percentage of their sales price. To determine whether these rules apply to tiny homes and pay the correct amount of sales and use tax, manufacturers serving this niche market and purchasers of tiny homes must be mindful of the mobile home definitions applied to these tax base rules. In particular, the small size of tiny homes may disqualify them from treatment as mobile homes in certain jurisdictions. When tiny homes are designed in such a way that they may be easily relocated, this may also disqualify them from treatment as mobile homes.
By all indications, the heyday of the traditional mobile home in America has passed. The mobile home reached its zenith in 1973, with 579,900 new mobile homes sold nationwide that year.2 Sales have declined significantly since then, reaching an all-time low of 44,100 last year.3
But now it's beginning to look like the mobile home may see a renaissance. In recent years, a number of forward-thinking designers have compelled the question of whether the mobile home model is fundamentally flawed or if, instead, its perceived flaws exist only in the form of its execution.4
Unique tax base rules apply to prefabricated, modular buildings (2015 Weekly State Tax Report 3, 8/28/15). But in many states, mobile homes are an entirely different tax animal with their own unique tax base rules. For example, in Florida, a mobile home sold and installed by its manufacturer is treated as a “factory-built building,” and the manufacturer is subject to use tax on the cost price of items that it incorporates into the mobile home.5 This differs from the rule applicable to modular buildings, which requires that use tax be paid based on the building modules' fabricated cost, which is comprised of all-allocable material, off-site fabrication, service, transportation and overhead costs.6 By applying its tax base rule for factory-built buildings, Florida grants new mobile homes sold installed a tax treatment that is equivalent to the treatment of buildings constructed on-site. In both the case of factory-built buildings and buildings constructed on-site, Florida levies use tax on the cost price of items incorporated into the buildings.
Most commonly, states approximate parity between the tax treatment of mobile homes and the tax treatment of homes built on-site. Unlike the sale of other new buildings under which the contractor is treated as the end consumer subject to use tax on materials, mobile home sales are typically treated as sales of tangible personal property subject to sales tax. This might be expected to result in a higher tax base for mobile homes than for homes built on-site, one that includes the home's fabrication labor. To avoid this result, many states exclude from the tax base a fixed percentage of the sales price of mobile homes. For instance, Indiana deems only 65 percent of the sales price of manufactured homes to be attributable to the underlying materials and taxable as tangible personal property.7
Example : Arkansas imposes sales tax on 62 percent of the price paid for a new “manufactured” (mobile) home, excluding charges for delivery and installation.8 TrailerCo sells a new mobile home installed for $70,000. It charges $50,000 for the mobile home, $10,000 for delivery and $10,000 for installation. Assuming a combined state and local tax rate of 7 percent, the total tax-included price of the installed mobile home would be calculated as follows:
|Sales Tax ($50,000 x 0.62 x 0.07)||$2,170|
In some states that have special tax base rules for mobile homes, tiny homes will be disqualified from treatment as mobile homes because they fall outside the state's mobile home definition. In the case of tiny homes sold uninstalled, this will result in sales tax applying under the rules generally applicable to tangible personal property.
Example : Colorado imposes sales tax on 52 percent of the price paid for a new “factory-built” (mobile) home, excluding charges for delivery and installation.9 TrailerCo sells a new tiny home uninstalled for $65,000. It charges $60,000 for the tiny home and $5,000 for delivery. Assuming a combined state and local tax rate of 4.5 percent, conforming tax base rules at the local level, and that the tiny home qualifies as a mobile home, the total tax-included price of the tiny home would be calculated as follows:
|Sales Tax ($60,000 x 0.52 x 0.045)||$1,404|
Assuming the same facts, except that the tiny home does not qualify for treatment as a mobile home, the total tax-included price would be calculated as follows:
|Sales Tax ($60,000 x 0.045)||$2,700|
In this case, the tiny home is subject to $1,296 more in tax than if it had been taxed as a mobile home.
In those states that levy tax on less than 100 percent of the amount paid for mobile homes, tiny homes sold uninstalled will always be taxed less favorably if disqualified from treatment as mobile homes. However, if sold installed, this will not always be true.
Example : Maryland imposes sales tax on 60 percent of the price paid for a new “manufactured” (mobile) home, excluding charges for delivery and installation.10 TrailerCo sells a new tiny home installed for $65,000. It charges $50,000 for the tiny home, $5,000 for delivery, and $10,000 for installation. Applying Maryland's 6-percent state rate, and assuming that the tiny home qualifies as a mobile home, the total tax-included price of the tiny home would be calculated as follows:
|Sales Tax ($50,000 x 0.6 x 0.06)||$1,800|
If the tiny home does not qualify for treatment as a mobile home, the total tax-included price would be determined by applying use tax to TrailerCo's cost of the tiny home or, if TrailerCo manufactured the tiny home, by applying use tax to TrailerCo's cost of materials incorporated into the tiny home.11 Assuming the same facts as in the above example, except that the tiny home does not qualify for treatment as a mobile home, and assuming further that TrailerCo manufactured the tiny home out of materials that cost it $25,000, the total tax-included price of the tiny home would be calculated as follows:
|Use Tax ($25,000 x 0.06)||$1,500|
Under these particular facts, the tiny home sold installed is subject to $300 less in tax than if it had been taxed as a mobile home.
To determine whether a state's special tax base rules for mobile homes apply to a tiny home, a review of relevant state definitions will likely be required. Common differences between tiny homes and the mobile homes of yesteryear may cause a tiny home to fall outside of a state's mobile home definitions. In particular, a tiny home's small size and ease of relocation may disqualify it from treatment as a mobile home.
Tiny homes may be disqualified from tax treatment as mobile homes based on their size. Under the National Manufactured Housing Construction and Safety Standards Act of 1974 (NMHCSSA of 1974), unless a manufacturer voluntarily submits to the standards established for manufactured homes,12 a structure will only be treated as a “manufactured home” if it is at least eight feet wide, 40 feet long or 320 square feet in area.13 A number of states incorporate this definition into their definition of mobile homes to which special tax base rules apply. This is the case in Indiana where tax applies to a reduced tax base equal to 65 percent of a manufactured home's sales price.14 Idaho, South Carolina, Tennessee, Texas, West Virginia and Wisconsin incorporate this definition into their statutes as well and have similar reduced tax base rules.15 Some states may apply their own size requirements to their definition of mobile homes eligible for a reduced tax base. For example, in Connecticut, “mobile manufactured homes” are defined as being at least 12 feet in width.16 Tiny homes that meet Connecticut's definition of “mobile manufactured homes” are eligible for a reduced tax base equal to 70 percent of their sales price.17 In Maryland, manufactured homes are defined as being at least eight feet wide and at least 30 feet long.18 Maryland applies its tax to a reduced tax base of 60 percent of a manufactured home's sales price.19 It is not uncommon for tiny homes to fall beneath the NMHCSSA of 1974's size criteria or criteria otherwise established by the states.20 For this reason, depending on their dimensions, tiny homes may not qualify for special mobile home tax base rules in certain states.
In addition to the size requirements in some states, tiny homes may be excluded from treatment as mobile homes if they are not designed to be affixed to (rather than parked on) real property. For example, in Virginia, tax is imposed on a reduced tax base equal to 60 percent of the sales price of “modular” (mobile) homes intended to be permanently attached to real property.21 In Virginia, tiny homes with self-contained utility systems may be more likely to be treated like other tangible personal property not designed to be affixed to real property. Some other states specifically require that a structure be designed to be connected to outside utilities to be treated as a mobile home. For example, to qualify as a “manufactured” (mobile) home in Tennessee, a structure must be capable of being connected to utilities.22 For qualifying mobile homes, Tennessee reduces the tax base by 50 percent.23 In this and similar states, tiny homes with self-contained utility systems will be taxable as tangible personal property on their full sales price.
When new products and transaction structures gain popularity, transaction taxes are often strained to fit them within existing models. Tiny homes appear to represent one of the latest examples of this. The taxation of traditional mobile homes is an appropriate starting point for determining the tax treatment of tiny homes. In addition, the design specifics of tiny homes should be looked at to determine whether they fit within these established tax paradigms.
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