Friday, February 05, 2010

Watch Out, Construction Contractors!

There was a case recently in Minnesota. You can read the opinion here, if you dare. Section I is what I'm going to talk about.

Remember the typical way that contractors are handled in most states: they pay sales or use tax on their building materials but do not charge their customers tax. What they sell (construction contracts) isn't taxable.

The intention of the law is that the contractor, when preparing his bid, factors in his material costs, which include the sales tax. So the contractor really looses no money. The tax gets passed on to the customer, buried in the material costs.

But in the above situation, the contractor got busted. He didn't bury the tax in the material cost. Instead, he showed it separately on his billings and apparently in a pretty obvious way. It was so obvious, (and I'm reading between the lines a little) that his customers (and the auditor) could easily assume that he was billing for the sales tax.

Minnesota law states that, if you bill someone for sales tax, you owe that money to the state, even if the billing was incorrect or illegal. Similar laws exist in many of the states.

This guy had billed his customers sales tax by showing it on the invoice. Minnesota held out their hand and said, "pay up." He argued that he had already paid the tax to his building materials vendors. They said, "Don't care. You collected sales tax. Pay it to us." He lost.

I'm often asked about this by contractors. "My customer wants to see my costs broken out separately on the invoice. Can I show the sales tax I paid?"

The answer is be very, very careful. You don't want it to look, in any way, like you're charging them sales tax. Frankly, the best way is just to show the material cost, with the tax as part of the number. Heck it's calculated for you - it's at the bottom of your materials invoices. But if you show the tax on the invoice, even if you're careful to say that it's merely one of all the costs you've paid for the materials, you might get an over-zealous auditor. Like me.

Check the law in your state to see how much flexibility you have. And write your contracts so that you don't have to break out the sales tax on the your invoices.

The Sales Tax Guy

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

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