Information for Construction Contractors

Terry O’Neill

Taxpayer Service Specialist

Today’s Webinar

• Definitions and details– 4 types of contractors

• Sales tax for each type of contractor– Materials, Equipment, Labor

• Differences between repair and construction

• Designated Exempt Entities

• Resources

What is a Construction Contract?

• An agreement to provide labor and materials to build a structure.

• General contractor, subcontractor, or builder.

• An individual, corporation, partnership, or other entity.

Four Types

• Contractor

• Contractor - Retailer

• Repair Company

• Manufacturer - Contractor

Does Type Matter?

Yes.• Basis for determining many tax obligations. • Must determine if engaged in

– Contracting or– Retailing or– Both or– Repair.

One status must be chosen.

What is a Construction Contractor?

• Consumer of building materials and supplies used in construction contracts.

And

• Pays sales tax on the purchases or Pays use tax to the Department of Revenue.

Sales Tax for Contractors

• New Construction– Pay tax on materials when purchased– Does not collect any tax from customers

• Performing Taxable Services– Pay tax on materials when purchased– Collects tax on labor and materials from customers– On Sales Tax Return takes credit for tax paid on materials,

if itemized on invoice to the customer

QUIZ QUESTION #1a

EFG Company is a mechanical contractor and has no retail outlets. EFG rarely sells any of its inventory to other persons or contractors

Does EFG pay sales tax when buying building materials?

Yes. Since EFG is a contractor, it must purchase all materials with tax paid.

QUIZ QUESTION #1b

Does EFG charge sales tax on those rare

occasions when it sells an item to another

person or contractor?

Yes. EFG must collect sales tax on the

selling price. EFG must have a sales tax

permit to report this tax.

QUIZ QUESTION #1c

Can EFG take credit for the sales tax paid

when the materials were purchased?

Yes. An adjustment can be made on the

sales tax return by entering the amount

EFG paid for the item as an “other”

exemption on line 4 of the sales tax

return.

What is a Contractor – Retailer?

• Generally Have a Store Front– supplies & materials – frequent retail sales to the public– may sell to other contractors– builds residential or commercial structures.

• Must Obtain a Sales Tax Permit and Collect/Remit tax accordingly – retail sales– taxable repairs– materials used in a construction contracts.

Sales Tax for Contractor – Retailers

Buys Tax Free • For supplies and materials to be resold.

• Provide supplier with a valid sales tax exemption certificate

Pays Sales Tax• To suppliers for supplies and materials not placed in inventory.

• To the Department if inventory is removed for use by the business.

Sales Tax for Contractor – Retailers

Collects Sales Tax from customers• For materials, supplies, and equipment sold without

installation

• When performing a taxable service (repairs) – sales tax charged on labor and materials

Doesn’t Collect/Remit Sales Tax• performing a construction contract

• materials withdrawn from inventory for use in construction projects performed outside Iowa

QUIZ QUESTION #2a

ABC Company operates a retail outlet that sells lumber and other building materials and supplies. ABC is also a contractor that builds residential and commercial structures.

Does ABC pay sales tax when buying building materials?

No. Since ABC is a contractor-retailer, it purchases all inventory items for resale.

QUIZ QUESTION #2b

When using materials to fulfill a construction

contract, does ABC pay tax on their cost of the

materials?

Yes. The materials should be reported as “goods consumed” on line 2 of the sales tax return.

QUIZ QUESTION #2c

Does ABC collect tax on materials it sells at

retail?

Yes. Items that are sold by ABC are subject

to sales tax at the over-the-counter selling

price.

Repair Companies

• Does– Repairs an existing structure that has been damaged.

• Rarely or Never– Sells supplies and materials

– Build residential or commercial structures.

Sales Tax forRepair Companies

• Itemizes Materials and Labor separately on the bill

• No sales tax on purchases of building materials and supplies when– purchases are for resale – give supplier a valid sales tax exemption certificate– collect tax on the total bill from the customer

Sales Tax for Repair Companies

• Doesn’t Itemize materials and labor:– pay tax on the materials when purchased – collect tax on the total bill

QUIZ QUESTION #3a

XYZ is a repair company that separately itemizes materials and labor on bills to customers.

Does XYZ pay sales tax when buying building materials?

No. XYZ purchases building materials tax

free for resale.

QUIZ QUESTION #3b

RST is a repair company that doesn’t separately itemize materials and labor on bills to customers.

Does RST pay sales tax when buying building materials?

Yes. RST cannot purchase building

materials tax free for resale.

QUIZ QUESTION #3c

Do XYZ and RST have to collect sales

tax from their customers?

Yes. Both must collect tax on the total

bill to their customers.

Manufacturer – Contractors

• Sell to contractors or other consumers– collects tax on the gross receipts.

• Make retail sales – must hold an Iowa sales tax or use tax permit.

• May sell or use their products in construction contracts.

Sales Tax for Manufacturer – Contractors

Primarily Manufacturers:• Tax is computed on “fabricated” costs.

– Materials– Labor,– Power– Transportation to the plant– Other plant expenses such as overhead, but it does not include

installation on the job site.

Primarily Contractors:• Tax is computed on the cost of raw materials.

Sales Tax for Manufacturer – Contractors

• New Construction– does not collect sales tax from the final customer.

• Taxable repair service– may withdraw materials from inventory tax free. – tax is collected from the final customer on the labor and

materials.

• Construction contracts outside of Iowa– no Iowa sales or use tax is due on the materials used.

QUIZ QUESTION #4

A manufacturer-contractor is functioning primarily as a manufacturer. When performing a construction contract, is tax due on the fabricated cost of materials or cost of raw materials?

Sales tax is due on the fabricated cost of materials.

What About Tools, Equipment, Supplies, & Materials?

Examples include:Barricades Forms

Building equipment Fuel

Compressors Hand tools

Cranes Lathes

Drill press Lodging

Dynamite Machinery Electric generators Pile Drivers

Equipment Parts Scaffolds

(replacement)

Stakes

Tools

Utilities

Vehicles, including grading, lifting and excavating vehicles

Warning lights

Tax is due on items that do not become part

of the realty being constructed.

Tax is Due on Building Materials & Supplies

•asphalt•bricks•builders hardware•caulking material•cement•central air conditioning•cleaning compounds•conduit•doors•ducts•electric wiring, connections, and switching devices•fencing materials•floor covering other than carpeting•flooring•glass•gravel•insulation•lath•lead•lighting fixtures•lime•linoleum•lubricants•lumber•macadam•millwork•modular and mobile homes•mortar

•oil•paint•paper•piping, valves, and pipe fittings•plaster •plates and rods to anchor masonry foundations•plumbing supplies•polyethylene covers•power poles, towers, and lines•putty•reinforcing mesh•rock salt•roofing •rope•sand•sheet metal•steel•stone•stucco•tile•wall coping•wallboard•water conditioners•weather stripping•windows•window screens•wire netting and screen•wood preserver

Some Machinery5% Excise Tax = Yes

Local Option Tax = No

• What Machinery?– Self-propelled building equipment

– Pile drivers

– Motorized scaffolding, or

– Attachments which improve their performance, safety, operation, or efficiency and including replacement parts.

Some MachinerySales Tax = Yes

Local Option Tax = Yes

• Used directly and primarily by – contractors, subcontractors, and builders

– for new construction, reconstruction, alterations, expansion, or remodeling of real property or structures.

• If rented for this purpose - rental payments are exempt from tax.

QUIZ QUESTION #5

A contractor purchases a bulldozer.

Should the contractor pay tax?

Yes. Iowa 5% excise tax is due.

Is Labor Taxable?

• demolition • electrical and electronic

repair and installation • excavating and grading • house or building moving • landscaping, lawn care, and

tree trimming and removal • painting, papering, and

interior decorating

• pipe fitting and plumbing • roof, shingle, and glass

repair • sign construction and

installation • welding • well drilling

Only enumerated services are taxable Examples of (enumerated) taxable services related to

construction contracts include:

Is Labor Taxable?

YES when taxable services

are performed to repair:

• Tangible personal property • Real property

Is Labor Taxable?

NO when services are performed on or connected with

• new construction, • reconstruction, • alteration,

• expansion• remodeling of buildings or

structures.

Repair & New ConstructionWhat’s The Difference?

Repair• Mend, restore, maintain, replace, or service - restores an

existing structure that has been damaged.

• When in doubt, treat as a taxable repair. Can always apply for a refund of tax paid.

Repair Examples

• Broken or defective glass / windows • Individual or damaged roof shingles • Original wiring in a house or building • Defective:

– garage door or garage door opener– kitchen cabinets– tub, shower, or faucet – water heater, furnace, or central air conditioning

compressor

Repair & New ConstructionWhat’s The Difference?

New Construction, Reconstruction, Alteration, Expansion or Remodeling• Labor is exempt from sales tax for real property and structures

only. Not tangible personal property.

• You pay tax to the supplier for materials.

• You do not charge tax to the customer for labor or materials.

Examples

New Construction• To existing structures

– Building or adding a garage – Adding a deck – Replacing a roof – Adding a new room

• Installing a modular or mobile home on a foundation

• Sign installation and well-drilling services when performed in connection with new construction

Examples

Reconstruction• Rebuilding a structure damaged by flood, fire, or other

uncontrollable disaster or casualty

Reconstruction or Remodeling

• Replacing an entire water heater, water softener, furnace, or central air conditioning unit that is not defective

Examples

Alteration• Adding a new room by building interior walls

Alteration or Remodeling • Replacing kitchen cabinets that are not defective • Paneling existing walls • Laying a new floor over an existing floor

Expansion• Building a new wing to an existing building

Additional CircumstancesIs Labor Taxable?

Circumstance Example

Timing close/near to construction Excavate as part of construction project = exempt; Grade for seed a year after construction = taxable

Physical Relationship Machinery installed during machinery building construction = exempt

Magnitude of Service Replace a few shingles = repair = taxableReplace an entire roof = construction = exempt

Is Item Replaced Defective Replace working furnace for energy efficient furnace = reconstruction or remodeling = exemptReplace broken furnace = repair = taxable

Capital Improvement Capital Improvement contracts are not always construction. Must consider total project.

Both Construction and Repair Itemize statement for taxable repair labor and exempt construction

QUIZ QUESTION #6

A homeowner has a new more energy

efficient water heater installed. The

existing water heater was in working

order. Is the installation treated as

repair or new construction?

New construction.

Designated Exempt Entities –Only the Following

• private nonprofit educational institution in Iowa

• nonprofit private museum in Iowa

• tax-certifying or tax-levying body or governmental subdivision of Iowa, including the state board of regents, state department of human services, state department of transportation

• Habitat for Humanity

• rural water districts organized under Iowa Code chapter 357A

• municipally-owned solid waste facility which sells all or part of its processed waste as fuel to a municipally-owned public utility

• all divisions, boards, commissions, agencies, or instrumentalities of state, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder

NOTE: Nonprofit hospitals are NOT

designated exempt entities.

Exemption Certificates

• Designated exempt entities – May issue special exemption certificates to contractors and

subcontractors

• Exemption Certificates allow:– Purchase of materials free from sales tax– Use of building materials from inventory without tax

• See Department Web site for more detailed information

How it Works• Designated exempt entities:

– Register contracts with Department of Revenue• Includes information on contractors and subcontractors. • Uses online application.

– Provide each contractor/subcontractor with an exemption certificate/authorization letter developed exclusively for this purpose.

• The letters are printed directly from the online application.

• Contractors and subcontractors give a copy of the certificate to their material suppliers. – Allows purchase building materials for the contract free from sales tax.

• Suppliers should retain this certificate in their records for at least three years.

Benefits for Exempt Entities

• Contracts don’t include Iowa sales tax, which lower the bids.

• They do not need to obtain Contractor’s Statements after the project is completed.

• They do not need to apply to the Iowa Department of Revenue for a refund of Iowa sales tax.

QUIZ QUESTION #7

A new nonprofit hospital is being built.

Does the hospital qualify as a

designated exempt entity?

No.

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