Anthony Pokrentowski, CPA, Dannible & McKee, LLP
Taxable vs. Nontaxable Services
In NYS, sales tax applies to two main categories for contractors: repairs and maintenance, and installation services. Repairs and maintenance are subject to tax when they involve fixing or maintaining existing systems or structures, such as repairing damaged roof shingles or fixing a broken railing. Installation services are taxable when the installed items do not become part of the real property. This includes freestanding appliances, above-ground swimming pools, canvas awnings or weather stripping.
Conversely, capital improvements are exempt from sales tax. A capital improvement is characterized as an addition or modification that must:
1. Enhance the property’s value
or extend its useful life.
2. Become a permanent part of
the property.
3. Be intended as a permanent fixture.
To qualify, the customer must provide the contractor with a Certificate of Capital Improvement (Form ST-124).
Distinguishing between repairs and maintenance versus capital improvement can sometimes be tricky. The NYS Department of Taxation and Finance’s Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, offers guidance. However, each project should be assessed individually to determine its classification.
Purchasing and Billing
Contractors generally pay sales tax on all materials and other tangible personal property purchased. Nevertheless, as discussed later, situations exist where purchases may be exempt, or credits can apply.
When invoicing a customer for taxable services, sales tax applies to all materials and labor costs, including markups. For instance, if $200 is billed for materials and $400 for labor, sales tax applies to the total of $600.
Organizations like churches, private schools and government entities are exempt from sales tax. To forgo collecting sales tax, contractors must obtain an Exempt Organization Certificate (Form ST-119) from these customers. In some situations, contractors can purchase materials tax-free when transferred to a tax-exempt customer as part of the project by using a Contractor Exempt Purchase Certificate (Form ST-120.1).
Use of Subcontractors
General contractors can hire subcontractors for taxable work without paying sales tax by using a Contractor Exempt Purchase Certificate (Form ST-120.1). This exemption allows the services the subcontractor provides to be exempt from sales tax to the general contractor. However, the general contractor remains responsible for collecting sales tax on the entire amount charged to the customer, which includes the fees of the subcontractor.
Materials and Projects
When purchasing materials for taxable services, contractors must pay sales tax at the time of purchase, but they can claim a credit for the tax paid. Examples include plywood, drywall, nails, landscaping, plumbing and electrical materials. However, credits do not apply for sales tax paid for items not transferred to your customer as part of the project, such as tools, rental equipment, paint brushes, drop cloths and gas.
For capital improvement projects, contractors pay sales tax on all purchased materials but do not charge sales tax to the customer. Additionally, you cannot claim a credit for the sales tax paid on these materials on your sales tax return. However, the sales tax paid on materials can be included in your material costs for the job performed.
When working with tax-exempt organizations, you can purchase materials tax-free using the Contractor Exempt Purchase Certificate (Form ST-120.1). If sales tax was paid on materials that later were used in an exempt project, you can claim a tax credit on those materials. However, sales tax paid on other supplies, even if used in an exempt project, cannot be claimed for credit.
Credits
Contractors may claim a sales tax credit if they paid sales tax on materials purchased and then passed those materials on to a customer as part of a taxable service while also charging sales tax to your customer. However, credits do not apply to capital improvement projects.
If you purchase materials and pay sales tax in NYS and later use them for an out-of-state project, you can receive a credit for the NYS sales tax paid. Similarly, if sales tax is mistakenly charged to a customer and later refunded, you can claim a credit for the refunded sales tax.
Subcontractors can accept a Contractor Exempt Purchase Certificate (Form ST-120.1) from the prime contractor instead of charging sales tax. Doing so does not prevent you from claiming a sales tax credit for any taxes paid on materials, provided that the project qualifies as a taxable repair, maintenance or installation service.
Documentation
To claim credits or substantiate nontaxable sales, contractors must maintain proper documentation, including:
• Purchase invoices showing sales tax paid.
• Customer invoices detailing materials used or invoices indicating materials were resold as retail.
• Contracts confirming the project as a repair, maintenance or installation service.
• Form ST-124 for capital improvement projects.
•Exemption certificates from customers, as needed.
Navigating NYS sales tax rules requires a clear understanding of taxable services, capital improvements, and the ability to manage tax credits and exemptions. Maintaining thorough documentation and staying updated on tax guidelines can help contractors stay compliant and avoid penalties. If in doubt, consulting with a tax professional is advisable
Anthony P. Pokrentowski, CPA, is a tax senior manager at Dannible & McKee, LLP, a public accounting firm with offices in Syracuse, Auburn, Binghamton and Schenectady, NY, and Tampa, FL. The firm has specialized in providing tax, audit, accounting, and advisory services since its inception in 1978. For more information on this topic, you may contact Anthony at (315) 472-9127 or visit online at www.dmcpas.com.