New York State Sales Tax – A Complex Issue

When discussing the complexities of taxes for contractors, most people immediately think of income taxes. Yet, there is another significant tax that can be equally intricate: sales tax.

For contractors operating in New York State (NYS), it’s vital to understand the sales tax requirements to ensure you are compliant and managing your taxes correctly. Here are five important topics to become familiar with:

1. Distinguishing between taxable and nontaxable services.
2. Navigating the process of purchasing and billing.
3. Handling of tax-exempt customers.
4. Understanding the implications of using subcontractors.
5. Identifying potential tax credits.

Taxable vs. Nontaxable Services

Taxable Services

In NYS, contractors must navigate two primary categories of taxable services under sales tax: (1) repairs and maintenance and (2) installation services. Repairs and maintenance are subject to tax when performed to keep real property in good working order, readiness, safety or restore it to such condition. Common examples include:

• • Fixing a broken railing;
  • Repointing a chimney;
  • Replacing a faucet; and
  • Repairing damaged roof shingles.

Installation services are taxable if the installed items are not a permanent part of the real property, such as freestanding appliances, above-ground swimming pools, canvas awnings or weather stripping.

Nontaxable Services

Capital improvements are the only category of services provided by contractors that are exempt from NYS sales tax. A capital improvement is defined as any addition or modification to real property that: significantly enhances the property’s value or extends its useful life; becomes a permanent part of the property or is affixed in a way that removing it would cause substantial damage; and is intended to be a permanent fixture. For a project to qualify as a capital improvement, the customer must provide the contractor with a completed Certificate of Capital Improvement (Form ST-124).

Repair or Capital Improvement Determination

Sometimes, determining whether a service qualifies as repair and maintenance or a capital improvement can pose a challenge. The New York State Department of Taxation and Finance provides guidance in Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, which offers detailed examples to help distinguish between the two categories. Nonetheless, it’s essential to assess each project individually to determine its classification accurately.

Purchasing and Billing

Purchasing

As a contractor or subcontractor, you typically must pay sales tax on all building materials and other tangible personal property you purchase. However, as discussed below, specific circumstances exist where these purchases may be completely exempt from sales tax, or where credits are available to offset the tax liability.

Billing

When issuing an invoice to a customer for services rendered, all costs related to materials and labor for any repair, maintenance or installation project, including any markups, are subject to sales tax. For instance, if you bill a customer $200 for materials and $400 for labor, sales tax must be applied to the total of $600.

Tax-Exempt Customers

Certain customers, including churches, private schools, charitable organizations, and government entities, are not obligated to pay sales tax. For these exempt customers, you need to receive a completed Exempt Organization Certificate (Form ST-119) from them to document their exemption, which will allow you to forgo the collection of sales tax. In some situations, you may purchase materials or other tangible personal property without paying sales tax provided that these items are transferred to the tax-exempt customer as part of the project. To make tax-free purchases, you must furnish a Contractor Exempt Purchase Certificate (Form ST-120.1) to your supplier.

Use of Subcontractors

When a general contractor hires a subcontractor to perform taxable work on a project, the general contractor can obtain the subcontractor’s services tax-free by using the Contractor Exempt Purchase Certificate (Form ST-120.1). This exemption means that the services rendered by the subcontractor are not subject to sales tax for the general contractor. However, the general contractor is still responsible for collecting sales tax on the entire amount billed to the customer, which includes the subcontractor’s fees. This purchase of services for resale can occur between general contractors and subcontractors or between two subcontractors.

Credits

Qualifying to Take a Credit

If you have paid sales tax on building materials purchased from a supplier and then passed those materials on to your customer as part of a taxable repair, maintenance, or installation service while also charging sales tax to your customer, you can claim a sales tax credit on your return. This credit usually applies when the work is categorized as a taxable repair, maintenance, or installation service. However, you cannot get the credit if the work is classified as a capital improvement.

Subcontractors’ Credit

If you’re a subcontractor, you 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.

Materials Used in a Taxable Repair, Maintenance or Installation Service

When purchasing materials from a supplier that will be used for a taxable service provided to your customer, you must pay sales tax at the time of purchase. Fortunately, you can claim a sales tax credit for the tax paid on these materials. Examples of such materials include, but are not limited to:

• • Plywood, drywall, shingles and 2 x 4s;
  • Nails, screws, bolts and staples;
  • Electric materials;
  • Plumbing materials; and
  • Landscaping materials

You cannot claim a credit for sales tax paid on materials, supplies or other items that are not transferred to your customer as part of the project you undertake. Items include:

• • Tools, such as hammers, paint brushes, etc.;
  • Consumable supplies, such as sandpaper and garbage bags;
  • Cell phones, pagers and office supplies;
  • Drop cloths;
  • Uniforms, clothing and work boots;
  • Equipment or tools you rent;
  • Gases used in plumbing, welding, etc.; and
  • Vehicle fuels used in vehicles.

Materials Used in Capital Improvement Projects

When performing capital improvement projects, it is important to remember that while you are required to pay sales tax on all purchased materials, you should 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.

Work Performed for Exempt Organizations

When providing services for a tax-exempt organization, you can purchase materials tax-free by providing a completed Contractor Exempt Purchase Certificate (Form ST-120.1) to your supplier. If you initially purchased materials without this exemption and later used them in the project, you can claim a tax credit for the sales tax paid on those materials. However, sales tax paid on other supplies, even if used in an exempt project, cannot be claimed for credit.

Other Situations Where Credits May Apply

If you purchase materials and pay sales tax in NYS but subsequently use those materials for a project outside of the state, you can receive a credit for the sales tax paid to New York State. Similarly, if you mistakenly charge your customer sales tax and later refund that tax amount to the customer, you are eligible to claim a credit for the refunded sales tax.

Documentation

To claim any of the credits mentioned, as well as substantiate your nontaxable sales, it’s essential to maintain thorough documentation, which includes:

• • Purchase invoices showing sales tax paid to your suppliers.
  • Invoices issued to customers that detail materials used in the project or invoices indicating materials were resold as retail.
  • Customer contracts or invoices confirming the project as a repair, maintenance or installation service.
  • Copies of all Form ST-124s that certify the project as a capital improvement.
  • Any additional documentation, such as exemption certificates from customers, validating your eligibility for tax credits.

These documents are crucial to substantiate your claims for tax credits.

If you are unsure of your company’s treatment of NYS sales tax or need assistance with determining taxable versus nontaxable services, applying taxes to purchasing and billing, serving tax-exempt organizations, working with subcontractors, understanding what credits you may be eligible for or would like assistance with your sales tax returns, please contact our office so we can help you comply with all sales tax requirements.

Contributing author: Anthony P. Pokrentowski, CPA, is a tax senior manager at the firm. He specializes in manufacturing, construction and the professional service industries, as well as multi-state entities and high-net-worth individuals. For more information on this topic, you may contact apokrentowski@dmcpas.com or (315) 472-9127.