New York State Sales Tax for Contractors
Federal and state income taxes are not the only complex taxes that affect contractors. New York State (NYS) sales tax is another important form of taxation that companies must comply with. For contractors, the following items are extremely important to understand when it comes to NYS sales tax: (i) understanding what services are taxable versus nontaxable; (ii) how to deal with purchasing and billing; (iii) how to treat tax-exempt customers; (iv) the effect of using subcontractors; and (v) identifying credits.
Taxable vs. Nontaxable Services
When it comes to contractors, taxable services for NYS sales tax purposes come down to two categories: (1) repairs and maintenance and (2) installation services. Repairs and maintenance services are taxable when it pertains to a job where the purpose is to keep real property in good working order, readiness and safety or restoring it to that condition. Examples of repairs and maintenance services include:
- fixing a broken railing;
- repointing a chimney;
- replacing a faucet; or
- replacing damaged roof shingles.
Installation services are taxable when the items installed do not become part of the real property. This includes the installation of items such as:
- freestanding appliances;
- above-ground swimming pools;
- canvas awnings; or
- weather stripping.
Capital improvements are the only form of service performed by a contractor that is not subject to NYS sales tax collection. A capital improvement is defined as an addition or alteration to real property that: (i) substantially adds to the value of the real property or appreciably prolongs the useful life of the real property; (ii) becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself; and (iii) is intended to become a permanent installation. To be considered a capital improvement, the customer must provide to you, as the contractor, a completed Certificate of Capital Improvement (Form ST-124).
Determining Whether Services Are Repairs or Capital Improvements
In certain cases, it may be difficult to decide if the service being performed is considered to be a repair and maintenance or a capital improvement. New York State Department of Taxation and Finance’s Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, provides specific examples for work performed and whether they should be considered a repair or a capital improvement. Although examples are provided by the state, each job should be examined on a case-by-case basis as to the classification.
Purchasing and Billing
As a contractor or subcontractor, you are generally obligated to pay sales tax on all building materials and other tangible personal property you purchase. However, as discussed below, there are certain instances when these purchases may either be exempt from sales tax altogether or have offsetting credits available.
When providing an invoice to a customer for work performed, all charges for materials and labor for any repair, maintenance or installation project, including any markups, are subject to sales tax. For example, if you are charging a customer $150 for materials and $300 for labor, you must charge sales tax on the full amount of $450.
Customers that you are not required to charge sales tax to include churches, private schools, charitable organizations and governmental entities. You will not have to collect sales tax on any work performed for these organizations as long as the exempt customer provides you, as the contractor, with a properly completed Exempt Organization Certificate (Form ST-119). In certain cases, you may be able to purchase the materials or other tangible personal property without paying sales tax, so long as the materials or property will be transferred to the tax-exempt customer as part of the project. In order to purchase materials tax free, you must complete and provide Contractor Exempt Purchase Certificate (Form ST-120.1) to the supplier.
Use of Subcontractors
If, as a general contractor, you hire a subcontractor to perform taxable work as part of a project, the general contractor can purchase the subcontractor’s services for resale by using Contractor Exempt Purchase Certificate (Form ST-120.1), allowing the subcontractors services to be tax-free to the general contractor. However, the general contractor will still be required to collect sales tax on their total charge to the customer, including the subcontractor’s fees. This purchase of services for resale can occur between general contractors and subcontractors or between two subcontractors.
Qualifying to Take a Credit
You are eligible to take a sales tax credit on your return if you paid sales tax on building materials to a supplier; transferred those materials to your customer in a taxable repair, maintenance or installation service; and charged sales tax to your customer. In most cases, you can take a credit when the work you perform is classified as a taxable repair, maintenance or installation service, but not when it is classified as a capital improvement.
As a subcontractor, you may accept Contractor Exempt Purchase Certificate (Form ST-120.1) from the prime contractor instead of charging sales tax to the prime contractor. This will not disqualify you from claiming a sales tax credit for sales tax paid on materials if the job that was being worked on 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 transferred to your customer as part of a taxable service, you must pay sales tax at the time of purchase. However, the tax paid on these materials will qualify for a sales tax credit. Such materials include, but are not limited to, the following: (i)
- plywood, drywall, shingles and 2 x 4s;
- nails, screws, bolts and staples;
- electric materials;
- plumbing materials; and
- landscaping materials.
You may not claim a credit for sales tax paid on materials, supplies or other items that are not transferred to your customer as part of the job you perform. These 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 services treated as capital improvement projects, even though you will pay sales tax on all materials purchased, you should not charge the customer sales tax and cannot claim the sales tax paid on the materials as a credit on your sales tax return.
Work Performed for Exempt Organizations
When providing services for a tax-exempt organization, you are able to purchase materials tax-free by providing a completed Contractor Exempt Purchase Certificate (Form ST-120.1). If you did not use the exemption form when you purchased the materials, you are able to claim a tax credit for the sales tax paid on the purchase of materials used in the project. You cannot take a credit for sales tax paid on other supplies even though they may be used in an exempt job.
Lump Sum Contracts
If you enter into a unit-price construction contract or have a pre-existing lump sum contract with a customer, and during the period of the contract, the sales tax rate is increased, you may be eligible for a credit for the additional sales tax paid on property purchased after the rate change that is incorporated in the project.
For example: You enter into an irrevocable contract at a time when the sales tax rate is 7%. During the course of the project, the sales tax rate increases to 8%. You will have to pay 8% sales tax on future purchases of building materials without having the ability to charge your customer the higher rate to recoup your expenses. In these circumstances, you can claim a credit or refund for the additional tax paid (1%) on those materials purchased after the rate increase and used solely in that contract.
Other Situations Where Credits May Apply
If you purchase materials and pay sales tax in New York State, but later use the materials in a job outside of New York State, you are allowed a credit for the sales tax paid to New York State. If you charge your customer sales tax in error and later provide the customer with a refund of the tax, you may claim a credit for the amount of sales tax refunded.
In order to claim any credit listed above, you must be sure to have adequate documentation such as: (i) a purchase invoice showing the sales tax paid to a supplier; (ii) an invoice to the customer documenting the material used on the project or invoices showing that materials or supplies were resold as a retail sale; (iii) customer contracts or invoices showing that the project was a repair, maintenance or installation service; or (iv) any other documentation, including copies of exemption certificates received from customers, showing you are entitled to a credit for tax paid.
If you are unsure of your company’s treatment of NYS sales tax or would like assistance with determining taxable versus nontaxable services, applying taxes to purchasing and billing, providing services for tax-exempt organizations, using subcontractors, understanding what credits you may be eligible for or would like assistance with sales tax returns, please contact our office so we can help you comply with all sales tax requirements.
Contributing Authors: Shawn T. Layo, CPA, is a tax partner with over 20 years of experience in taxation and planning for individuals and closely-held companies. He is responsible for overseeing tax engagements for a variety of clientele with a focus on manufacturing, construction, retail automotive, multi-state corporations and high net worth individuals. This article was also co-authored by Anthony Pokrentowski, CPA, a tax manager at Dannible & McKee, LLP. For more information on this topic, you may contact Shawn at email@example.com or (315) 472-9127.