Contractor tax question

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Mr. Serious

Mr. Serious

Senior Member
Location
Oklahoma, USA
Occupation
Electrical Contractor
Oklahoma is like the majority of states - unless the contractor's customer has a qualified sales tax exemption, a contractor pays sales tax on their items at the time they buy them. The contractor does not collect sales tax when selling the items to the customer. It's my understanding that contractors are considered the final consumer of the items because the contractor does not sell the electrical inventory items to their customer, per se; rather they sell a completed electrical job incorporating those items.

I have two suppliers that have been treating tax slightly differently, and I'm not sure which one is correct. I have a customer who lives outside the city limits, so the customer is only subject to county and state sales tax at his location, not city. The tax rate at the customer location is over 3% lower than the tax rate at the stores' locations in the city. I had supplies delivered to the customer's location from two different suppliers, and I was hoping to be able to pass on the tax savings to the customer to save them a little bit of money. One of the suppliers charged the tax rate at the customer's location, but the other one charged the tax rate at their store location, even though the material was delivered to the customer location.

I haven't been a contractor very long, and I didn't even know about the special contractor tax rules until after I got my contractor license, so I don't know which is correct. Do I owe the higher tax anyway as a provision to keep me from defrauding the state by running everything through a low-tax location? Or, do I need to go to the second supplier and see if they can charge the correct tax rate from the customer's location and refund the extra money?
 
It's not that simple :LOL:.

A contractor might have it's own resale license- buy w/o tax, bill customer for the tax (on marked-up value).
Some places tax the entire service performed, which will include any materials.

Sales tax is usually assessed at the place the buyer takes possession of the goods, but if the supplier is invisibly using a contracted service to deliver it could be argued that the possession passed when the delivery contractor picked up from the seller. (I don't think this is a good argument, BTW.)

And... there are also rules about when a single seller operated in multiple taxing regions.

In this case, if the materials were delivered to the lower-tax location and you never touched them, that's probably the tax regime that should apply. This is really one to run by a local CPA; we're all just guessing.
 
Yeah, I figured it might differ depending on state.

I used to work for an electrical contractor here in Oklahoma that also had a lighting store. The lighting store had a sales tax permit and would collect sales tax when the customer bought things, instead of paying tax when the store bought them. I never understood at the time that the contracting side of the business wasn't allowed to operate the same way. A large fraction of their work was done for tax-exempt entities, and they had to get letters from the exempt customers and provide them to their vendors, and I always thought it would be simpler for them if they just had a sales tax permit for the contracting side of the business. Now I know contractors can't do that.

But I also know that the lighting store, which collected tax when it sold items instead of paying tax when it bought them, would charge tax according to the customer's location, if the goods were delivered to the customer. So, I think that the vendors for an electrical contractor should do the same thing. I think I'll call the Oklahoma Tax Commission in the morning and ask them.
 
If the material was delivered to the job location by the supplier, the address of the job location determines the taxing jurisdiction.

If you had picked up the material from the supplier and brought it to the job location, the supplier location determines the taxing jurisdiction.

-Hal
 
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NC charges sales tax on labor also. Not sure about OK.
It’s a PIA because different counties charge different rates.
One of the reasons I quit doing (chargeable) EC work in ‘17
 
Probably need to check with your taxing authority, or at least an accountant that works in or is familiar with the taxing authority there.

I think most places if tax is to be applied it applies wherever the transition from buyer to seller of the goods/services that are taxable takes place. For us contractors that can depend on if you picked it up at the supplier or if the supplier delivered. For those that repair things, if you did it on customer site, whatever tax applies at that site is generally what is to be charged. If customer took item to your shop and you repaired it there, the rate at your shop location is supposed to apply.

Same generally goes with stuff you buy on line. Those companies charge you sales tax for the address delivery was made to.

If they don't charge you tax but the address is in a tax jurisdiction technically you are supposed to remit that tax yourself, but it is difficult for jurisdictions to police this and many (probably most) don't do it.
 
I called the Oklahoma Tax Commission. I confirmed that sales taxes do indeed work like we all suspected: the tax rate that is charged depends on the location where the goods were exchanged, where the buyer takes possession of the goods from the seller.

So then I called the supplier that had charged the wrong tax rate. I followed up by email, and they were able to correct the wrong rate that had been charged on three invoices, and they issued a credit to my account.
 
I was also informed that Oklahoma has a special form that I could fill out to request a refund for extra sales tax paid, if the vendor would have refused to change it. But I'm glad I didn't have to do that; it probably wouldn't have been worth my time. The total amount overcharged was about $60.
 
Those with a sales tax permit might be able to do it that way, but in Oklahoma if you're just a regular contractor, you don't have such a permit and you don't collect any taxes from customers, so you don't have a normal sales tax return.

There is one line on your yearly income tax return, for paying extra sales/use taxes if you bought from vendors who didn't charge the tax. But that can't be used for a refund of extra sales tax paid.
 
Mr. Serious said:
Those with a sales tax permit might be able to do it that way, but in Oklahoma if you're just a regular contractor, you don't have such a permit and you don't collect any taxes from customers, so you don't have a normal sales tax return.
Click to expand...

Many of us don't think that we have to collect sales tax but it's rarely true. If you ONLY do new work in new construction you don't collect sales tax. But the rub is many of us also do repair work such as replacing fixtures, installing fans, switches, receptacles, services, additional circuits, etc. Those jobs are not tax exempt and you must collect sales tax on the total amount. Each state will be a little different but it's basically the same. I ALWAYS advise new contractors to get a certificate of authority from their state tax department even if they don't use it. I've heard many accountants mess up and give bad advice on that point. That way, when you do something that requires you to collect sales tax you do it no problem, not wait for them to come after you years later with interest and penalties when one of your customers gets audited and they come across your invoice.

-Hal
 
hbiss said:
Many of us don't think that we have to collect sales tax but it's rarely true. If you ONLY do new work in new construction you don't collect sales tax. But the rub is many of us also do repair work such as replacing fixtures, installing fans, switches, receptacles, services, additional circuits, etc. Those jobs are not tax exempt and you must collect sales tax on the total amount. Each state will be a little different but it's basically the same. I ALWAYS advise new contractors to get a certificate of authority from their state tax department even if they don't use it. I've heard many accountants mess up and give bad advice on that point. That way, when you do something that requires you to collect sales tax you do it no problem, not wait for them to come after you years later with interest and penalties when one of your customers gets audited and they come across your invoice.

-Hal
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I agree that will be true in most cases with a little bit of variances at times.

I attended a class put on by the State taxing AHJ quite some time ago, basically came down to if the items being sold are annexed into real estate in the process is what determines if any special circumstances for contractors can apply. Here contractors have some options on how to set things up, but you set it up once and continue to do it that way, no changing back and forth with your options. Option 1 is you pay tax on all material purchases but you don't collect and remit taxes on what you sell - this only can apply to new construction and additions and such. Service work, over the counter sales, etc. still require you to collect and remit tax on the amount of the sale of those items. Option 2 is you can purchase items tax free, but you must pay tax when you sell the items, I believe based on price you paid for them, this still supposed to apply to items annexed into real estate - like a new building or an addition. Repair items and "over the counter sales" you still supposed to collect and remit tax on the sale price. Third option you are treated like a retailer for the most part, you can purchase items tax free, but you collect and remit tax on sale price for everything ( labor it not taxable in all cases in these sort of contractor operations)

Since I do a lot of service type work as well as new construction I am set up with the third option and collect and remit tax on everything I sell. I do need to track where items are sold and charge accordingly when there is a city tax that applies.

I have tax exempt status with majority of my suppliers, but if I buy something on line, at a store I do not have an account with tax exemption, etc. and am charged tax, I do keep track of that and take that amount off when doing my sales tax returns. Why pay nearly double the tax on those items when all is done, when I am only obligated to collect and remit tax on my sales price?
 
We did a $200k steam boiler installation in MA. many years ago for a commercial business. The way it worked is they used steam for process as well as heat.. If it was soley process there would be no sales tax, a heating boiler would be taxed.

The customer claimed process was the majority of use and didn't pay the sales tax my company billed, but they did send the required documentation.

A year later the state did an audit and turned the down so the customer had to come up with the dough.

document document document

Every state is different. Ma doesn't tax labor, CT does depending on job type
 
Eddie702 said:
We did a $200k steam boiler installation in MA. many years ago for a commercial business. The way it worked is they used steam for process as well as heat.. If it was soley process there would be no sales tax, a heating boiler would be taxed.

The customer claimed process was the majority of use and didn't pay the sales tax my company billed, but they did send the required documentation.

A year later the state did an audit and turned the down so the customer had to come up with the dough.

document document document

Every state is different. Ma doesn't tax labor, CT does depending on job type
Click to expand...
Sounds like you did your part and collected proper documentation to sell that tax exempt. If they present proper documentation to you then it is on them to prove to the tax authority they did the right thing if it gets caught.

Same would apply if you sold things to say a non profit or to another reseller - they present you with tax exempt form and if done correctly it is on them whether they qualified to present you with that form, unless maybe there is any way of proving you are involved in some kind of tax fraud thing and coerced them into things though that probably isn't too likely. Who does that unless they have a way to profit from it? Collecting the tax and then not submitting it would be extra profit for the contractor - but that is a different game and no wrongdoing by the customer.
 
kwired said:
Collecting the tax and then not submitting it would be extra profit for the contractor - but that is a different game and no wrongdoing by the customer.
Click to expand...

Here in NY at least, the tax we collect doesn't have to go into any kind of separate account. It can go into our usual accounts receivable account. That means we are free to use it to cover our short term expenses, as long as we have it back in time to remit it when due. I file quarterly but you can file yearly under certain circumstances.

-Hal
 
We have a customer who buys equipment from us that is sometimes used in their lab (taxable) and other times the equipment is used in production (non-taxable). So we have to collect sales tax if it is lab equipment but not if it is production equipment, although they may be the same item.
 
Mr. Serious said:
Oklahoma is like the majority of states - unless the contractor's customer has a qualified sales tax exemption, a contractor pays sales tax on their items at the time they buy them. The contractor does not collect sales tax when selling the items to the customer. It's my understanding that contractors are considered the final consumer of the items because the contractor does not sell the electrical inventory items to their customer, per se; rather they sell a completed electrical job incorporating those items.

I have two suppliers that have been treating tax slightly differently, and I'm not sure which one is correct. I have a customer who lives outside the city limits, so the customer is only subject to county and state sales tax at his location, not city. The tax rate at the customer location is over 3% lower than the tax rate at the stores' locations in the city. I had supplies delivered to the customer's location from two different suppliers, and I was hoping to be able to pass on the tax savings to the customer to save them a little bit of money. One of the suppliers charged the tax rate at the customer's location, but the other one charged the tax rate at their store location, even though the material was delivered to the customer location.

I haven't been a contractor very long, and I didn't even know about the special contractor tax rules until after I got my contractor license, so I don't know which is correct. Do I owe the higher tax anyway as a provision to keep me from defrauding the state by running everything through a low-tax location? Or, do I need to go to the second supplier and see if they can charge the correct tax rate from the customer's location and refund the extra money?
Click to expand...
This doesn't seem correct at all. Here in NJ, as a contractor we pay no sales tax on items that will be resold, such as pipe, elbows, fire alarm equipment, etc. You get a reseller's certificate and a Certificate of Authority and all is good.

Consumables for the business such as copy paper, toner, toilet paper, etc. are taxed.

See here for a resale certificate for the great state of Oklahoma:

Printable Oklahoma Sales Tax Exemption Certificates

www.salestaxhandbook.com www.salestaxhandbook.com
 
Different states. Very different :LOL:.

It really comes to two questions- Is the item taxed at all? Who collects it? Remember that in the US, sales are only taxed once, so if the contractor pays the tax when they buy the item, the customer doesn't because it's already been paid. There are probably a few exceptions to this, but I doubt they're relevant.
 
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