The overwhelming feeling of dismay is not unusual when it comes to state sales tax audits. The process can often be time-consuming and expensive. Many contractors do not fully understand their responsibilities in regards to state sales tax and the risk in determining the proper amount to collect and self-assess.
I recently wrote an article for CFMA Building Profits discussing common audit mistakes and how contractors can avoid them to better manage their sales tax audits. For example:
If goods are purchased online or over the phone from out-of-state companies, then those vendors may not be required or have proper authorization to collect your state’s sales tax. It is common for contractors to miss paying taxes on construction equipment, tools, office supplies, furniture, software and other purchases that the company uses, but does not end up incorporating into realty or otherwise transferring to the customer.
Frequently, states will audit fixed asset purchases more closely than other items, often reviewing 100% of a company’s fixed asset purchases. Therefore, contractors should have a process in place to review and make sure that state sales states are not missed.
Of course one of the most common and often difficult tasks is to determine whether you’re acting as a retailer or as a contractor, and it can vary from job-to-job and from state-to-state.
Often, contractors believe that much of their work performed is a real property improvement. Therefore, they pay tax on their purchase of materials and do not charge tax on the sale of their construction services. However, states often treat a project partly as a sale of real property improvement services and partly as sale of tangible personal property. This is especially true for states that determine the classification of the property based on the function that it performs, and not the fact that the property is attached or incorporated into the real property.
With the right resources and preparation, contractors can better understand their state sales tax audit liabilities, identify areas of opportunity and improve their business processes.