Sales Tax for Contractors
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat talk about some common problems contractors face when dealing with sales tax.
Here’s a glimpse of what you’ll learn:
When materials are moved to out-of-state job sites, do they trigger use tax obligations?
What are the hidden nexus risks of warranties, repairs, and subcontractor work?
How can someone understand when registration is required and when it’s not required?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More your go-to resource for all things state tax related. Now here is your host, Michael Fleming.
Michael Fleming: Hi, Mike Fleming here, founder of Sales Tax and More, and today's co-host of the Sales Tax and More Podcast where we talk about everybody's favorite topic, which is of course sales tax. And today we're gonna go over some of the questions we've been asked during our webinars. But first, let me introduce you to my co-host, Ellie Moffat
Ellie Moffat: Hi everyone. It's so great to be here. We love being back. We've had a couple weeks off. I'm excited for these questions that we're gonna address today. But before we get to
[00:01:00] them, I'll go ahead and do a quick introduction. So for those who don't know us. We are Sales Tax and More, and this is a Sales Tax and More Podcast. Please like and subscribe. Sales Tax and More is a full service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs.
So we do a lot of sales tax returns, sales tax registrations, consultations, research, audit defense, exemption certificate management, and like our name states more. So if you have questions about our services or you'd like to work with us, please reach out. We would love to hear from you and we would love to work with you as well.
And with that, Mike, why don't we jump right in. Right off the bat here: When materials are moved to out-of-state job sites, do they trigger use tax obligations?
Michael Fleming: Great question. So let's take a step back and look at what a
[00:02:00] use tax is. And a use tax, it's complimentary to the sales tax and it's a tax on the storage, use, or consumption of an item or nowadays a service.
When materials are moved to an out-of-state job, they're being used in another state. So storage, use, or consumption, that's the second word in the definition. So in general there's always exceptions, but in general, yes, they can trigger use tax obligations and usually do.
Ellie Moffat: Okay, so the next question here is: What are the hidden nexus risks of warranties, repairs, and subcontractor work?
Michael Fleming: There are actually two major issues that I see and you hit on one of them here.
It's nexus. So whether you are using employees or whether you are using third parties, repair
[00:03:00] work, implementations, having warranties in a state, these can all be nexus creating. Now, not all states are gonna look at all things the same. But if you're doing implementations, pretty much all states are gonna look at that as nexus creating if you're having contractors do it for you, even third parties. When it comes to warranties, many states are gonna look at that as nexus creating not all states. As with so many of our answers is, it depends. In general, if you want a general answer across all the states, yes.
These type of work, whether it's done by third parties or by employees, is going to be nexus creating. And many companies just don't realize that. Nowadays, people say we're underneath the economic nexus thresholds. A physical presence is always going to, when it comes to sales tax, it's going to trump an economic nexus.
And these are types of physical
[00:04:00] presence nexus. So that's number one. But I also want talk about taxability. Because now you've got nexus in another state and many people don't realize its services can be taxable. Even when your state may actually exempt improvements to real property.
Maybe you're a sign manufacturer and you're doing work installing a sign in the state of Virginia and it's gonna be a permanent improvement. There's a special carve out in Virginia that says signs do not. You still gotta treat it as tangible personal property, even if it's an improvement to real property.
So you gotta collect the tax on that service. Whereas in another state, because it's an improvement to real property, maybe you don't have to collect that tax. It's gonna depend on the state, the taxability, it's gonna depend on what you're doing. In New York, if you are doing let's use a sign company again, if you're installing a
[00:05:00] sign into real property for tenant. A lot of people renting leasing buildings and they're installing a sign. It can't be permanently attached because when the tenant changes, you're gonna have to take your sign down or you're gonna have to take your sign down and they're gonna put their sign up.
So by definition, that's not permanent. Whereas if the owner of the building does it and he puts a sign there, in general that's going to be looked at as a permanent attachment and therefore an improvement to realty. So sometimes the type of project is going to impact whether it's taxable or not.
And what's taxable in one state may be different in another state. And then sometimes it comes down to how you're doing your invoicing. Maybe the service by itself is not taxable, but when you bundle it together, if you do a lump sum invoice and put, a non-taxable service with a taxable item, the whole item in many
[00:06:00] states the whole charge for that becomes taxable.
So a lot of hidden nexus issues and a lot of hidden taxability issues. I wish I could lay out a ground plan for you here or game plan and tell you exactly where it's gonna create nexus and exactly what's gonna be taxable. But each state looks at this differently and we could not. It would take us days to go through all the different scenarios.
And I don't think any of you wanna listen to me talking for days. We've got the answers. We can help you out or we can find the answers. We just can't give you all the answers on a podcast like this.
Ellie Moffat: No. And yeah, just to reemphasize again, Mike. That it's part of why we exist is because it's really hard to get those answers and it's just too much for one person dealing with a few states of information past that it starts getting too complicated. So that's why we exist and that's why we're
[00:07:00] here.
Michael Fleming: Yeah and I want to jump in here. A lot of times nowadays with all let's talk of AI, people say, "I just ask Google". Wrong answer because Google can't tell what's the right answer or not.
And there's so much misinformation out on the Internet. The AI is just taking that information and gonna regurgitate it to you. And a lot of people take that as fact and it's not unfortunately. You can't tell an auditor the Google AI told me that it wasn't taxable, so it must not be taxable.
That is not a defense. That auditor may actually get a good chuckle out of that. Someone the other day said, "I just didn't know". Guess what? It's like TV. You watch TV and you ever hear anyone say ignorance of the law is not a defense? Unfortunately, that's what this is.
And whether you know what it is, whether you know whether it's right or not the state is still gonna come after you. And if you're in the wrong, they're gonna assess you.
[00:08:00] Big money penalties. So it's up to you to figure out what is actually right or wrong, or hire someone like us. Calling a state usually not good.
You can call a state three or four times in a row and get three or four different answers. So when you're coming down to things like this, you gotta dig deeper. You gotta actually look at the statutes. You gotta look at the rules and regulations. You can confirm something with a state and if it matches with what you are getting from those rules or regulations or statutes that gives you an extra sense of confidence. But to go to the state first and ask them or to go to some artificial intelligence, I would not be doing that. If you do go to the state first, at least ask them to point you towards something that is gonna confirm what they're saying.
And if you don't want to be confrontational and say, "Hey, that's a great answer. Thanks for helping me out. But my boss is gonna want to see something in writing.
[00:09:00] Is there any way that you can point me in the right direction or send me an email or something?" And if they do, great. If they point you in the right direction, make sure you read what they're pointing you to. Because very often what you're reading is gonna contradict what they told you on the phone. Happens all of the time. That's why we exist. If this was easy, you wouldn't need us. I tell people all the time, we'd go do something else. There's plenty of things out there we could find to do, but because this is so complicated that's why we're here. We're here to help.
Ellie Moffat: Yup, and I think that little tidbit for everyone is worth your weight in gold or if not at least whatever your exposure is in gold so.
Michael Fleming: I weigh a lot so that would mean that I got a lot of gold, huh?
Ellie Moffat: Yeah, it's really dependent on your weight or your exposure whatever comes first. Okay, Mike, let's move forward here. How can someone understand when registration is required and when it's not
[00:10:00] required?
Michael Fleming: All right. Here's a lot of moving parts here. There's what a state will say and then there's what we generally are going to say. What we say is if you have nexus, this link or connection with the state, and if what you sell is taxable, then you should get registered. Now, a couple of caveats. If your exposure, maybe you're only gonna sell a thousand dollars worth of items into a state, the state says, "If you have nexus, you should collect the tax and remit it". But the cost of compliance is gonna be a lot greater than the actual penalty and interest and tax.
So you know, yes, the tax would be coming out of your customer's pocket if you charge them, and there would be no penalty and interest. But now you gotta worry about getting registered and you gotta worry about filing returns. And whether you hire someone like us that's a real cost or whether you do
[00:11:00] it yourself, that takes time and time is money. There's opportunity cost. You could be doing something else that's higher value. So we say if the cost of compliance is gonna be greater than your actual exposure, the penalty, the tax, and the interest. Then don't do it. Now that doesn't mean the state's not gonna come after you, but it's just cheaper to reach into your pocket and pay the state that than to have to be compliant every year.
And pay someone or yourself to do this. The other thing is states don't say you need to be registered. Or some states say, even if what you sell is not taxable, you still need to be registered. Since in most states the penalties are based upon the tax you owe. If you don't have anything taxable, most of our clients would not get registered if they don't have any taxable sales.
Now you gotta make sure that your sales aren't taxable because you don't wanna say, "I don't have
[00:12:00] any taxable sales, so I'm not getting registered". And later find out that your assumption was wrong. But if you don't have any taxable sales, then a lot of our clients would just choose not to get registered.
But the rule of thumb is if you have this link or connection we call nexus and what you sell is taxable, it's a good idea to get registered.
Ellie Moffat: Alright, thank you so much Mike. I think we've covered a good amount. There's a lot of really valuable tips here, so go back and re-listen and we expand on a lot of this in other episodes of our podcast.
We have webinars out there. We have lots of information and resources and you can always contact us directly. You can reach out to me at my email is E Moffat, that's E-M-O-F-F-A-T at salestaxandmore.com. You can also visit our website salestaxandmore.com and thank you so much for joining us. Please again like and subscribe and we
[00:13:00] hope to hear from you.
Michael Fleming: Thank you everyone and hope to see you on the next episode of the Sales Tax and More Podcast. Bye-bye.