With summertime around the corner, a lot of our clients have been asking us about the sales tax that they need to collect from their clients. For example, a client of ours that sells kitchen cabinets might want to know if they need to collect sales tax on the merchandise that they sell to their own clients.
Tangible Personal Property vs. Real Property Improvement
The issue boils down to the difference between:
Tangible personal property
Real property improvement
The cabinets are tangible property when they are purchased, so they are taxed. But if a company sells and installs cabinets in a customer’s home, they are property improvements and therefore not taxed.
The same is true of many of the major upgrades to your home. If it’s not something you can’t remove without causing permanent damage to the home, then it’s an improvement.
Examples:
Improvement: Central air conditioning
Not an improvement: Window unit
Improvement: Wall-to-wall carpeting
Not an improvement: Throw rug
Protect Yourself as a Contractor
Contractors who do real property improvements:
Are supposed to pay sales tax on their materials
Are not allowed to charge sales tax to their customers
Contractors may:
Purchase cabinets for resale and not pay sales tax
Build cabinets in their shop and not pay tax on the labor and materials used to make them
Then they:
Charge the customer the tax on the cost of the cabinets
Send what’s collected to the state
From a Customer’s Perspective
A customer that pays sales tax when they shouldn’t can:
Ask the contractor for a refund
File for a refund from the Department of Revenue
In an extreme situation, customers can sue. This is most important to understand for a contractor, as a client will most likely seek punitive damages and attorney’s fees.
Consequences of Sales Tax Mistakes
A second consequence of this mistake is that when the state audits—as they often do with cabinet and remodeling companies the contractor will:
End up owing sales and use tax, even though the business owner sent in tax money collected from customers.
Get Help
Call any of our offices in the Midwest to discuss your sales and use tax audit.
Frequently Asked Questions
Do I need to charge sales tax if I sell and install kitchen cabinets?
If you only sell the cabinets, they are considered tangible personal property and are subject to sales tax. However, if you sell and install them as part of a job, they are considered a real property improvement and typically not subject to sales tax to the customer.
What is the difference between tangible personal property and a real property improvement?
Tangible personal property refers to items that can be moved, like a window AC unit or a throw rug, and these are usually taxable. Real property improvements are permanent additions or alterations to real estate, like central air conditioning or wall-to-wall carpeting, and are generally not taxable to the end customer.
As a contractor, when should I pay sales tax?
Contractors who perform real property improvements must pay sales tax on the materials they purchase, unless those materials are bought for resale. They cannot charge sales tax directly to customers for the labor or improvement services.
Can customers get a refund if they were charged sales tax incorrectly?
Yes. If a customer was wrongly charged sales tax, they can request a refund from the contractor. If that doesn’t work, they can file a claim with the Department of Revenue and in extreme cases, they might sue the contractor for damages and legal fees.
What happens if I make a mistake on sales tax collection?
If you incorrectly collect or remit sales tax, especially during an audit, you could end up owing both sales and use tax even if you already sent tax money to the state. It’s crucial to follow the rules precisely to avoid financial and legal penalties.
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