By: Mansoor Ansari J.D., LL.M. (TAX)
Summer Season and Sales Tax Concerns
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.