Sales Tax Audit: Texas General Contractor Back Charges
If you are a General Contractor in Texas, then you should be familiar with the term “back charges.” If you do not account for back charges properly in your records, then the new problem that you will face is double taxation. Yes, you will essentially be charged tax twice on a single transaction only because it looks like separate transactions to your auditor.
Double Taxation Risk Due to Back Charges
In our last audit with a general contractor, double taxation occurred as a result of not accounting for back charges. Back charges are an industry norm in the construction industry.
The following organizations have established rules and guidance regarding back charges:
- Associated General Contractors (AGC)
- American Subcontractors Association (ASA)
- Associated Schools of Construction (ASC)
Understanding Back Charges in Practice
Back charges are an accounting method where the Petitioner pays some or all of the material invoices on behalf of a subcontractor or vendor. Thereafter, the Petitioner deducts this amount from any total amount which is due to the subcontractor.
These are contractual rights set forth between the Petitioner and its subcontractors to offset costs as the project proceeds.
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Frequently Asked Questions
What is the risk of undocumented back charges in Texas construction?
If back charges are undocumented, Texas tax authorities may treat them as separate taxable events. This could trigger double taxation, once when the general contractor pays the vendor, and again when the charge is deducted from the subcontractor’s payment.
How can subcontractors avoid unexpected back charges?
Subcontractors can avoid surprises by ensuring clear, written agreements with the general contractor. This should include procedures for change orders, approval of extra costs, and proper documentation before any charges are made.
Are back charges taxable in all situations?
Not always. The taxability of back charges in Texas depends on the nature of the transaction and how it’s documented. Some charges may be exempt if proper resale or exemption certificates are in place and the charge isn’t treated as a markup.
What documentation should contractors retain for tax audits?
Contractors should keep vendor invoices, subcontractor agreements, proof of payment, correspondence related to the back charge, and a breakdown of materials or labor provided. This helps clarify that no separate taxable transaction occurred.
Can I challenge a sales tax assessment related to back charges?
Yes, you can dispute a sales tax assessment. It’s advisable to work with a tax attorney or consultant who understands Texas construction tax law. They can help present evidence and potentially reduce or eliminate assessed taxes and penalties.