Posted in Business & Corporate Law,Tax Law & IRS Defense

The St. Johns County and surrounding areas have seen a recent boom in the housing market and work by building contractors.  The complexity of the sales and use tax rules has led to erroneous and misapplication of the taxes, making this area ripe for Tax Audit with the Florida Department of Revenue (“DOR”). 

As they say, “the devil is in the detail” and failure to pay close attention can result in costly mistakes.

The burden falls on building contractors to determine the taxability of their transactions.  Contractors should first determine whether the work they are performing is a real property contract and involves permanent installation into a structure, or whether the work involves installation of Tangible Personal Property (“TPP”).  A general rule of thumb is that if the work will be permanent, meaning removal would cause damage or destruction, then it’s likely to be classified as a real property contract.

For real property improvements, contractors should pay very close attention to the actual contract with the homeowner. The following are different types of contracts and general rules for the corresponding tax implications:

Lump sum, cost plus, fixed fee, guaranteed price, or time and materials real property contracts:

• Under these types of real property contracts where contractors do not sell tangible personal property, the contractor is the final consumer and pays sales tax upon purchase of the goods. Sales tax is not collected from the homeowner.
• If you purchase materials outside of Florida, tax is due to the DOR.
• Contractors who manufacture, produce, compound, process, or fabricate items used in these types of real property contracts must pay a use tax on the fabrication cost.  Fabrication costs include the cost of direct materials on which sales tax has not been paid, labor/service costs, and transportation costs.  If fabricated on the job site, then fabrication labor is not included in the fabrication cost of the item.

Retail sale plus installation contracts:

• The contract lists all materials to be used and is separately stated from labor. The contractor should purchase the materials tax exempt and charge/collect sales tax from the customer.

Contract to Install Fixtures:

• A contractor must pay sales tax on the purchase of fixtures and installation materials. No sales tax is collected from the homeowner.
• Consideration should be given to the installation agreement, method of attachment, intent of the parties, and permits and licensing in determining whether an item is a fixture.  

On the other hand, contractors who install TPP should collect sales tax on the total charge without regard to how the contract is worded. Instead, Contractors need to pay close attention to the method of installation because it can affect whether a TPP remains TPP.  For example, a mailbox that is installed via a post in the ground might remain TPP while a mailbox cemented in brick could be considered a real property improvement. 

More information can be found on the Florida Department of Revenue’s website or by clicking here. Contractors should consult with their accountant or tax attorney to ensure compliance is met and the proper tax amounts are collected from the homeowner and remitted to the DOR.  Tax planning opportunities should also be discussed.