While any business is subject to audit, the construction industry seems to garner close attention by the Ohio Department of Taxation. There are many nuances and “gray areas” involved with the taxability of the construction industry that can create surprise liabilities or overpayment opportunities for multiple Ohio taxes including sales and use tax, commercial activity tax, pass-through entity tax and municipal income tax. The following are just some of the issues that construction contractors face for these taxes:
Sales and Use Tax
- Is the contractor installing real or tangible personal property or providing a taxable service? Such a determination has a critical impact as to whether the contractor should collect sales tax from its customer or owes sales/use tax on the contractor’s purchases of materials. If the contractor makes the wrong decision, the contractor could take on an unexpected liability that it may not be able to recoup from the customer.
- Are the tools used by the contractor in the construction project exempt from sales and use tax? Does that answer change if the customer is an exempt entity?
- Are any of the tools/equipment provided by the contractor as part of the construction project rented to the customer? If so, does the contractor need to collect sales tax on such rentals?
- What is the proper tax base for materials created by the contractor and does the contractor get the manufacturing exemption for any purchases of equipment used to create those materials?
- What documentation is required to be obtained from a customer that claims to be exempt from sales and use tax?
- Should a contractor have a direct payment permit to help with sales and use tax compliance or is a consumers use tax account sufficient for proper compliance?
- What materials are taxable to the contractor if a customer provides a Direct Pay permit?
Commercial Activity Tax (CAT)
- Is the contractor acting as an agent of its customer in such a way as to qualify for the agency exclusion?
- Is the contractor using the most beneficial filing method to eliminate intercompany sales?
- Did the contractor situs the gross receipts to the proper state?
Pass-through Entity Tax (PTE)
- Does the contractor know how to source its sales of services and its sales of property for the pass-through entity apportionment formula?
- Does the contractor understand the 20% or greater compensation adjustment that can adjust the tax base?
- Does the contractor know about the new Direct Tax option for avoiding the SALT-Cap limit of $10,000?
Municipal Income Tax
- Does the contractor know how to source its sales of services and its sales of property for the pass-through entity apportionment formula for the net profits tax?
- Does the contractor know about the 20-day occasional entrant rule, and the “presumed worksite location” rule?
In our practice, we regularly assist contractors in dealing with tax audits or assisting them with completing voluntary disclosures to help minimize the impact of any unpaid tax liability. We also assist contractors with obtaining overpaid tax through refund claims. Please contact one of our tax professionals if you would like to discuss any tax issues.