1999 SALES AND USE TAX STUDY
Sales and Use Tax Implications of Constructions Contracts
Preparer: Arthur I. Feuerstein
Reviewer: Audra Kunkel
I. Overview
Please provide an overview of how sales and use tax is imposed generally and how it is imposed on contractors.
The Gross Receipts and Compensating Tax is imposed on the gross receipts for selling products or furnishing services in the state. The contractor is treated as a retailer that must pay the tax based on its sale of materials and services, including on progress payments received on an extended project.
II. Sales and Use tax Imposition on Contractors
a. What are the sales tax requirements of purchasing materials and supplies for use in a
construction project: (e.g., is the tax based on the lump sum amount of the contract, or is the tax based on the supplies and materials used by the contractor, or some other alternative – please explain)?
A contractor is responsible to pay the tax based on his receipts from construction projects and the sale of construction services. Vendors of materials and supplies to a construction contractor may accept a “non- taxable transaction certificate” (NTTC) and deduct such sales from their gross receipts. N.M. Stat. Ann. § 7-9-51.
b. Does the State allow contractors to purchase materials exempt: 1) for resale, 2) under direct permit authority; 3) for use in a project of an exempt organization; 4) other? If yes, what documentation must the contractor retain to evince the exempt character of the transaction?
1) If the materials and supplies are purchased as ingredients or component parts of the project, the state exempts those purchases as for resale; however, the project must be taxable a) upon
completion or on completion of the overall construction job of which it is a part or b) upon the sale of the real property on which the project was constructed.
2) There are no provisions for direct payment permits.
3) A construction contractor’s receipts from a project for a government are not deductible and so a vendor supplying materials and supplies to a government contractor may accept his NTTC and deduct those receipts from the vendor’s taxable base.
A federal contractor must supply a Type 15 NTTC to his vendor as evidence of deductibility of those receipts or be subject to the compensating tax on the value of the tangible personal property. The NTTC must have the federal contract number and the contracting agency must be one or more of the nine signatories to the agreement made between the U.S. and New Mexico.
3 NMAC § 2.47.11.1.
A contractor may not provide an NTTC to a vendor in order to deduct gross receipts from the sale of tangible personal property incorporated into projects for an Indian reservation or pueblo grant or for a project located outside New Mexico (because those projects would not be subject to the tax upon completion). 3 NMAC § 2.51.23.1.
III. Improvements to Realty
a. Please describe the sales and use tax implications of improving realty. Please address factors used to determine whether the installation of property constitutes a capital improvement.
“Construction” means building, altering, repairing or demolishing roads, bridges, parking areas, buildings, structures, airports, subways, parks, trails, athletic fields, dams, reservoirs, canals, ditches, sewerage or water treatment plants, power generation plants, gas processing plants, refineries, pipelines, transmission lines, towers, storage tanks, shafts or tunnels, or microwave stations or leveling or clearing land, excavating, drilling wells or similar work.
N.M. Stat. Ann. § 7-9-3(C).
Generally, receipts from the sale or lease of real property are deductible from a seller’s gross receipts. However, when a construction contractor that owns land and builds improvements on it sells the improved real property, the portion attributable to improvements is taxable. N.M. Stat. Ann. § 7-9-53(A).
IV. Repair and Maintenance Contracts/Services
a. Please discuss the sales and use taxation of repair and maintenance contracts. Please include a description of the tax base.
Repairing is one of the activities described as taxable construction in III a. above.
“Construction”, however, does not include services only incidental to construction projects such as hauling, maintenance, landscaping upkeep, the repair of equipment or appliances of laboratory work, or erecting fences. 3 NMAC §§ 2.1.11.1.1 - 2.1.11.1.3.
b. Please discuss taxable services related to the use of contractors.
Subcontractors that sell “services” to construction contractors may deduct those receipts from taxable gross receipts if an NTTC is supplied. N.M. Stat. Ann. § 7-9-52.
V. Use Taxes
a. Describe the application of the State’s use tax on material, supplies and services purchased outside the State and used within the State?
If a gross receipts, sales or compensating tax has been paid to another state or political subdivision, that tax may be credited against any compensating use tax due on tangible personal property used within New Mexico. N.M. Stat. Ann. § 7-9-79.
VI. Construction Contracts
a. Type of Contract Issues – Does the State address different types of contracts and, if so, does the State have specific rules that apply to different types of contracts? Are there specific elements of contracts that are looked to by the State?
The state does not identify different treatment by types of construction contract.
b. Does an exemption exist for the transfer of tangible personal property from a contractor to a customer which would allow the use of a split contract (not an exemption for direct purchases by the contractor?. There is no difference in tax treatment if the contract is “split” between services and materials. The latter come within the definition of “taxable services”.
c. Does the State have specific contractor regulations?
Regulations specific to construction contractors include. 3 NMAC §§ 2.1.11.1 -2.1.11.11. d. What other definitions or terms of contracts are addressed in the sales and use tax statues and regulations?
Terms specifically described include: “construction”, “service”, “fixtures”, “building”, “construction materials”, and “ingredient or component part”.
e. Discuss the tax obligations of subcontractors.
Subcontractors that sell “services” to construction contractors may deduct those receipts from taxable gross receipts if an NTTC is supplied.
VII. Machinery and Equipment and Contractors
a. Does the State have a manufacturing exemption for machinery and equipment purchased to produce tangible personal property? Mention any permits or certificates which must be obtained to qualify for the exemption.
There is no manufacturing equipment exemption available in New Mexico. If a manufacturer of equipment installs his equipment on a construction project in a manner that it is an ingredient or component of the project, then the manufacturer is selling a “construction service”. Receipts of the manufacturer for installing equipment for a prime contractor may be deducted from taxable gross receipts if the prime contractor supplies an NTTC. 3 NMAC § 2.52-17.
b-d. Is there a specific State exemption for a contractor to take advantage of the machinery and equipment exemption?
No specific machinery and equipment exemption exists in New Mexico. VIII. General Planning Suggestions
Please discuss any planning opportunities or methods to reduce sales and use tax exposure.
Construction contractors should try to identify non-construction services to exclude from taxable receipts. Some indirect services which qualify are accounting, architecture, legal, traffic safety, engineering, drafting, bid depository service, hauling, and installation of carpet or draperies. 3 NMAC § 2.1.11.1.
There are significant exclusions for servicing the oil and gas industry. 3 NMAC §§ 2.1.11.5.1 - 2.1.11.5.2.
A person who engages in the construction business, but does not have a principal place of business in New Mexico and who enters into a prime construction contract must provide the state a surety bond or other security if the gross receipts are $50,000 or more.
N.M. Stat. Ann. § 7-1-55.
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