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?
There are no special considerations for different types of contracts with the exception for federal cost-plus contractors as discussed under II.b.(3) above.
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 advantage to a split contract.
c. Does the State have specific contractor regulations?
Hawaii Regulation section 18-237-13-03 deals with the tax on contractors. Also, see General Excise Tax Memorandum No. 3 for contractors and selling leaseholds.
d. What other definitions or terms of contracts are addressed in the sales and use tax statutes and regulations?
All pertinent definitions and terms have been discussed above. e. Discuss the tax obligations of subcontractors.
The tax obligations of subcontractors are the same as those of contractors. Special rules apply to purchases of subcontractors’ services by contractors as discussed under II.b.(3) above.
XX. Machinery and Equipment Exemption 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.
No exemptions exist for manufacturing machinery and equipment.
b. Is there a specific State exemption for a contractor to take advantage of the machinery and equipment exemption?
No.
c. How may a customer take advantage of the machinery and equipment exemption in the State when using a contractor?
d. What are the rules for obtaining an exemption certificate or permit in the State? Not applicable.
XXI. General Planning Suggestions
Please discuss any planning opportunities or methods to reduce sales and use tax exposure. Hawaii’s general excise tax scheme leaves little room for tax planning. The two important features of the tax on contractors relate to contractor purchases of materials incorporated into the project and purchases of subcontractor services. Both receive special treatment and the law should be reviewed carefully. In addition, contractors working in an Enterprise Zone receive a full exemption from the general excise tax for gross income generated from projects in such Enterprise Zone. Finally, exemptions are also available for air pollution control facilities as explained above.
IDAHO
Preparer: Mark Faulkner ? Owens Corning Reviewer: Jim Childress ? Columbia/HCA Date: 5/10/99 1:39 PM
Overview
The Idaho sales tax is imposed on retailers for the privilege of making retail sales. The consumer is considered the actual taxpayer and must pay the tax to the retailer. Use tax is imposed by Idaho on the use, storage or other
consumption of nonexempt tangible personal property in the state for which sales tax has not been paid. Sales to contractors of materials to be incorporated into real property, or for their own use in improving real property are subject to the sales/use tax. A contractor is any person who uses material and equipment to perform any written or verbal contract to improve, alter, or repair real property. Sales and Use Tax Imposition on Contractors
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)? All persons engaged in constructing, altering, repairing or improving real estate, are consumers of the material used by them. All sales of tangible personal
property to such persons are taxable whether or not such person intends to resell the improved property. Sec. 63-3609(a), Idaho Code. The contractor is required to pay the sales/use tax at the time of purchase. A contractor is liable for use tax for materials bought from an unlicensed out-of-state retailer. Tax also applies to government contractors with respect to materials purchased from an out-of-state retailer for resale to the U.S. or used in the performance of contracts with the United States. Idaho Code §63-3621.
If the owner of the real property or project purchases the materials for the improvements and hires a contractor to install them, the owner pays tax on the materials but not on the services provided by the contractor (unless the owner is tax exempt). If the owner fails to pay tax on the materials, the contractor is liable for the sales tax. If the owner is tax exempt, the contractor is subject to use tax on his use of the materials that the owner supplies, even if the materials are to be incorporated into real property owned by an exempt entity. Idaho Admin. Rules §35.01.02.012.
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 evidence the exempt character of the transaction. Idaho defines a contractor as a consumer when performing contracts to improve
real property. Idaho Admin. Rules §35.01.02.010(04). A contractor who purchases tangible personal property for use in the improvement of real property must pay sales tax at the time of purchase. However, a contractor may also operate a retail shop which would require a sales tax permit. The contractor is required to collect tax on all sales made directly to its retail customers and remit such sales tax with the filing of the sales/use tax return. The contractor may make such purchases without paying tax by giving his suppliers a resale certificate (Form ST-101). Idaho Admin. Rules
§35.01.02.014
Direct pay authorization is issued to certain taxpayers where it is to the mutual convenience of the Tax Commission, the taxpayer and the taxpayer?s vendors to have the sales/use tax liability upon the taxpayer?s purchases determined by the taxpayer and reported directly to the state in the form of a use tax. If authorized, in order to make a purchase without paying sales tax to the vendor, the taxpayer must furnish a copy of the letter from the
Commission granting the direct pay authorization. (Idaho Admin. Rule §35.01.02.112)
A contractor is required to pay sales/use tax on materials that are incorporated into real property even if the materials are to be incorporated into real property owned by an exempt entity. The materials are also taxable to the contractor if the exempt entity purchases the materials and provides them to the
contractor. Idaho Admin. Rules §35.01.02.012(10).
A contractor can purchase materials tax exempt, provided they are installed into real property in a state that does not have a sales tax; Oregon, Montana, Alaska, Delaware. This rule also applies to a contractor improving real property in Washington as long as the contractor will not owe a sales or use tax for his activity there. Note that Idaho tax applies to materials purchased or withdrawn from inventory (located in Idaho) for use in a contract to improve real property in a state that has a sales tax. Idaho Admin. Rules
§35.01.02.012(13).
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.
All persons engaged in constructing, altering, repairing or improving real estate, are consumers of the materials used by them. Idaho Code §63-3609. A contractor improving real property is any person acting as a general contractor, subcontractor, contractee, subcontractee who uses material and equipment to perform any written or verbal contract to improve, alter, or repair real property. Idaho Admin. Rule §35.01.02.010(04). Real property is defined as land and improvements or fixtures to the land. Idaho Admin. Rule §35.01.02.010(16). Pursuant to Idaho Admin. Rule §35.01.02.067(02), a three factor test may be applied to determine whether a particular article has become a fixture to real property. The three tests that apply are: 1) Annexation to the realty 2) Adoption or application to the use or purpose to which the part of the realty to which is connected is suitable and 3) Intention to make the article a permanent addition to realty.
Repair and Maintenance Contracts/Services
Please discuss the sales and use taxation of repair and maintenance contracts. Please include a description of the tax base.
Persons engaged in repairing, renovating or altering tangible person property owned by others must collect tax on the parts or materials needed for the repair or renovation of the property. Idaho Admin. Rule §35.01.02.062(01). Any labor provided is not taxable as long as it is separately stated on the invoice. Idaho Admin. Rule §35.01.02.062(02).
Please discuss taxable services related to the use of contractors. None
Use Taxes
Describe the application of the State?s use tax on material, supplies and services purchased outside the State and used within the State.
Contractors are liable for use tax for materials and supplies bought from an unlicensed out-of-state retailer. Idaho Admin. Rule §35.01.02.012(05). An exception to this rule would be materials and supplies purchased for use in a project located in a state which does not have a sales tax - see II(b)(4) above. Construction Contracts
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?
Idaho Admin. Rule §35.01.02.012(02) discusses the various types of contracts. However, the type of contract does not affect the taxability of the transaction. 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?)
Does the State have specific contractor regulations?
Idaho Admin. Rule §35.01.02.012, 35.01.02.013, 35.01.02.014.
What other definitions or terms of contracts are addressed in the sales and use tax statutes and regulations?
Discuss the tax obligations of subcontractors.
Pursuant to Idaho Admin. Rule §35.01.02.012(11), a subcontractor is treated the same as a general contractor. Whether the contract is with the owner or the general contractor, the subcontractor pays tax on materials he buys to improve real property. Services rendered by the subcontractor are not taxable.
Machinery and Equipment Exemption and Contractors.
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.
Tangible personal property used directly and primarily during a manufacturing process and which is essential to the operation is exempt from sales/use tax. Idaho Code §63-3622D.
Form ST-101 - Sales Tax Resale or Exemption Certificate is used to purchase qualified machinery and equipment exempt from sales/use tax.
Is there a specific State exemption for a contractor to take advantage of the machinery and equipment exemption?
A contractor who installs production equipment for a producer/manufacturer can buy the materials for the production equipment exempt from tax. This exemption does not apply to materials that become part of real property. Instructions to Form ST-101 ? revised 08/21/97
How may a customer take advantage of the machinery and equipment exemption in the State when using a contractor?
The customer needs to give the contractor a completed ST-101 and in turn, the contractor needs to give his vendors a completed ST-101.
What are the rules for obtaining an exemption certificate or permit in the State?
A contractor/retailer may issue an ST-101 for materials and supplies it purchases for the following reasons:
for purposes of resale in its retailing operations
for materials purchased for the exclusive use in installing machinery, equipment or apparatus exempt at the time of purchase
Materials purchased that will become a part of real property located in a state that has no sales tax.
A properly executed approved sales tax exemption certificate (Form ST-101) obtained by the seller at or before the time of sale establishes a presumption that the sales transaction is exempt. However, the presumption of exemption arises only if the exemption certificate is taken by the retailer in good faith. An
exemption certificate is not taken in good faith if the retailer actually knew or reasonably should have known that the representation made by the purchaser on the certificate is erroneous as a matter of fact or that the exemption claimed by the purchaser is not available as a matter of law. Idaho Admin. Rule
Note that a buyer signing an exemption certificate with the intention of evading payment of tax is guilty of a misdemeanor.
General Planning Suggestions
Please discuss any planning opportunities or methods to reduce sales and use tax exposure.
COST SALES AND USE TAX STUDY ON CONTRACTORS