a. Describe the application of the District’s use tax on material, supplies and services purchased outside the District and used within District.
As a general proposition, the D.C. use tax is imposed on the storage, use or consumption of tangible personal property within the District. D.C. Code § 47- 2201(a)(1). Use tax specifically applies to the sale of materials used in the
construction, repair or alteration of real property, when the materials become real property upon completion of such construction, alterations, or repairs, regardless of whether or not such real property is to be sold or resold. D.C. Code § 47-
2201(a)(1)(C). If tangible personal property has been purchased outside the District and delivered to the purchaser outside the District, and a sales or use tax on the sale of the property has been properly paid to another jurisdiction, the property is generally exempt from District use tax. However, if property purchased and delivered outside the District is brought into the District, and if the purchaser is entitled to claim a refund of the sales or use tax paid to the other jurisdiction upon removal of the property from the other jurisdiction, the District use tax shall be applicable to the purchase price of the property. In that instance, the District use tax should be paid to when the property is brought into the District for use, storage, or consumption, whether or not a refund is actually obtained from the other jurisdiction. D.C. Mun. Regs. 9 § 405.7, 405.8 and 405.9. The regulations hold that whenever a contractor purchases any materials, supplies or equipment outside the District of Columbia which are subject to the District Sales or Use Tax, and on which the tax
reimbursement has not been paid to the supplier, the contractor must file a use tax return with the District and pay the tax. D.C. Mun. Regs. 9 § 438.26. The District has adopted the Multistate Tax Compact at D.C. Code § 47-441. Article V thereunder specifically provides that each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined amount or amounts of legally
imposed sales or use taxes paid by him with respect to the same property to another
state and any subdivision thereof. VI. Construction Contracts
a. Type of Contract Issues-Does the District address different types of contracts and, if so, does the District have specific rules that apply to different types of contracts? Are there specific elements of contracts that are looked to by the District?
Yes, the District specifically distinguishes between two types of contracts to construct, repair, or alter real property, based on the contract terms. Those where the contractor agrees to sell materials used and to perform the work either for an additional price, or on the basis of time consumed-generically, a “time-and-materials” contract-are treated one way. All other contracts to construct, repair, or alter real property-whether “lump sum”, “cost-plus” or materials and services with a guaranteed price which may not be exceeded, are treated another way.
If the contractor agrees to sell materials used, and to perform the construction, repair, or alteration work for an additional price or on the basis of time consumed, then the
contractor is considered to be making a taxable retail sale of the materials to the customer. With that type of arrangement, the contractor would be required to collect District sales tax on amounts billed to the purchaser for materials. The contractor would purchase the materials and supplies that become a physical part of (and remain in) the finished job for resale by issuing a resale certificate to suppliers. D.C. Mun. Regs. 9 § 438.3, 438.4, 438.15, 438.16 and 438.17, and 438.21.
With respect to all other contracts for the construction, repair or alteration of real property, the contractor furnishing materials as well as performing the work of affixing those materials so that they become part of the realty is considered to be the user and consumer of all materials so used. Accordingly, a contractor in that scenario would be responsible for paying District sales tax to its vendors, or self-assessing and remitting D.C. use tax, with respect to all materials used on that project. D.C. Mun. Regs. 9 § 438.5, 438.18. The contractor will not charge District sales or use tax to the purchaser. Please see the attached Exhibit-District of Columbia Sales Tax Chart-for a summary of the 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?).
The use of a split contract within the District would not provide for any particular tax advantage. When the contractor is performing the work for one of three classes of
“exempt organizations”: the federal government and its agencies; the District government and its agencies; and semipublic institutions holding a valid Certificate of Exemption issued by the Department of Revenue, the exemption of the organization typically passes through the contractor to the contractor’s supplier(s). The contractor is permitted to purchase materials and supplies that will be physically incorporated in and become part of the real property for those customers exempt from the District sales and use tax, regardless of the form of the contract. D.C. Mun. Regs. 9 § 438.9.
c. Does the District have specific contractor regulations?
Yes. See D.C. Mun. Regs. 9 § 438-Construction, Repair or Alteration of Real Property and § 472-Real Property Maintenance.
d. What other definitions or terms of contracts are addressed in the sales and use tax statutes and regulations.
D.C. Code § 47-2001(n)(1)(M) and § 47-2201(a)(1)(J) define the terms “real property maintenance” and “landscaping”. These definitions are repeated in the regulations at D.C. Mun. Regs. 9 § 472.1 and 473.1, respectively.
e. Discuss the tax obligations of subcontractors.
A subcontractor is treated in the same manner as a contractor. D.C. Mun. Regs. 9 § 438.2. VII. Machinery and Equipment Exemption and Contractors
a. Does the District 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 exemption for manufacturing machinery and equipment in the District’s sales and use tax law.
b. Is there a specific District exemption for a contractor to take advantage of the machinery and equipment exemption?
c. How may a customer take advantage of the machinery and equipment exemption in the District when using a contractor?
d. What are the rules for obtaining an exemption certificate or permit in the District?
VIII. GENERAL PLANNING SUGGESTIONS