January 3, 2013
New Jersey Sales Tax Update for Contractors Working for Exempt Owners
Over the many past years, we have assisted construction contractors through the various interpretations of New Jersey Sales tax regulations as it applies to materials, supplies and services that are not directly incorporated into a construction project with an exempt owner. This assistance usually resulted in varying interpretations of existing sales tax laws and disagreements with various New Jersey State Auditors as to what materials, supplies and services were taxable and which ones were not. Finally, on November 1, 2012, the New Jersey Division of Taxation Regulatory Services Branch issued a Technical Bulletin TB-67 (the “Bulletin”) clarifying what materials, supplies and services are taxable and which are exempt. The Bulletin also addresses other purchases, rentals, leases and uses by contractors.
First, this Technical Bulletin is not a change to any existing regulations or sales tax laws, but rather a clarification. Secondly, this Bulletin specially only addresses work that is done for an “Exempt Organization” by a “Contractor”. Many of UTCA member contractors will fall under this Bulletin as they do work for “an agency, instrumentality, authority or public corporation of the governments of the United States of America or the State of New Jersey or any political subdivision of the State of New Jersey; or any nonprofit organization which holds a valid exempt organization certificate. This Bulletin also includes work done for a “Qualified Housing Sponsor” and for a “UEZ Qualified Business”.
Materials That Qualify for Exemption
Materials Incorporated into the Project – There has been little disagreement in the past as to interpretation of the exemption for items of tangible personal property purchased by a contractor for incorporation into property as a physical component part of such property. All material incorporated into the project are exempt from New Jersey sales taxes.
Supplies that are “Consumed” in the Project – In the past, this definition was somewhat vague in that the regulations defined “construction supplies” as “…items of tangible personal property consumed in the fulfillment of a construction contract, which items do not become a physical component part of the property upon which work is performed. Supplies include, but are not limited to lubricants, cleaning compounds, polyethylene covers, rock salt and rope.” The Bulletin further clarifies the “exclusive use” meaning that the supplies purchased will be entirely consumed in use, or lack any residual utility after use, and they will not be used on jobs performed for nonexempt organizations either prior to, simultaneously with, or after completion of the exempt organization job. The KEY words here are “ENTIRELY CONSUMED”. Under the Bulletin, construction supplies now include items commonly used by UTCA members including drill bits, masking tape, blades, grease, fasteners, single use cardboard, plastic molds, cleaning compounds and many other items.
Services That May Qualify for Exemption
In the past, this was one of the most controversial areas upon audit. The Bulletin specifically exempts certain services for which there has been some confusion in the past as to whether sales tax should be charged or not. For purposes of the exemption, services include but are not limited to:
- Construction site cleanup services for sweeping and removing debris
- Construction site garbage removal
- Construction site snow removal services
- Dust control services
- Fabrication services (to fabricate material that will be permanently attached to real property)
- Installation of alarm or security systems
- Installation of floor coverings (if coverings will be permanently attached to real property)
- Installation of scaffolding used for construction
- Installation of temporary fencing around the construction site
- Installation of temporary lighting during construction (exemption does not apply to temporary lighting for the offices of the contractor)
- Landscaping services and maintaining landscaped grounds, such as mowing services
- Pest control services
- Test well drilling
- Washing of decks, siding or windows
Purchases Ineligible for Contractor Exemption
The Bulletin reinforces certain purchases which are not eligible for sales tax exemption when working for exempt entities as follows:
Construction Equipment - The sales tax exemption does not apply to leases, rentals, purchases or uses of construction equipment. Construction equipment includes, but is not limited to grading, lifting and excavating vehicles, compressors, scaffolds, forms, hand tools, and ladders. Other examples of taxable equipment and tools are chains, cutters, extension cords, gas cans, generators, guide wires, hand trucks, hoses, industrial vacuum cleaners, measuring devices, metal buckets, metal trowels, padlocks, road skids and wheelbarrows.
Office Equipment and Supplies - Office equipment, furniture, and office supplies used by contractors do not qualify for exemption, including, computers, copiers, ice chests, microwave ovens, mini-fridges, safes and water dispensers.
Temporary Buildings and Conveniences - The use of temporary buildings and conveniences fail to meet the exemption criteria of exclusively used for improving, altering or repairing the real property. Portable toilet rentals, including cleaning and waste disposal charges, are taxable. Also, purchases, leases, rentals and uses of temporary structures and trailers, such as a temporary garage, office space, porch, shed, tent and storage structures, are taxable. Associated delivery, installation, maintenance and similar charges are also taxable.
Services and Other Transactions Subject to Tax - Repair or maintenance services performed on construction equipment, including tools (see above), are taxable. Further, the sales tax law imposes tax on several types of services and transactions that are not for the contractor’s exclusive use in erecting structures or building on, or otherwise improving, altering or repairing real property. These purchases do not qualify for the exemption include but are not limited to hotel/motel occupancies, information services, memberships, parking, prepared food and beverages, and telecommunications services.
Summary and Recommendation to all UTCA Contractors
Due to the release of this Bulletin, UTCA contractor members are encouraged to review the sales taxation of materials, supplies, and services used on all exempt jobs. There is a huge opportunity to save 7% on many purchases that were taxed in the past. Since this Bulletin is very recent, many vendors may not be aware of this new clarification. It is up to the Contractor to provide the correct exemption certificate to the vendor to save the related sales tax. Contractors that buy supplies in bulk will benefit by buying their supplies on a job by job basis and taking advantage of these exemptions.