Get It Right And Avoid The Consequences
For those contractors that have performed construction work in New Jersey, you may think you have done everything right from paying tax on material purchases, collecting exemption certificates from exempt organizations, charging and remitting sales taxes on repair and maintenance work and then a letter from the State of New Jersey arrives in the mail for a 4-year income tax, payroll tax and SALES TAX AUDIT. First of all, do not panic. You are most likely doing all the correct and timely filings and payments with regard to income tax and payroll taxes. This leaves the NJ Auditor focusing the bulk of his time on Sales & Use Taxes. The second thing to do is to call in the “right” professional to assist you with the audit. Taking charge of this audit is something you should not tackle yourself unless you have the expertise in-house – the typical New Jersey contractor does not have this in-house expertise. The person you call is not necessarily your current CPA or consultant unless you know they also possess the skills of a construction savvy sales tax expert. The person you choose to assist and represent you can mean the difference between 4-year $100,000 assessment vs a $20,000 assessment. You are most likely wondering at this point why?
New Jersey and other States have been selecting more businesses for sales tax audits, particularly contractors. For the construction industry, especially for the typical UTCA contractor, the sales tax rules are very confusing, misunderstood, misapplied, exemption certificates are not collected or supplied and in the past few years, certain changes have been made to the sales tax laws for contractors. These laws get further complicated when a contractor has its home office in New Jersey but works in New York and other states. As a result, it is likely that the auditor will find enough of purchase or sales invoices that the resultant sales and use tax will result in a material assessment to the contractor. BUT, is the Auditor right? While New Jersey and other states have beefed up their training for their Auditors, their primary mission is to complete an audit only based on what documents you provide to them. It is then your responsibility to determine whether their judgment call is correct or whether further information can be provided or obtained to support your non-payment of sales tax on purchases or non-billing of sales tax on contract billings. The ultimate goal is to pay New Jersey taxes in accordance with existing laws and regulation and no more than is owed.
In a typical 4-year audit, the auditor will focus on 3 major areas which are:
- Equipment Purchases – These will be audited 100% for all purchases made during the 4 year period. The auditor will most likely request the detail depreciation schedules that support the Company’s New Jersey corporate income tax return to determine that all purchases are included. This category includes automobiles and trucks.
In New Jersey, the majority of this category will require the payment of sales tax on purchase or registration of vehicles. However, certain exemptions from New Jersey sales tax exist for trucks with a GVW of 26,000 lbs. for which Federal Excise Tax was paid. In addition, parts purchased to repair such trucks are also exempt from sales tax (labor paid to a vendor to install the parts is not). There is also an exemption from sales taxes for asset purchases (other than registered vehicles) under the Occasional Sales rules. This means if you purchase equipment from another Company (say another construction company) who is not a vendor (i.e., does not regularly sell equipment), the seller does not charge sales tax and the buyer is relieved of paying use tax on the purchase. This exemption can be used up to 4 times a year and can save the contractor significant amounts of use tax. There are also certain exemptions for sales and purchases between “related companies”.
- Vendor Purchases – These include job material purchases, equipment rentals and office related purchases. In New Jersey, the contractor is considered the end-user of these vendor purchases, and unless the properly completed exemption certificate is presented to the vendor, sales tax will be charged.
Generally, all rentals of equipment are taxable in New Jersey – it does not matter whether you are using the equipment on a taxable or tax-exempt job. But be careful, because when you “rent equipment with an operator” or use “trucking services”, these purchases are not taxable. Many times the auditor will see the words “rental” and “trucking services” and will be ready to assess use tax on this invoice!
Generally, unless specifically exempt under the tax code or an exempt certificate on a tax exempt contract is provided to the vendor, sales tax will be charged. Note that the exemption certificate for tax exempt contractors only applies to “materials permanently installed in the project”. If a tax exempt certificate is not provided, sales taxes are usually charged. It is extremely important that the invoice from the vendor clearly identify the contract to which the purchase applies. The Auditor will look at the invoice to see if sales tax is charged, but unless the job number or name is specifically indicated on the invoice (preferably by the vendor), the Auditor will want to assess use tax. Be careful of vendors that the Contractor may purchase for both taxable and tax exempt contracts as in many cases, sales taxes are not charged on all purchases. Typical supplies, materials and other taxable services that are not tax exempt on exempt projects include lumber for forms or temporary support, small tools, supplies, sweeping services, jobsite trailer and related office purchases and as previously discussed equipment rentals. On the flipside, there are certain purchases which are specifically exempt from sales taxes. These include all safety equipment (hardhats, vests, eye protection, etc.), solar panels and related equipment and others.
The contractor must also be very careful when they purchase materials either from an in-state vendor or from an out of state vendor and take delivery in New Jersey. This frequently happens when the contractor takes delivery in New Jersey then transports the materials to the job site out of state. In this instance, the “sale” took place in New Jersey and use tax is due. If the materials are taken to a job site out of state, additional use taxes may be due to that state (this frequently happens when working in New York State).
Lastly, the Contractor should be cognizant of office related purchases, particularly from out of state vendors and as they relate to certain exemptions for certain purchases such as software. Again, the Contractor should review the list of exempt and non-exempt purchases.
- Customer Billings – This is the most complicated area for contractors for sales taxes in New Jersey. There is a whole listing of exemption certificates and when not to charge sales taxes on billings to customers. The general rule is that when contractors are working for an owner of real property, the service they provide is taxable, unless they obtain a properly completed, timely dated and signed sales tax exemption form. The Contractor must also accept the exemption certificate in “good faith” meaning that the work that is performed by the Contractor corresponds to the exemption certificate received. The common forms that the contractor will accept include:
- ST-8 Certificate of Capital Improvement
- ST-4 Exempt Use Certificate
- ST-5 Exempt Organization Certificate
- ST-6A Direct Payment Permit
A contractor should not accept a ST-3 Resale Certificate. In addition, no exemption certificate is required when working for a governmental agency. Maintenance and repair services are generally always taxable to the owner and exemption certificates should not be accepted. There are specific exceptions to components of a building project that are taxable and an ST-8 is not acceptable. These include floorcoverings, landscaping, security system installation and others. The Contractor should also be cognizant of billings to customers for which sales tax has already been paid on materials. If the invoice to the customer does not separately state the materials portion of the invoice, the customer must be charged sales taxes on the entire invoice. If the materials portion of the invoice is separately stated (and sales tax was already paid), the sales taxes are only charged on the remaining portion of the invoice.
When a contractor works as a subcontractor for another contractor, the subcontractor does not bill the prime contractor for the sales tax on the bill if it is a taxable service. The subcontractor should keep records to document that sales tax was not collected because the services were performed for a prime contractor. The most common way to do this is to indicate on the invoice to the prime contractor some designation such as “Subcontractor to Prime Contractor”.
As this article illustrates, the sales tax laws for Contractors in New Jersey are extremely complicated and should be carefully analyzed for each Contractors unique situation. This is not a “one size fits all scenario”. This article only provides a very high level view of New Jersey sales tax and Contractors and the reader is advised to consult with an expert before relying on any information in this article. It is suggested that the reader refer to the State of New Jersey Division of Taxation website. Publication S&U-3 Contractors located on this website provides further information for Contractors.