By Tim Kennedy
Not all work performed on a property is created equal in the eyes of the tax collector. Some improvements fall into the realm of capital improvement, while others are considered repairs, and still others are maintenance services.
Because New Jersey sales tax rules differ based on the type of work performed, it is important to understand the classifications to avoid paying too much or too little in taxes. Here’s what you need to know.
What work is exempt from sales tax?
For owners of real property -- land or buildings, and any property permanently attached to the land and/or buildings -- certain types of purchases of tangible personal property (items that have physical mass and can be touched) or certain capital improvements are exempt. Capital improvements include the installation of tangible property that increases the value or the useful life of the real property.
Examples of tax-exempt improvements are new driveways, new central air conditioning units, new fences, in-ground swimming pools, fireplaces and underground water sprinklers, new heating systems, new electrical outlets, new doors, new roofs and new decks.
What is not exempt?
Under the tax code, there is a difference between improvement and upkeep. Services not exempt from sales tax include landscaping services, installation of carpet or flooring and installation of alarm or security systems.
Repairs, such as fixing loose patio tiles, a leaky roof or faulty plumbing, also fall into the nonexempt category, because they merely maintain the existing value of the property, as opposed to increasing its total value.
How does this impact contractors?
Unless contractors are working for an exempt organization, such as certain nonprofits or the state of New Jersey or its agencies or political subdivisions, they must pay sales tax to the material suppliers and also pay on any taxable services. Should a contractor purchase materials tax-free or at a reduced tax rate in another state for use in New Jersey, they must pay a use tax -- representing the spread between the New Jersey sales tax rate and the lower sales tax rate in the state in which the materials were purchased. If a New Jersey contractor is purchasing materials for use in another state, we advise our clients to have the materials delivered directly to the out-of-state job site. Once the materials are delivered in the state of New Jersey, they are subject to New Jersey sales or use tax.
Finally, obtain the proper certificates and keep all documentation related to tax exemptions. Contractors must have proper documentation in the event of a New Jersey sales tax audit. Contractors receive an ST-5 certificate if they are working for an exempt organization, or an ST-8 if working on an exempt capital improvement project for a property owner. In addition, the contractor provides an ST-13 exemption certificate to the material supplier to prove that the contractor is working for an exempt organization and does not have to pay sales tax on materials or services.
If you find yourself facing down a New Jersey sales tax audit, or to gain the peace of mind that you are not paying too little – or too much – sales or use tax, consult with an experienced accountant to make sure your company is complying with state law.
Tim Kennedy, CPA is a Manager at Wiss with over ten years of accounting experience. Tim is dedicated to providing guidance on business, identifying audit and accounting issues encountered on an engagement, and maintaining communicative relationships with his clients. Reach Tim at 973.994.9400 or firstname.lastname@example.org.