96-164
Response November 4, 1996
Request
State of Utah
Utah State Tax Commission
210 North 1950 West
Salt Lake city, UT 84134
Attn: XXXXX
RE: Sales/Use Taxes
Dear XXXXX
We are an out of state contractor potentially going
to perform construction work for an “exempt” owner in the fine state of
Utah. Written clarification pertaining
to the following questions would be greatly appreciated:
1. Are
contractors and subcontractors considered to be the “end user” for all their
purchases, including materials, supplies, equipment parts and third party
rentals?
2. As “end
users” are contractors and subcontractors responsible for paying the sales/use
taxes, on all purchases of tangible personal property from vendors, by either
paying the vendor the tax or by accruing and paying the State?
3. Do the
only “truly exempt” purchases of “permanently installed materials” for
construction projects have to be made by the “exempt” agency on the exempt
agency's paper?
4. Does a
contractor, purchasing a read-mix concrete from a concrete supplier, owe sales/use
tax based on the purchase price of concrete?
5. Does a
contractor, making concrete with his/her company owned or rented/leased
concrete plant, only owe sales/use tax on the materials used in making the
concrete, related supplies and concrete plant equipment parts? Is this true for all types material
manufacturing type plants such as cement stabilized base, hot mix asphaltic
concrete, etc.? (Assume that these
referenced materials would be permanently installed in the exempt construction
project and would not be sold to a third party.)
6. Is the
contractor's or subcontractor's labor subject to sales/use tax when performing
“new construction” for an exempt owner?
7. Is there
any form of “gross receipts” sales/use tax due that the state based on any
portion of the contractor's billings to the owner or any portion of the
subcontractor's billing to the prime contractor?
8. Can the
contractor “resell” permanently installed materials or any other contractor
purchased items to an “exempt” owner?
9. Can the
subcontractor “resell” permanently installed materials or any other
subcontractor purchased items to a prime contractor that is working for an
“exempt” owner?
10. Is there
a difference in the amount of sales/use tax due to the State and Local authorities
if a subcontractor “furnishes and installs” or if the prime contractor
purchases the permanently installed materials for the subcontractor? Consider the following steel mill price
example:
Subcontractor Contractor
Mill Price 25.00 25.00
Fabrication 25.00 25.00
Delivery 10.00 10.00
Erect 10.00 10.00
Total price 70.00 70.00
Tax due @6.125% ? ?
11. Is the
correct sales/use tax rate in the city limits of Salt Lake City, Utah equal 6.125%
(4.875% State, 1% City and .25% Transit)?
Please advise as soon as possible.
My direct line is: XXXXX
My fax # XXXXX
Thank you.
Regards,
XXXXX
State of Utah
Utah State Tax Commission
210 North 1950 West
Salt Lake City, UT 84134
Attn: XXXXX
RE: Utah Sales/Use Taxes
Dear XXXXX
As indicated via our phone conversation XXXXX, you
have received my fax and hard copy letter dated XXXXX. I appreciate your cooperation in reviewing
and answering these questions as soon as possible.
We visited briefly concerning subcontractors and you
explained that clarification would be forthcoming. Please send me a written response to the following additional
questions.
1. If a
subcontractor fabricates a “moveable” product “off site” or “on site” and
installs his/her fabricated product without the prime contractor “touching” the
work, the prime contractor does not owe any sales/use tax on the
subcontractor's billing. Is this statement
true? (Understand we assume, in this
instance, the subcontractor is the “end user” and has paid the sales/use tax on
all of his/her purchases.)
2. If a
subcontractor fabricates “on site” and the “finished product” is “built in
place” and “not moveable,” the subcontractor is once again the “end user” and
is responsible for his/her sales/use taxes.
In this case the prime contractor does not owe any sales/use tax on the
subcontractor's billing. Is this
statement true?
3. Is there any
instance, pertaining to sub contractors working for prime contractors, when
sales/use tax is applied to the subcontractor's billing to the prime contractor
for “labor & skills,” material or supplies?
Regards,
XXXXX
XXXXX
Advisory opinion - Sales tax on construction
materials
Dear XXXXX
We
have received your request for sales tax advice pertaining to purchases of
construction materials that will be used to repair or reconstruct highways in
Utah. As we understand your situation,
you anticipate purchasing all materials and installing them into the highway
project, or you will use subcontractors who will either purchase and install
materials or install materials purchased by your company. No materials will be supplied by UDOT.
We offer the following guidance:
The
purchase of items of tangible personal property is taxable in Utah. If the item
is converted to real property upon installation, the last person to own it
before conversion is liable for the sales tax.
As a general rule, construction materials are considered “converted to
real property” when they are used in the construction of buildings or
improvements on real property.
Construction materials are bricks, lumbers, nails, cement and other
items that typically lose their separate identity as personal property once
incorporated into real property.
If
a contractor purchases construction materials, uses the materials to build a
real property improvement, then sells the finished improvement to the property
owner, the contractor is responsible for paying sales tax on his purchase of
the materials from the supplier because he is the last person to own the
materials in their state as personal property.
Your company must pay sales tax on your purchases of construction materials
and supplies that you will consume in the construction process or convert to
real property.
Because
you mentioned that you may be working with subcontractors, we add following
advice. If your company purchases
construction materials, then resells those materials to a subcontractor who
converts them to real property, you may purchase the materials tax free for
resale, but you must collect sales tax on your sale of those items to the
subcontractor. This is an important
point for you to consider as you structure your agreements with subcontractors
because if you are required to collect sales tax, you must obtain a sales tax
license and report the sales tax at intervals prescribed by law. You can avoid that situation by requiring
your subcontractors to purchase materials directly from suppliers.
We
also caution you that if you are using out-of-state suppliers who do not
collect Utah use tax on your purchases, you must accrue the use tax and report
it directly to the Commission.
With
that background, we turn to your questions:
1. The
contractor who converts materials to real property is the “end user” for sales
and use tax purposes. The contractor
must also pay sales or use tax on tools or supplies that he purchases, rents or
leases for use during the construction project.
2. As
“end users,” the contractor should be paying sales tax to the supplier. The supplier, in turn, is responsible for
reporting and remitting the tax to the Tax Commission. Two exceptions may arise:
a. If the contractor purchases supplies
from an out-of-state vendor which does not have nexus with Utah, the contractor
must accrue and report the use tax directly to the Commission. If you use an out-of-state vendor who does
not collect use tax, assume that you are responsible to pay that tax directly
to the Tax Commission.
b. If the contractor purchases any item
tax free for resale, then either converts the item to real property, converts
it to his own use, or consumes it in the construction process, the contractor
must accrue the sales or use tax and remit it directly to the Tax Commission.
3. An
exempt entity (in this case, the State of Utah) may purchase items of tangible
personal property tax free. However,
the exemption is limited with regard to construction materials. To purchase construction materials tax free,
the state must not only make the purchase directly, it must also use its own
employees to convert the materials to real property. Therefore, there is no advantage of having UDOT purchase construction
materials on your behalf.
4. A
contractor buying redi-mix concrete from a third party must pay sales tax on
the entire amount charged (concrete plus delivery).
5. A
contractor who purchases or rents concrete mixing equipment and the raw materials
to mix the concrete must pay sales or use tax on both the purchase or rental of
the equipment and the raw materials used to make the concrete that is converted
to real property.
6. None
of the amount charged to UDOT for the finished highway improvement is
taxable.
7. There
is no “gross receipts” sales or use tax due.
However, your company will be liable for corporate income tax on income
earned from Utah sources.
8. As
stated in 6 above, if an item of tangible personal property is converted to real
property by the contractor, the contractor is liable for sales tax on his
purchase of the item. The charge to the
property owner (UDOT) for the finished real property improvement is not
taxable. If the contractor sells items
of tangible personal property other than construction materials to an exempt
entity (UDOT), the sale is not subject to tax.
9. The
contractor or subcontractor cannot avoid the sales tax by purchasing materials
on behalf of UDOT. (A different rule
applies to purchases of construction materials for schools or religious or
charitable organizations.)
10. If a
contractor purchases construction materials, then gives those materials to the
subcontractor for installation as part of a real property contractor, the
contractor is liable for sales tax on the purchase of the materials. The subcontractor’s charges to install the
construction materials to real property are not taxable.
Note,
however, that charges to install an item of personal property in connection
with another item of personal property are taxable. In other words, if the item is not affixed
to real property upon installa tion, the installation charges are taxable. For instance, assume that you lease
scaffolding for use on the project, and the lessor installs it by assembling it
on the work site. Unless the
scaffolding is actually affixed to real property, the installation charges are
taxable.
11. The
tax rate in Salt Lake County for areas in which the freeway construction will
take place is 6.125% If the
construction passes into Utah County, contact us for information about the
appropriate tax rate.
In
response to questions raised in your letter of October 21, we offer the
following advice:
12. You have
described a situation in which a subcontractor fabricates a “movable” item away
from the construction site, then installs it on site. We assume that you are envisioning an item that is fabricated as
an item of tangible personal property, but is converted to real property upon
installation. For instance, a
subcontractor may fabricate concrete “jersey barriers” off site, then transport
them to the work site and place them in position as a permanent part of the roadway. The last person to own them as tangible
personal property before they are converted to real property is liable for the
tax. If the subcontractor owned the
them at the time of conversion, the subcontractor, as the final consumer, is
liable for the tax on the materials used to fabricate them. If the general contractor owned the
materials or the barriers at the time of conversion, the general contractor is
liable for the tax. This is true even
if the subcontractor, acting on behalf of the general contractor, put them in
place along the roadway. In either
case, the charge by a subcontractor to the general contractor is not subject to
sales tax.
13. As in
the example above, if the subcontractor is the last person to own the
construction materials as tangible personal property, the subcontractor is
liable for the amount paid to purchase those materials. If the general contractor owns the materials
and hires a subcontractor to use them to fabricate a finished product, the
general contractor is liable for the tax on the materials.
14. Charges
by a subcontractor to a contractor are taxable if the subcontractor is selling
items of tangible personal property to the general contractor. For instance, if a subcontractor builds
steel I-beams, then sells the I-beams to the general contractor before they are
converted to real property, the sale between the subcontractor and general
contractor is subject to tax. The
general contractor, as the final consumer, is liable for the tax.
We
realize this is a confusing area of tax law.
If you have other questions or concerns, please let us know how we can
help you.
For
the Commission,
Joe
B. Pacheco,
Commissioner