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Summing It Up

Keeping you ahead of the curve with timely news & updates.


Capital Improvement vs Repair: What the New York Construction Industry Needs to Know

NY Sales and Use Tax for Construction IndustryContactors generally perform two types of transactions for sales tax purposes in New York; (1) performance of a capital improvement to real property, or (2) repair and other maintenance services to real property. As simple as it may sound, distinguishing whether a particular project qualifies as a capital improvement and therefore tax exempt, can be quite problematic and potentially significant in terms of tax dollar savings if a project is incorrectly evaluated.

How to Define Capital Improvement Projects

New York utilizes a three-prong test to define a capital improvement. A project will qualify as a capital improvement if it meets all three of the following:

  • Substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property;
  • Becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property of the item itself, and
  • It’s intended to become a permanent installation.

Projects that meet the above criteria are not subject to New York sales tax to the owner. On these projects, the contractor must obtain a properly completed Certificate of Capital Improvement, Form ST-124 from the owner. Once obtained, the contractor will pay sales tax on the purchases of the materials for the project. The use of subcontractors will follow the same principle.  No tax is due on labor charges for the use of subcontractors in a capital improvement project. Subcontractors are required to pay tax on their purchases of materials. Sales tax on the purchases by the contractors are normally passed on to the owner in the total invoice, but the invoice itself is not subject to sales tax.

Note however, the addition of a mobile home to real property is never a capital improvement, regardless of how it is installed. New York also implements special rules in regards to floor coverings. That is, the installation of carpet, padding, linoleum, vinyl roll floor, and other similar floor covering only qualifies as a capital improvement if it’s performed as the initial floor covering. If the floor covering installation is performed in an existing building, or in a building more than six months after the building has been completed, the floor covering and installation charges are deemed as a repair/maintenance and subject to New York sales tax.

How to Define Repair and Installation Projects

If the project is a repair, the contractor must pay sales tax on all the materials purchased for the job. In addition, sales tax is due from the owner based on the contractor’s total invoice for the labor and materials of the job. The contractor may in turn claim a credit on their sales and use tax return for the sales tax paid on the materials that were purchased since sales tax is charged to the owner on the same materials.

To illustrate differences between a capital improvement and a repair/maintenance, below are a few comparisons of work that could be performed:

Capital Improvement

Repair/Maintenance

  • Construction of a building, home, deck, garage
  • Additions to existing structure
  • Complete re-siding of structures
  • Excavation work if for a capital improvement
  • Demolition of a building or structure
  • Installation of new or complete replacement of fences, awnings, gutters, shutters
  • Repair or maintenance of exterior surfaces, patios, roof decks,
  • Repair, replacement, or maintenance of fences, shingles (partial), siding (partial)
  • Installation of canvas awnings, patching cracks
  • Cleaning, refinishing floors, removal of water or debris, replacement of broken glass
  • New structure exterior painting, brickwork,  concrete
  • Re-painting of existing structure, brickwork, concrete
  • Complete wiring or rewiring of structures
  • Additions to wiring systems
  • In-wall installation of electrical wiring for installation of security systems
  • Original installation of: circuit breakers, outlets, switches
  • Original installation or complete replacement of: add-on panels, breaker panels, door bells.
  • Repair of: floor outlets, lighting fixtures, wall boxes, wiring, wall fixtures
  • Replacement of: circuit breakers, fuses, light bulbs, outlets, receptacles, switches.
  • Installation or complete repaving (resurfacing) of driveways, lots, walks
  • Repair/patching holes and cracks, replacing sections of concrete or blacktop driveways, parking lots, restriping, sealing.
  • Original installation or a complete replacement of central air conditioning systems, original installation of ductwork or required additional ductwork
  • Maintenance contracts, repair or replacement of: blowers, coils, compressors, condenser coils, control devices, ductwork sections, fans, filters, refrigerant
  • Complete installation or replacement of bathroom: cabinets, exhaust fans, floor tiles, sinks, toilets, tubs
  • Repair of cabinets, exhaust fans, faucets, toilets, tubs. Replacement of faucets and shower heads

Due to the difference in tax consequence between a capital improvement and repair/maintenance project, it’s imperative for the contractor to make correct determination prior to beginning the project. The contractor must know whether or not to include sales tax on the cost of materials incorporated into the project. If a contractor is performing a combination of a capital improvement and repair/maintenance work, they should separately state the invoice for these jobs, and only charge sales tax on the repair/maintenance work performed.

Understanding sales and use tax can be very cumbersome and mistakes on charging sales tax can be costly. If your business is involved in any construction project or significant expenditures and would like to discuss the potential sales tax rules and exemptions that may apply including capital improvement vs repair, contact our State and Local Tax team by clicking here or calling 716-847-2651.

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Spring Cleaning: Time for State Tax Review and Housekeeping

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Spring has sprung! With the nice weather comes the concept of “spring cleaning.” Time to open the windows, let in the fresh air, clean up any lingering messes, and get everything in order for the upcoming season. It’s time to sweep out underneath your bed and dust out the cob webs. The same can be done in the state tax arena.

It’s time to do a little state tax housekeeping.

Now is a good time for businesses to take a look at their nexus fingerprint in the states and ask:

“Are we filing in states where we should be filing?”

“Are we filing in states where we shouldn’t be filing?”

Sometimes businesses file in states where they no longer have activity or are paying income tax in states where they aren’t really subject to income tax based on their activity in the state. This can be costly but easily fixed.

Maybe your activities in the state have changed such that your business should have been filing in new states or should have been collecting sales tax on items you were not aware of. If this is the case, you can go through a Voluntary Disclosure or Amnesty Program to ensure all your state filings are up to date and go into next filing season without the old cob webs lurking in the closet, so to speak.

Overpaying Sales Tax? It's Time for a Sales Tax Review

This is also a great time to look at what you are paying sales tax on and see if there is chance you are overpaying sales tax. Sometimes businesses have turnover or taxability of items change. There may be exemptions that are you are not aware, or refund opportunities for these overpayments. For example, there are many exemptions in the manufacturing industry that could easily be overlooked.

Finally, this a good time to look at where your business is registered and ensure you are registered properly. You may need to dissolve from states you are no longer doing business in. Furthermore, are you collecting sales tax in jurisdictions you are not registered in? If you are, this should be rectified immediately.

As you clean out your closets as part of your spring cleaning, don’t forget to do the same when it comes to your state taxes. Please contact a member of the Freed Maxick SALT Team to help you conduct a state tax review and a sales tax review.

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Sales Tax on Software: Complexities Businesses Need to Understand

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In today’s technological society, every business is purchasing or licensing some type of software. However, vendors are not always charging sales tax on these purchases, or in some instances, sales tax is being charged incorrectly.

Are you paying the correct sales tax on your software purchases/licenses and/or your software maintenance agreements?

Rules for Taxability of Software and Maintenance Agreements Vary

The type of software, where it is being used, how it is billed on the invoice, and the items included in the charge determines its taxability. The rules vary from state to state.

In general, “canned software” is subject to sales tax in most states. “Canned software” is prewritten software not designed or developed to the specification of a specific buyer. It is software you can buy off the shelf. Some states have an exemption for software which is electronically delivered. However, reasonable and separately stated modifications and custom software are generally exempt from sales tax. Most states also exempt maintenance agreements for software, training and installation of software if separately stated on the invoice. Whereas, maintenance agreements that cover hardware or agreements that contain upgrades to software are subject to sales tax. In most states, exempt items need to be reasonable and separately stated from the taxable items on the invoice, in order for them to be exempt from sales tax.

It is also important to check any invoices and review software contracts and maintenance agreements for any software you purchase. This is important because usually these contracts or agreements detail out what is being included in the sales price. (For example, does your maintenance agreement include software upgrades?) Computer expenses (software, maintenance agreements, etc.) seem to be a common area reviewed during sales tax audits and seem to be a high exposure area.

When the Software Purchaser is Responsible

In some instances your software vendor may not be registered in the state you are using the software and therefore is unable to charge you the proper state sales tax. This does not make the transaction exempt. The responsibility then shifts to you, as the purchaser, and it is your responsibility to self-assess use tax on the taxable piece of the invoice. Complexity becomes an issue when the invoice is issued as a simple lump sum. It might be hard to tell what is actually included in the sales price. This is when careful review of the agreements needs to be done to determine what is included and its taxability. Determining what is subject to state sales tax can also be complex.

We Can Help with the Complexities of Software Sales Tax

Freed Maxick’s SALT team can assist with the analysis of your agreements to determine what is subject to software sales and use tax. Contact us today.

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Overpaying Sales and Use Tax?

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The complexity of state and local sales and use tax is a problem in every state and for many businesses. Each jurisdiction has a different rule on the taxability and exemption of a particular product or service. For instance, downloaded computer software (that isn’t customized) is considered taxable in New York, but not taxable in California. Payroll services are subject to sales tax in Texas as a data processing service, but this service is not considered taxable in Pennsylvania or New York.

It continues to be a growing problem in an ecommerce world for businesses, especially small businesses, to stay compliant with each state’s regulations and to identify overpaying sales tax. In addition to the complexity of sales and use tax, states continue to broaden the taxability of transactions and audit businesses in order to raise more revenue. As such, businesses are likely to err on the side of caution and pay unnecessary sales tax on purchases or charge customers who are exempt. A company should evaluate the complexity and volume of their sales and use tax transactions to determine if there’s a remote possibility that the company is overpaying sales tax.

Reverse Sales Tax Audit

A reverse sales tax audit is a thorough analysis of a business in order to identify the overpayment of sales and use tax. A state and local sales tax consultant will evaluate your company’s business operations, fixed assets, and how you are paying and charging sales and use tax.

Generally, the first step is an evaluation of the purchasing function within your business in order to obtain an understanding of how purchases are being made and approved. Once the consultant has analyzed the business processes and purchasing methods, a sample of paid invoices will be reviewed for sales tax that was charged on exempt items and for the incorrect sales tax rate that may have been applied. Once a quantitative analysis has been completed, the appropriate documentation and information will be delivered to the state or vendors to recover the overpaid sales tax.

It’s also imperative to have an analysis performed on invoices to your customers. In today’s competitive global market, the ultimate decision of a customer could be based on the price of your product or service. Therefore, it’s vital for a business to know who they are selling to and whether the customer is subject to sales tax in their jurisdiction. Generally, a similar approach in reviewing the purchasing functions would be used on the company’s sales functions.

Stay Ahead

If you’ve had a reverse sales tax audit performed in the past, opportunities may still exist. State tax laws and exemptions are always changing and these changes could be overlooked by your company. In addition, having a reverse sales tax audit performed in conjunction with a major capital project underway can save tax dollars promptly by avoiding the payment of sales tax on purchases of equipment, supplies, etc. that could be exempt.

If your business engages in manufacturing activities or purchases and sells across multiple jurisdictions, you should discuss a reverse sales tax audit with a Freed Maxick professional from the SALT team. Contact Freed Maxick's professionals to discuss your specific situation, or call to speak with an individual directly at 716.847.2651.

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