Contractor to Pay Indiana Sales or Use Tax on Supplies Instead of Passing Tax on to Customer
In a recent Indiana Tax Court case (Lafayette
Square Amoco, Inc. v. Indiana Department of State Revenue 867 N.E.2d 289
(Ind. Tax Ct. 2007)), the court stated that if consumable supplies and
rental equipment used by a taxpayer are not sold directly to the customer,
then the sales and/or use tax liability for materials consumed by the
taxpayer cannot be transferred to the customer.
In this case, the taxpayer is an Indiana mechanical construction contractor
that charged its customers on either “lump sum” or “time and materials”
basis. The taxpayer purchased certain items – such as tools, safety glasses
and gloves – and also rented equipment – such as booms, cranes and loaders –
that it consumed or used in the process of providing its services to a
customer.
The taxpayer self assessed and remitted use tax on these purchases to the
Department; however, the taxpayer invoiced the customer for the additional
use tax not on its original invoice from its vendor. To make the invoice
easier to read and tie to the original vendor invoices, the taxpayer
included a sales tax line on the invoice. The taxpayer explained that they
needed to reflect the use tax paid on the invoices which were sent to their
customers in order to recoup the total cost of materials.
For example, the taxpayer’s vendor invoice is $100, but the taxpayer adds use tax on it of $7; thus the taxpayer’s billing invoice shows an invoice total amount of $107. The customer sees a vendor invoice supplied as backup for only $100.
The Department noted that the taxpayer
collected sales tax from its customers on the items. The Department also
noted that because the taxpayer consumed or used these items rather than
transfer items to its customers, the taxpayer should have either paid sales
tax when it acquired the consumables and rented the equipment, or self
assessed and remitted use tax.
How should a contractor bill supplies, rental equipment sales and use tax
to its customers? While the taxpayer is certainly entitled to recoup
whatever overhead costs incurred to complete construction projects, there
has been no retail transaction for the items discussed above. Therefore, the
taxpayer cannot collect sales tax on the consumables and rented equipment
from the customers. The taxpayer cannot transfer the cost of these items to
the customers in the form of sales tax or use tax because it is the taxpayer
who purchased and consumed them, not the customers.
In conclusion, a contractor should not bill customers specifically for sales
and use tax on consumable
supplies – such as tools, safety glasses and gloves – and rental equipment –
such as booms, cranes and loaders. In this case, the taxpayer could have
avoided the issue by simply paying the sales tax upon purchase or not
including a line item on the invoice for sales tax.
For additional information on this issue, please
contact us.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.IndianaConstructionCPAs.com
info@somersetcpas.com
