Navigating Sales Tax Complexities for Construction Companies: An Aronson Q&A

Blog
July 30, 2014

Q. How do you file for a refund in Maryland for sales tax paid on purchases for exempt jobs in the District of Columbia?

A. Maryland requires contractors to pay sales tax on all purchases of materials that will be incorporated into real property as part of a construction contract. However, Maryland allows contractors to apply for a refund if the materials will be used for a contract in another jurisdiction where the same purchase would not have been subject to tax (e.g., a contract with a government agency in the District of Columbia). Virginia has a similar rule; however, the contractor can prequalify for an exemption from tax, rather than having to pay the tax upfront and apply for a refund after the fact.

Maryland has a standard refund application that is required when claiming a refund of sales and/or use tax; claimants are required to describe the reason for the claimed refund, including exemptions. Claimants must provide substantiation for the requested refund by attaching the receipts/invoices reflecting the tax paid, the contract to perform the work in the exempt area, and support for the exemption (e.g., sales tax exemption certificate of the customer).

Q. Where can I download the Maryland application for refund?

A. Maryland’s sales and use tax refund application (Form ST205) can be found on the Comptroller’s website.

Q. What are the time limitations on claiming a refund?

A. Every state has rules that limit the time for the filing of a refund claim. Typically, states allow refund claims to be filed for taxes paid within a three to four year period, depending on the state. Maryland, Virginia, and the District of Columbia all have three year limitation periods for the filing of a claim for refund. It’s important to keep in mind that if you have not paid use tax in a state and have never filed a use tax return that it is likely that there will be limitations on the years for which they can issue an assessment. The period of limitation for assessment purposes is only triggered once a return is filed.

Q. Does sales tax apply to repair services in Virginia and Maryland?

A. Most states only impose sales tax on services that are specifically listed as a service subject to tax. Neither Virginia nor Maryland imposes sales tax on repair services performed on real property. For repairs to tangible personal property, Maryland does not impose a tax on the labor. However, if separate charges are made for the materials incorporated in the property being repaired, Maryland requires that sales tax be collected on the charges for the materials. Under these circumstances, purchases of materials transferred to customers in connection with the repair work can be purchased tax-free by presenting the supplier a resale certificate.

Similarly, Virginia does not tax repair services. However, sales tax must be collected for materials and parts used to perform the repair. In order for the labor charges to remain exempt from tax, the contractor needs to separately itemize such charges on the customer’s invoice. If the contractor does not separately state the labor, then Virginia requires sales tax to be collected on the entire charge.

Q. Does sales tax apply to freight/shipping charges?

A. The taxability of freight varies from state to state. A number of states base the taxability of an item on the tax rules of its final destination. In these states, the shipping charge is considered part of the price of the taxable item. Further, many states do not tax shipping charges when the service is provided by a third party (i.e., not the seller of the items being shipping). Contractors are typically considered the consumer of goods purchased for incorporation in their construction projects.

Aronson recently held a webinar on sales and use tax for construction companies, highlighting the above topics and more. To view a recording of the webinar and ask more questions, please click here and fill out the brief registration form for instant access. For a review and analysis of your specific situation, contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200 or mcolavito@aronsonllc.com.