Nebraska sales tax leaves contractors with questions
INSIGHT ARTICLE |
Unique to Nebraska, the state’s framework for imposing sales and use tax on contractor activity requires construction contractors to select one of three classification options. Each option presents different sales and use tax consequences, and for companies based in Nebraska or operating within the state, the options have real implications. Real property construction contractors should be educated on the options to avoid over or underpayment of sales and use tax.
Understanding the activities that qualify
Before selecting from the construction classification options, contractors should understand if the activities they are conducting in the state subject them to be registered. Construction services are generally defined as the annexation of building materials to real property or repair of real property or its fixtures. While the definition certainly includes new construction that is from the ground up, it is meant to be broad and some contractors may be surprised to find that their repair activities meet the definition for qualification purposes. For example, a contractor company that repairs or annexes property by attaching building materials to real estate through improvement, would be subject to registration requirements. In other words, construction does not need to be new construction, but rather can be repairs or improvements to existing buildings.
Even with the broad definition, there are still exceptions. Separately stated construction labor is generally exempt to the customer, while the sale of building materials may be subject to sales and use taxes depending on the option the contractor chooses. For example, if a contractor itemizes billing invoices, with labor and materials as separate line items with separate costs, the labor will always be exempt. However, whether the materials are taxable is dependent on the contractor option.
The classification options described below are applicable when the contractor is performing work on real property, and not when the contractor is operating as a retail vendor of materials.
Factors that Nebraska contractors should consider when determining if their activities are performed on realty or annexed property include whether the work performed is on a building or structure (opposed to tangible personal property) and whether the materials used become a part of the real property.
Understanding the classification options
Retailers of building materials—Option one
An option one contractor is generally referred to as a retailer of building materials. In performing its real property construction projects, an option one contractor should purchase building materials exempt for resale by presenting the vendor of the materials with a properly completed Form 13 Exemption Certificate. Option one contractors must collect sales tax from their customers on separately stated material charges. If a lump-sum invoice is made for both materials and labor, sales tax should be charged on the entire invoice amount.
Consumers of building materials—Option two
An option two contractor is generally referred to as a consumer of building materials. In performing construction projects, an option two contractor should pay sales tax on its purchases of building materials at the time of purchase. When billing for a construction contract, sales and use tax should not be charged on the invoice, regardless of whether the contract is separately stated or lump-sum.
Consumers of building materials who purchase materials tax-exempt—Option three
An option three contractor is also referred to as a consumer of building materials, like option two, except option three contractors purchase materials tax exempt and accrue the use tax due when materials are drawn from inventory for taxable use. An option three contractor should provide its material vendors a properly completed Form 13 Exemption Certificate. Upon withdrawing materials from inventory for a job, the contractor should accrue use tax on the purchase price of the materials. When billing its customers for a construction contract, sales and use tax should not be charged on the invoice. Contractors must choose an option through the Nebraska Department of Labor’s website. Those who do not select an option, will be treated as option one contractors.
Selecting the appropriate option and understanding the implications on your business
It is important for contractors to understand the available options and then to choose which option most closely aligns with their business practices. Option 1 contractors pass the sales and use tax liability on materials through to their customers, where Option 2 and 3 contractors absorb the sales and use tax on materials and generally account for that liability through a mark-up of the construction contract price. None of the three options impact the sales and use tax liability for tools, equipment, and supplies which are generally taxable to all contractors.
Other factors that Nebraska contractors should consider when choosing an option include:
- Is the contractor performing work for a governmental entity or other exempt entities?
- Is the contractor performing services in addition to real property construction, such as repairs to machinery and equipment?
- Is the contractor performing taxable services, such as building cleaning services?
- Is the contractor purchasing services from other contractors?
Nebraska-based contractors or out-of-state contractors performing work in Nebraska, should fully understand the state’s procedures for real property contractor classification. This includes assessing whether activities are performed are related to realty or not, registering for the contractor option with the Nebraska Department of Labor, and accounting for both sales and purchases in accordance with their selected option. In addition to registering, reporting, and remitting sales and use tax, the state requires contractors to keep extensive records, including applicable exemption certificates, contracts, permits, invoices, and any other documentation to document tax paid or collected.
Multistate construction contractors are often faced with unique sales and use tax procedures when it comes to performing construction services. In Nebraska, the questions become even more important. Contractors planning to perform work in Nebraska or who are currently performing work in the state, but are unsure if the correct option has been selected, should seek guidance from their tax adviser. It’s important to understand the correct procedures and the compliance obligations that accompany each option, thus being prepared to address a state audit or other inquiry.