United States

Indiana retroactively enacts construction regulations found invalid

Legislature reinstates tax treatment for time and material contracts

TAX ALERT  | 

UPDATE: On March 24, 2016, Indiana Gov. Mike Pence signed Senate Bill 309 into law enacting retroactive statutes that effectively overrule Lowe’s Home Centers, LLC v. Indiana Department of Revenue and reestablishes the Department’s position requiring contractors to collect sales tax on materials sold under time and material contracts.

In late 2014, the Indiana Tax Court decided in favor of the taxpayer when it invalidated two of the Indiana Department of Revenue’s regulations to the extent they required contractor’s to act as retail merchants and collect sales tax on materials sold under time and material contracts for the improvement to realty. The Indiana Supreme Court chose not to hear an appeal of the decision.

In response to that litigation, the Indiana legislature retroactively enacted Indiana tax statutes Ind. Code sections 6-2.5-3-2(c) and 6-2.5-4-9(b), back to Jan. 1, 2010, to reinstate the same regulatory positions held invalid by the Indiana Tax Court in the Lowe’s decision. Section 6-2.5-3-2(c) states that use tax is imposed on a contractor’s conversion of construction materials into real property if that material was purchased by the contractor unless (1) sales or use tax has been previously imposed on the contractor’s acquisition or use of that material, (2) the person for whom the construction materials are being converted could have purchased the materials exempt from tax (evidenced by a properly executed exemption certificate), or (3) the conversion of the construction materials into real property is governed by a time and material; contract as described under Ind. Code section 6-2.5-4-9(b). 

Section 6-2.5-4-9(b) states, in part, that a contractor is a retail merchant making a retail transaction when the contractor: (1) disposes of tangible personal property or (2) converts tangible personal property into real property; under a time and material contract.      

In short, these statutes resurrected the Department’s regulatory language struck down by Lowe’s. As a result, contractors should review their purchases to determine whether they should continue to pay tax on materials purchased under lump sum contracts for improvement to realty and collect tax on the sale of materials provided under time and material contracts.  


UPDATE: The Indiana Supreme Court issued an order on June 4, 2015, denying the Indiana Department of Revenue’s (the Department) petition for review of the Indiana Tax Court’s 2014 decision in Lowe’s Home Centers, LLC v. Indiana Department of State Revenue (described below).

The Department has not yet reacted to the Indiana Supreme Court’s denial and it will likely be some time before it provides clear guidance on these issues. However, under Lowe’s, contractors are no longer able to separately state sales tax on invoices or collect and remit sales tax from customers on materials provided under time and material contracts for the improvement to realty. Instead, contractors must pay sales or remit use tax when they purchase materials or pull them from inventory, unless other exemptions apply.  

A natural development of the Lowe’s decision may be that companies that were assessed sales or use tax on materials under a time and material contract will be filing for sales and use tax refunds. Indiana’s statute of limitations on such refunds is three years plus the current year, allowing refunds to go back to Jan. 1, 2012. The statute of limitations on 2012 refunds lapse on or after Jan. 1, 2016. 

Contractors of real property improvement using time and material contracts or companies that have paid sales tax to a contractor under a time and material contract since Jan. 1, 2012, should consult with a state and local tax professional to understand the effect of this law on past and future sales tax related to real estate improvements.


A recent Indiana Tax Court decision impacts all Indiana companies and contractors entering into real property improvement agreements. Moving forward, contractors will no longer be required to collect and remit sales tax on time and material contracts. This article outlines the details of Lowe's Home Centers, LLC v. Indiana Department of State Revenue, 49T10-1201-TA-6 (IN Tax Ct. Dec. 19, 2014) so that taxpayers may assess the potential impact to their businesses.

Ending the year with a bang, the Indiana Tax Court granted Lowe's Home Centers, LLC's (Lowe's) motion for summary judgment against the Department, invalidating the long-standing distinction between the sales tax treatment of time and material and lump-sum contracts under Indiana tax regulations 45 I.A.C. 2.2-3-9 and I.A.C. 2.2-4-22. The issue was whether Lowe's properly self-assessed and remitted use tax on construction materials used in its real property improvement contracting work. Lowe's serves as general contractor on home improvement work, such as new roof and kitchen cabinet installation, where it routinely furnishes customers with both construction materials (typically pulled from inventory) and labor. Relying on tax regulations promulgated in the 1980s, the Department assessed Lowe's sales tax on the retail cost of the materials it claimed should have been collected from Lowe's customers.

The court dismissed the Department's position that under the construction contracts, customers of Lowe's are purchasing materials separately from the labor, causing the contractor to act as a retail merchant of the materials. The court agreed with Lowe's that its customers are purchasing a completed improvement. Title to the construction materials are deemed to have passed once they are installed, at which point, they lose their identity as tangible personal property, having been converted to real property. Thus, Lowe's did not transfer tangible personal property to its customers.

The court invalidated those portions of Indiana Tax Regulations 45 I.A.C. 2.2-3-9 and I.A.C. 2.2-4-22 that provide that when a contractor enters into a time and material contract with its customer, it owes no use tax on the materials because its customer owes sales tax on the materials supplied. These regulations also provide that when a contractor uses a lump-sum contract, it is required to self-assess and remit use tax on the construction materials supplied.

Although the court found the Lowe's contracts to be lump sum in nature, and not time and material as asserted by the Department, the court did not base its decision on this distinction. The court acknowledged the Department's authority to adopt rules and regulations that enable it to put into effect the purpose of Indiana tax statutes, but clearly indicated that the Department may not create rules or regulations that are inconsistent with, that add to or that detract from enacted legislation. The court went as far as to state that in this instance, the Department had created an artificial distinction between time and material and lump-sum contracts to convert a contractor's use tax liability under Indiana Code section 6-2.5-3-2(c) into a sales tax liability on the materials' higher price. The court said that because Indiana Code section 6-2.5-3-2(c) does not impose use tax liability contingent upon the type of contract a contractor uses, that distinction as contained in 45 I.A.C. 2.2-3-9 and I.A.C. 2.2-4-22 is invalid.

The Department may request a rehearing or petition the Indiana Supreme Court for review within 30 days. Contractors are no longer required to collect and remit Indiana sales tax on materials provided under a time and material contract. Instead, contractors must pay tax on materials when purchased or withdrawn from inventory unless a valid exemption certificate is received.

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