Current TPT Status & Recommendations, Courtesy of David James, CPA, CCIFP
As part of this process, we will have identified several issues that must be addressed in the next legislative session (begins 1/12/15) in order to provide DOR with the legal directives it needs. DOR cannot address these potential changes in their FAQ, as they are limited to responding to the law as it currently exists. So you will NOT see this in the final FAQ. The plan would be to make these clarifications/changes retroactive to 1/1/15. But that does not help us “now” . . . .
Obviously, this time line is way too late for those of us who are currently bidding jobs and negotiating change orders and buying inventories which will roll into 2015. At this point, there is not much we can do – except for you to plan that:
- The “hybrid” method of taxation WILL go into effect 1/1/15
- For those jobs that are clearly MRRA - you should price the projects accordingly – taxes to be paid on the cost of materials. That said, it appears that the purchase of materials will still be tax-free for all parties remaining licensed as “prime contractors” for TPT purposes, and that the materials will be taxed when they hit the job cost, based on the location of the job. This is not finalized, but it’s the direction we’re working toward for the final FAQs, and we are “cautiously optimistic”. Assuming this direction is successful, it will avoid any issue of some inventory being tax-paid with other inventory being tax-free. We should have clarity on or around October 29th. But regardless of where materials are sourced, these MRRA projects will be taxed on materials incorporated in the work. Accordingly, you may want to modify your pricing to include an estimate for the materials tax; and note, the historical prime contractor TPT (or GRT) would not be applied to such projects – so don’t ‘double up’! We’ll let you know when we have clarity on the sourcing issue, which affects the tax rate, and when the tax applies.
- For those jobs that are clearly MODIFICATION – they will be business as usual: taxed a prime TPT (GRT method).
- For those jobs which comprise components of both, you will need to apply the “diminimus” rule (see below). If unsure of the character of the job, you may want to calculate the tax based on prime TPT and retail TPT (which may require you apply a tax rate to material purchases if your suppliers quote you tax exempt), then review the magnitude of the delta, and load a contingency into your bid to cover this risk.
- Change orders are a challenge – the DOR has had a long standing position that change orders “stand alone” from the original contract. This policy is reflected in past DOR rulings and has broad application to various DOR activities. Accordingly, for consistency, they are treating change orders as separate contracts for the new TPT provisions. Legislative action will be required to provide direction and allow the DOR to change the policy for this specific instance.
- If you are able to qualify your bids (whether a GC or Sub) such that you can adjust pricing for final sales tax determination – I would suggest you do it! This will allow some protection until the final FAQ is issued.
The applicable definitions as they currently stand are as follows (I do hear that the MRRA definition will have some minor modifications to it in the final FAQ):
Projects subject to point of sale tax (pay tax when materials are purchased):
“Maintenance” is the upkeep of property or equipment. An example of maintenance is an annual system checkup that includes topping off any fluids.
“Repair” is an activity that returns real property to a usable state from a partial or total state of inoperability or nonfunctionality. Examples of repairs include: recharging partially or totally nonfunctional air-conditioning units with refrigerant, clearing partially or completely blocked pipes of debris, readjusting satellite dishes to restore reception, and replacing worn washers in leaky or totally inoperable faucets.
“Replacement” is the act of replacing something that exists with something else, including the upgrading of existing systems. An example of a replacement is a customer who decides to replace an HVAC system that is no longer functioning at optimum levels with a new, more efficient unit.
“Alteration” is an activity that causes a direct physical change to real property without causing a change in the identity of the real property. Examples of alterations include: re-staining a wood deck, refinishing hardwood floors, enlarging a patio, sandblasting a building’s façade, and tamping railroad ties.
(Note: the re-staining and refinishing most likely will move up into the “repair” classification - as such activities are not “alterations”)
Projects subject to the gross receipts tax (current system):
"Modification" means construction, improvement, movement (including removal), wreckage or demolition.
"Modify" means to construct, improve, move, wreck or demolish
We are encouraging the DOR to clarify as much as possible all terms and definitions within the FAQ document.
There is a “diminimus rule” that provides for those projects which would be taxed as MRRA but have Modification work involved (mostly likely demolition and removal) that exceeds 15% - - - these jobs would be taxed as prime TPT (under old GRT rules).
Many other items remain under review/discussion, including:
Heavy highway aggregate production
What constitutes “improved” property
Exempt materials (such as 4” water pipe)
Once the final FAQ is released, we can then identify the areas which will require legislative action and provide you an analysis on what the legislative clarifications will “add” to the equation.