State and Local Tax Issues Facing the Real Estate and Construction Industry

State and Local Tax Issues Facing the Real Estate and Construction Industry

September 22, 2016

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• Sales tax laws applicable to the real estate and construction industry

• State income tax consequences of performing work in different states

• Ohio Commercial Activity Tax (CAT)

• InvestOhio Credit

• Ohio municipal tax reform

AGENDA

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CONTRACTORSCONSTRUCTION

• In a construction contract, the contractor is considered the consumer of the materials incorporated into real property

• Contractors are liable for payment of the tax, unless an exception or exemption applies

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• Construction contractor – any person who performs a construction contract either as the prime contractor or subcontractor

• Construction contract – an agreement for the transfer of tangible personal property and its incorporation into real property

• Construction contract is not a sale of tangible personal property

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• R.C. 5739.01(B)(5)”…a construction contract pursuant to which tangible personal property is or is to be incorporated into a structure or improvement on and becoming part of real property is not a sale of such tangible personal property.”

• The construction contractor is the consumer of such tangible personal property.

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• The sale and installation of certain tangible personal property is never considered a construction contract: R.C. 5739.01(B)(5)

Carpeting

Agricultural land tiles

Portable grain bins

Tangible personal property transferred during a landscaping or lawn care service, such as trees, shrubs, seed, sod, fertilizer, mulch, etc.

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• Carpeting – sale and installation of tangible personal property – subject to sales tax on material and labor

• If installation of carpet is part of an overall contract and the charge for the carpet and installation is not separately stated in the contract, the contractor would be the consumer of the materials and use tax would be due

• If the installation of carpet is part of an overall contract and the charge for the carpet and installation is separately stated, the contractor must collect the tax on the separately stated carpet and installation

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Real Property: R.C. 5701.02

• Intention is to be permanent

Land (including trees, plants, etc.)

Buildings

Structures

Improvements

Fixtures

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Personal Property: R.C. 5701.03

• “…includes every tangible thing that is the subject of ownership, whether animate or inanimate, including a business fixture and that does not constitute real property.”

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Fixture is real property when:

• It becomes permanently attached or affixed to land or building, structure or improvement, and…

• It primarily benefits the real property and not the business

• Examples: HVAC; electrical and communication lines; tanks; towers; and lines of potable water, and other fixtures that primarily benefit the realty and not the business

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Business Fixture = Personal Property

• Machinery and equipment

• Signs

• Storage bins and tanks (whether above or below ground)

• Broadcasting, transportation, transmission and distribution systems (whether above or below ground)

• Those portions of buildings, structures or improvements specially designed, constructed and used for the business conducted including but not limited to, foundations and supports for machinery and equipment

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Real Property = Construction Contract

• Contractor is liable for the sales/use tax on the materials used

• If sales tax is not paid at the time of purchase, then must self-remit use tax

• Certain exemptions exist – must obtain exemption certificate

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Tangible Property = Sale

• Contractors must collect sales tax on the total price including materials, installation and other charges necessary to complete the sale

• Contractors can utilize resale certificate when they purchase the materials for resale

• Customer may be exempt – must obtain exemption certificate

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EXEMPTIONS• The Ohio R.C. 5739.02(B)(13) provides a number of

exemptions for sales to construction contractors. These include sales to:

State of Ohio, political subdivision or federal government or any of its agencies

House of public worship or religious education (R.C. 5739.02(B)(12)

Nonprofit if exclusively used for charitable purpose

Sports facility (R.C. 307.696)

Horticulture or livestock structure

Hospital facility (R.C. 140.08)

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EXEMPTIONS• A contractee claiming one of the above exemptions must

execute the Construction Contract Exemption Certificate

Contractor is protected from the liability if it is later determined that the contract did not qualify for exemption

Contractee assumes liability for any unpaid taxes

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EXEMPTIONS• When the contractor makes purchases of materials, the

contractor or subcontractor may use a Contractor’s Exemption Certificate when purchasing materials for an exempt contract

This certificate only protects the vendor/seller of the materials

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TAXABLE TO CONTRACTORTaxable items:

• Tangible personal property that is temporarily affixed to realty during the construction contract is taxable to the contractor (even if left behind at end of contract)

• Examples include temporary electricity or water service hook-ups, fencing, construction elevators, shoring lumber and concrete forms

• Tools and supplies used by contractors in performing their jobs are taxable to contractor, even if contractee is exempt

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CONTRACTOR ELECTIONMANUFACTURER/

• A person who manufactures or fabricates items of tangible personal property and then sells some and incorporates others into real property must elect to be taxed as a manufacturer, or as a contractor, with respect to the purchase of raw materials incorporated into the manufactured items

• The manufacturer/construction contractor need not notify the tax commissioner of such election and may elect to treat purchases of raw materials for distinct manufactured items differently

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MANUFACTURER ELECTION• When manufacturing is elected, raw materials may be

exempted under the manufacturing exemption

• Use tax will apply if the item ends up being consumed in performing a construction contract or in any other taxable manner

• Use tax would be due on the produced cost of materials consumed in the construction contract if the contractor elects to be treated as a manufacturer

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CONTRACTOR ELECTION• When contractor is elected, tax is due on purchases of

raw materials unless ultimately used in a nontaxable construction contract

• No refund is allowed even if the raw materials are incorporated into an item manufactured for sale

• If the item is sold at retail, the contractor is acting as a vendor and must collect sales tax on such transaction

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CONTRACTOR ELECTIONMANUFACTURER/

• This only applies to purchases of raw materials

• Purchases of machinery and equipment used in manufacturing is taxed according to primary use without regard to the raw materials election

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State Income Tax Consequences

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STATE AND LOCAL TAX• The importance of state and local taxes

As states continue to rebound from the recession, they look to different means to raise revenue

States are expanding their discovery of efforts to pull in more taxpayers

States more aggressive in sending out nexus questionnaires

Conducting audits of out-of-state businesses operating in state

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NEXUS• Nexus standards are different for state income tax and

sales tax

State income tax – public law protection

Sales tax – no public law protection

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STATE SALES TAX NEXUS• No Public Law 86-272 Protection

• Need to determine the laws in the different states impact your business

• If materials are purchased in one state but used in another state where is sales tax due – are you responsible for use tax with the other state?

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Ohio Commercial Activity Tax

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COMMERCIAL ACTIVITY TAX• Receipts based on where benefit is received

Where the worksite is located

Make sure you review billings so that you are only picking up receipts for Ohio worksite locations

• If you find you have over paid a refund can be secured

• Agency relationship for adjustment to receipts

Lump sum

Cost plus contract

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COMMERCIAL ACTIVITY TAXAgency Relationship

• Lump Sum Contract

Set fee for constructing a building

General contractor bears all risks of completing project within budget

General contractor not required to work in owner’s best interests

Not required to disclose costs to owner

No agency relationship established

Full cost of the project would be considered an Ohio gross receipt

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COMMERCIAL ACTIVITY TAXAgency Relationship• Cost plus contract

Owner agrees to reimburse general contractor for work performed by a subcontractor at a cost plus arrangement (generally cost plus five or ten percent)

Required to act in owner’s best interest with respect to cost issues

Agreement in writing with subcontractors indicating the general contractor is acting as an agent for the owner

General contractor acts as a conduit between the owner and the subcontractors

General contractor remits monies received from the owner for payment of work to the subcontractors

General contractor may exclude the money received from the owner to pay the subcontractors from the general contractor’s Ohio receipts

The mark-up would be considered a gross receipt for the general contractor

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Invest Ohio Tax Credit

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INVESTOHIO TAX CREDIT• Current opportunity for InvestOhio credit will expire

6/30/2017

• InvestOhio credit was part of the budget bill enacted in 2011

• Enacted to help spur investment in small-businesses operating in Ohio

• Credit is available against the owner’s Ohio individual income tax return

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INVESTOHIO TAX CREDIT• The credit generated is a non-refundable credit taken on

your individual income tax return. The credit can be carried forward for seven years

• The credit is for the acquisition of an ownership interest in a small-business entity operating in Ohio. If one owns an entity 100%, can still qualify for the InvestOhio credit

• The credit is equal to 10% of what is invested.

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INVESTOHIO TAX CREDITSmall business entity requirement

• The investor must be investing in a small-business entity operating in Ohio

• What is a small-business entity?

An entity with less than $10 million in sales

An entity with less than $50 million in assets

There is also an employee requirement to the credit

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INVESTOHIO TAX CREDITInvestor requirements

• Can be another pass-throughentity making the investment

• If another pass-through entity credit will flow up to the owners of the entity

• The investor can be a non-resident of Ohio but must opt out of the filing of a composite tax return with Ohio

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INVESTOHIO TAX CREDITSteps for securing credit

• Both the investor and the small-business entity must register and receive an InvestOhio identification number

• Once registered, one of the parties must complete an application for the credit

The credits will be granted on a first-come, first-serve basis

The application will receive an InvestOhio transaction number which will determine your order of receiving the credit

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INVESTOHIO TAX CREDITRegistration Process• When the investor completes the registration process, the

investor must know the type of entity that they will invest in

• The investor must also indicate where the money will be coming from for the investment

• The funds cannot come from a loan from the state of Ohio or the federal government Some dispute if it can be a distribution – but the state has

indicated if the SBE consistently makes distributions, then a distribution can be utilized

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INVESTOHIO TAX CREDITSmall-Business Entity

• Once the cash investment has been made the SBE has six months to secure the property investment

• Both the equity investment and the property acquired must be held for two years

• The investment holding period begins on the date of the investment

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INVESTOHIO TAX CREDITProperty Acquired

• Fixed assets

• Motor vehicles, as long as the vehicles will be titled in Ohio

• Intangible assets

• Wages – increase wages and new positions

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INVESTOHIO TAX CREDIT• The state has FAQs for the credit on the Department of

Development’s website.

• The state has several video tutorials on the Department of Development’s website:

Registration process

Overview of program

Application process

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Ohio Municipal Tax Issues

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CONSEQUENCESPAYROLL TAX

• Reciprocity issues

• Where withholding is required

• Where unemployment is required

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OCCASIONAL RULE20-DAY

• Under municipal reform 12 days is now 20 days

• The rule is an employer need not withhold tax for a city if the employee is working in the city for 20 or fewer days

• Instead the employer must withhold for the principal place of work city instead

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• The key now is to determine where the employee worked for the day

• The definition of “day” now is

An employee can only be considered to be in any one city during a day

The new law introduces the concept of the “preponderance of a day”

‒ An employee is considered to have spent a day working in a city if the employee spent the majority of his day performing services in one city versus another city. The city with the most time spent is considered the city where the employee spent his day and will count towards the 20-day rule.

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• In examining an employee’s work day you need to take into account the principal place of work city

• What does this mean – certain time during an employees day is considered time spent in the principal place of work city

Time spent traveling from principal place of work city to the first work city

Time spent traveling between work assignments is considered time spent in the principal place of work city

Traveling from last place of work for the day back to the principal place of work city

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• Other time that is considered time spent in the principal place of work city

Traveling from any location to another location in order to pick up or load, for the purpose of transportation or delivery, property that has been purchased, sold, delivered, assembled … or improved by the employer

Transporting or delivering property described above provided that, upon delivery of the property, the employee does not temporarily or permanently affix the property to the real estate owned, used, or controlled by a person other than the employee’s employer

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• Principal place of work – must utilize a cascading test to determine what city is the principal place of work

The fixed location to which an employee is required to report for work on a regular basis

‒ Fixed location – permanent place of doing business in Ohio, such as an office, warehouse, store front or similar that is owned or controlled by the employer

‒ Cannot be outside of Ohio

‒ Cannot be a location owned by a customer

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Principal Place of Work

• If no fixed location exists, then the principal pace of work means the worksite location to which the employee is required to report for employment duties on regular basis

A worksite location is a construction site or other temporary worksite in Ohio at which the employer provides services on more than 20 days during the calendar year

‒ A worksite location cannot include the employee’s residence

‒ A worksite location cannot include a location outside of Ohio

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Principal Place of Work

• If no fixed location or worksite location, Principal Place of Work means the location in Ohio at which the employee spends the greatest number of days in the calendar year performing services for the employer

If there is a tie between two or more cities – an employee spends the equal amount of time in two or more cities during a calendar year – the employer must allocate the employee’s wages among those cities for withholding purposes

‒ Any allocation method can be utilized as long as fair and reasonable

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• Presumed worksite location – a construction or other temporary worksite in Ohio at which the employer provides services that can be expected to last more than 20 days in a calendar year

• Services can be expected to last more than 20 days if either of the following apply:

The nature of the services are such that it will require more than 20 days or

The agreement between the employer and its customer requires the employer to perform services at the location for more than 20 days

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• Once an employee exceeds 20 days, the employer must withhold tax for the city for each additional day

• Retroactive withholding is not required under the 20-day rule

• Employer can elect to do retroactive withholding to day one and seek a refund for withholding for principal place of work withholding

• An employer can enter into an agreement with a city to bypass the 20-day rule

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• Small business exception to 20-day rule

• A small employer only is required to do withholding for the city where the employer has a fixed location

• Fixed location – permanent place of doing business in Ohio. This would be a store, warehouse, office and/or similar location

• Small employer – employer that has less than $500,000 of revenue during the proceeding year

• Ohio estimated that 90% of employers will fit into this rule

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CONCLUSIONIf you have any questions please feel free to contact us.

Mary Jo Dolson, CPA(440) [email protected]

Mark Thomas(330) [email protected]

Amy Gibson, CPA(440) [email protected]

State and Local Tax Issues Facing the Real Estate and Construction Industry

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