Ohio Sales and Use Tax in Construction Contracts
Attorney Steve Dimengo presents the following article on Ohio Sales and Use Tax issues in construction contracts:
Editor’s note: This is part 1 of a two-part series about tax issues affecting contractors. Part 2 will address the classification of property – whether an improvement is real or personal property.
In a construction contract, the contractor is deemed the consumer of any tangible personal property purchased that it incorporates into real property and, thus, must pay tax on the purchase of such property. The construction contractor is the consumer even though he may subcontract the actual labor to incorporate the materials into the real property. However, subcontractors who purchase materials for incorporation into a job must pay tax upon the purchase of the materials.
A contractor cannot use tax erroneously paid on the purchase of its materials as an offset against tax that should have been collected. For example, a contractor may erroneously believe property to be constructed is real property and remit the sales tax due on the materials as they are purchased while failing to collect tax upon completion of the project. Under such circumstances, the contractor can only obtain a refund of tax it erroneously paid on its materials.
To avoid the foregoing problem, a contractor is allowed to request certification from the owner as to the classification of the property – real or personal property – before the contract is executed. The owner must respond to the request, and the contractor can rely thereon so that the risk of erroneous classification is transferred to the owner.
If in doubt, claim the resale exemption
Since a contractor cannot always be certain as to whether property being purchased will be incorporated into real property or sold as tangible personal property, he or she should claim the resale exemption for any uncertain purchases. Use tax must then be paid on those materials subsequently incorporated into Ohio real property by the contractor, other than as part of an exempt construction contract .
Claim an exemption for materials used on Exempt Construction Contracts
A contractor may claim exemption upon the purchase of materials to be incorporated into:
1. Real property under a construction contract with the U.S. government or its agencies, the State of Ohio, or an Ohio political subdivision;
2. Real property which is owned or will be accepted for ownership at the time of completion by the U.S. government or its agencies, the State of Ohio or its political subdivisions;
3. A house of public worship or religious education, or a building used exclusively for charitable purposes by a nonprofit organization operated exclusively for charitable purposes;
4. The original construction of a sports facility under §307.696 of the Ohio Revised Code; or
5. A hospital facility entitled to exemption under §140.08 of the Ohio Revised Code.
A contractee claiming one of the above exemptions must execute the Construction Contract Exemption Certificate available on the Ohio Department of Taxation’s website. A contractor is then protected from liability if it is later determined that the contract did not qualify for exemption; the contractee assumes liability for any unpaid taxes.
Rather than using copies of the Construction Contract Exemption Certificate when making purchases of materials, the contractor or subcontractor may use a Contractor’s Exemption Certificate when purchasing materials to be used for an exempt contract. However, this certificate only protects the vendor/seller of the materials.