Protecting Construction Contractors From Erroneous Property Classifications – Real versus Personal
The rules concerning which components of a construction project become real property upon installation and those that are business fixtures (remaining personal property) are often confusing. Even the Ohio Department of Taxation has taken an inconsistent approach at times – for example, arguing (albeit unsuccessfully) that golf bunkers and tee boxes were personal property in a 2007 Board of Tax Appeals decision, while a 2007 Tax Commissioner’s Opinion found that bunkers were land and, thus, real property. Likewise, in the two seminal decisions concerning business fixtures, the Ohio Supreme Court found that roller coasters and station houses at Geauga Lake Amusement Park were personal property, while the Board of Tax Appeals later ruled that Polaris amphitheater and other structures were real property. Suffice it to say, it is often difficult to determine the portions of a construction project representing business fixtures, upon which the contractor must collect sales tax from its customer, versus those which become real property upon which the contractor must pay use tax on its materials.
Ohio Revised Code Section 5739.03(C) provides a procedure which protects the contractor from misclassification by requesting a certification from its customer – the contractee – as to the real property and personal property components of the project. The request must be sent via certified mail, return receipt requested, prior to entering into the contract or agreement. The contractor will be protected from a misclassification if it relies upon in good faith, and acts consistent with, the contractee’s certification. And if the contractee fails to provide the requested certification, the contractor may rely upon its good faith determination as to its Ohio sales and use tax obligations. However, since this procedure shifts the exposure of a misclassification to the contractee, it would be prudent to advise the contractee prior to requesting such a certification.
If you need help complying with the procedures for requesting a certification for your customer, or classifying components of a construction contract as real or personal property, contact us as we have extensive experience in this area. In fact, Steve represented the taxpayer in the controlling Ohio Supreme Court case (Funtime v. Wilkins) governing this area.