Helpful Charts on Taxability
We’ve assembled a number of charts with information on identifying credits. They should be useful to you for finding sales tax overpayments and reducing an audit assessment.
How Do States Tax Manufacturing Equipment?
Check out this chart from CCH that summarizes the taxation of manufacturing machinery across the US.
Are you a manufacturer? If so, there may be significant exemptions available to you, depending on where you have manufacturing operations. But even if you aren’t a “manufacturer” per se, there may be some exemptions available to you if you perform some “manufacturing” activities.
For example, in some states, cooking food is considered manufacturing. Therefore, convenience stores who make food, or even use soda machines, would qualify for that state’s manufacturing exemption.
To determine if you can purchase certain manufacturing equipment tax free, you’ll have to ask, “What is manufacturing?”
If you’re familiar with state sales tax, it should come as no surprise that the definition of the term “manufacturing” varies from state to state.
For example, all manufacturing probably includes some processing and/or fabrication, but not all fabrication or processing is manufacturing. Similar questions arise over refining, assembly and construction. The confusion arises in trying to distinguish between fabrication, processing, refining, assembly, etc.
In general, the manufacturing process begins when the raw materials are removed from their first point of storage and ends when the completed product is taken off the line and placed in storage.
However, there is some ambiguity as to when the “manufacturing process” begins or ends. Machinery used outside the manufacturing process usually does not qualify for a state’s sales tax exemption for machinery used in manufacturing.
Other typical areas not qualifying for the manufacturing exemption include receiving, inspection, shipping, intra plant transportation and finished goods warehousing equipment. The key is usually whether the activity or equipment contributes to a change in the product being produced or is an essential step in the manufacturing process.
Then comes the question of whether a state’s manufacturing exemption applies strictly to “manufacturers” as that term is defined by the state (usually by reference to an SIC code) or if the exemption is for equipment used in “manufacturing”. Equipment that is only exempt if it is used by a “manufacturer” in the “manufacturing process” is less broad than if the exemption is for equipment that is simply used in the “manufacturing process.”
How Do States Tax Cloud Computing? Including Application Service Providers (ASPs) and Software as a Service (Saas).
Check out this chart from CCH that summarizes the taxation of Cloud Computing across the US.
Do you purchase software? If so, you may be due a refund of sales tax. SaaS and ASP (AKA “cloud computing,”) are now a very common model for software delivery. Cloud computing means that customers access specific software applications over the internet through third-party providers rather than through a single purchase loaded on a single computer.
The sales and use tax implications of Cloud Computing are far reaching and prompt many questions including:
- Does the ASP or SaaS provider have nexus in the jurisdiction in which it is providing its product or services? (Quick answer: “probably, yes, especially in light of Wayfair.”)
- Is the ASP or SaaS involved in the sale or license of software or the performance of a service?
- Does the state consider cloud computing the sale of a service? If so, are those services taxable?
- Does the state consider cloud computing the sale of software? If so, is it canned or custom software?
- If the state considers cloud computing the sale of software, is an exemption available?
The basic problem in taxing cloud computing is that it’s not clear what is being sold. Is it considered tangible personal property or a service? It’s not always clear whether anything has been delivered where it has been delivered or whether the concept of delivery even applies.
Adding to the confusion, the distinctions between software, digital goods and SaaS have become blurred. As a consequence, some states that do not tax software delivered electronically will tax digital goods, like Colorado. Other states, such as New Jersey, taxes personal use software delivered electronically and digital goods, but do not tax SaaS.
Not surprisingly, the answers states have taken varying and inconsistent positions on these questions. In some states, Cloud Computing may not be taxable because they do not tax the sale of software delivered electronically or because there is no sale of tangible personal property (such as California).
Other states may not tax Cloud Computing because they consider it to be a nontaxable service. Still other states tax Cloud Computing as an information or data processing service (like Texas).
Construction Contractor Purchases
How Do States Tax Construction Contractors?
Check out this chart from CCH that indicates whether a contractor’s purchases of materials or equipment are subject to tax when used in performing a construction contract that is billed on a lump sum basis. Special rules may apply when construction is performed for government or not-for-profit entities.
Are you a construction contractor? If so, we feel your sales tax pain! In most states, when a contractor is performing work on real property, the contractor is deemed to be the final consumer and must pay sales tax upon those purchases. Accordingly, in most states, as a purchaser of construction services, you would not owe any sales/use tax on the contract price.
In the early days of sales tax, states applied the tax to tangible personal property (because real property was already taxed with property taxes). Services were not taxed in the early days. Therefore, construction historically has generally not been taxed because it was deemed a service. However, for construction and other service providers, they still owe sales or use tax on the tangible personal property used in performing those services.
This seems rather clear on its surface. A contractor is the end user of the tangible personal property because when the contractor finishes the job, the tangible personal property (the nails, sheet rock, lumber, cement, iron, etc.) has transformed into real property.
Unfortunately though, just paying sales tax on purchases does not begin to cover all the multitude of activities contractors perform.
In addition to contract jobs on real property, contractors sometimes act as retailers of fixtures or other tangible personal property such as furnaces, water heaters, cabinets, and air conditioners. Construction contractors will usually have questions over the different sales tax treatment depending on the types of contracts, such as cost-plus, fixed-price, time and materials. There are further complexities regarding contract work with federal and state governments, churches, and not-for-profit organizations. And then the distinction between real property and tangible personal property contracts is not always clear.
Construction contractors face some of the most complicated sales tax questions of any industry especially if they do business in different states. A contractor must always consider the impact of sales tax on its purchases when making a bid. They can be caught between a rock and a hard place because they face constant competition and the bid price is a major criteria for who gets the contract. But they also have to be very careful to accurately estimate the tax cost of the materials incorporated in the job so they don’t end up losing money. If state law requires it, they’ll need to be careful to bill the sales tax on the overall job.
Gross Receipts Taxes and Contractors
While the guidelines just provided are applicable to the majority of states, it is important to remember that there are always exceptions.
Arizona is one such exception. Arizona has a gross receipts tax called the Transaction Privilege Tax. In many ways, it operates like a sales tax in that it is billed separately. But technically speaking it is a tax on the seller, not the buyer. The differences become very apparent when you consider how the tax impacts construction.
In Arizona, “Prime Contractors,” purchase their construction materials free of tax. Why? Because the Prime Contractor must pay a “Transaction Privilege Tax” (TPT) on 65% of the gross receipts on their contracts, a tax that is passed on to the building owner in much the same way a sales tax is passed on to a purchaser.
At first glance, the TPT on contractors may seem simple enough. But if a contractor performs maintenance, repair, replacement or alterations (MRRA) work for the owner of real property, or the owners of improvements to real property, that contractor becomes a service contractor, not a prime contractor. As a consequence, instead of buying their building supplies free of tax like a prime contractor and paying tax on 65% of their gross receipts, a service contractor pays tax on the building materials when they buy them.
You can quickly see how this could be confusing. First, a contractor has to know what is included in MRRA and what is still modifications that are prime contracting. Second, contractors could be a prime contractor, or subcontractor to a prime, on one job and a service contractor on another job. In these cases, the prime contractor inventory and service contractor inventory must be accounted for separately.
Other states imposing special taxes upon contractors in addition to a general sales tax include Mississippi and South Dakota.
How Do States Tax the Most Common Services?
Check out this chart that shows what states tax certain key services that most companies would purchase in their business. The chart shows if sales tax applies to: