Contractors who aren’t aware of the complexities of inter-state sales tax rules can wind up on the hook for sales tax payments they collected from their customers but remitted to the wrong state. Going back four or more years and being assessed for sales tax that was originally the customer’s liability, in addition to being charged interest and penalties is a painful and costly, (but avoidable) way to learn the tax rules. Obtaining refunds from the state is challenging; consuming time and resources.
Construction contractors are deemed to be the consumer of the materials they install into realty where the materials lose their status as tangible personal property and become part of the realty. Absent an exception, contractors are liable for the payment of tax, and their suppliers must collect tax from them. Contractors that manufacture or purchase and store goods in Ohio are subject to Ohio use tax on the materials used to fulfil their contracts. When the product is sold outside Ohio, a credit for Ohio taxes paid may be allowed on the sales tax return of the state in which the product was installed. For example, both Ohio and Kentucky use tax is due on materials purchased in Ohio and installed in Kentucky. However, Kentucky has a reciprocal arrangement that allows a credit of up to six percent for sales or use tax paid to another state under reciprocal arrangement.
A nonprofit or tax-exempt entity’s exemption certificate is allowed to “pass-through” to the contractor for Ohio jobs. Kentucky does not allow the nonprofit’s exemption status to pass through to the contractor, so the nonprofit should purchase the materials directly for Kentucky jobs or Kentucky purchases. This distinction becomes even more important for contractors to track when a vendor has Ohio and Kentucky locations. Materials the contractor purchases from Ohio locations are tax exempt, while materials purchased from the Kentucky store location are taxable to the contractor.
Another difference between Kentucky and Ohio sales tax rules is that the installation of soft surface (carpet) into realty in Ohio is never considered a construction contract – it is a retail sale of carpet for which the customer pays Ohio sales tax (barring another exemption). The installation of soft surface (carpet) in Kentucky is a construction contract, therefore the contractor pays the sales or use tax on the materials.
What does it mean for you?
Interstate commerce is the norm vs. the exception, so investing the time to understand the sales tax requirements at the outset of your job will pay off in the end. Let one of our tax professionals help you. Reach out to us online by clicking here, or call 513-241-8313 to speak with a member of our tax team