In an effort to generate more revenue, many state tax departments are focusing attention on self-assessed use tax. It is a particularly challenging issue for contractors, because Ohio Sales and Use Tax rules for construction contracts are becoming increasingly complex.
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Ohio levies Sales and Use Tax on transfers of tangible personal property and certain taxable services, unless an exemption or exclusion applies. The Ohio sales/use tax treatment of personal property purchased by a construction contractor depends on whether the property is transferred to the owner of the contract and whether it is incorporated into realty, or whether it remains personal property after installation or is deemed consumed by the contractor but not incorporated into real property.
Under Ohio sales and use tax rules, if tangible personal property is incorporated into real property through a construction contract, it is not considered a sale of such tangible personal property. The construction contractor is the consumer of the tangible personal property and must pay sales or use tax when items are incorporated into realty. The contractor pays tax on materials and charges no sales tax to the contractee (owner) on either labor or materials used in fulfilling the construction contract.
When tangible personal property is permanently affixed to real property but primarily benefits the business conducted on the premises rather than the realty, it is considered a “business fixture” and retains its status as personal property. In these cases, the contractor must charge the contractee (owner) sales tax on the materials and labor.
Construction contractors must pay sales or use tax to the state in which the materials ultimately are affixed to real property.
Tax Manager Agnes Spoelker contributed to this article.