Sales Tax Trap for the Unwary Construction Contractor
Contractors commonly cross the border to do business in Ohio and Kentucky. Contractors commonly pick up materials and supplies to complete their customers construction jobs. The general rule in most states is that a contractor is treated as the consumer of all the materials and supplies used in the performance of a construction contract. As a result, sales tax is generally due on the purchase of materials and supplies by the contractor. If the supplies are purchased without tax use tax is generally imposed on the contractor’s sales and use tax return.
Many of the largest construction projects are with tax-exempt entities such as U.S., state or local governments, charitable and religious organizations, and nonprofit educational institutions (e.g. universities). Non-profit or tax exempt entities are typically exempt from sales or use tax on materials and supplies used in their exempt functions. Most states do not allow the exempt status to pass through to the contractor.
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.
A contractor buying materials for an Ohio job can purchase materials tax exempt for certain jobs for exempt entities using the exempt entity’s exemption status. What happens in situations where the Ohio vendor is out of a specific material and sends the contractor to its Kentucky location to buy the materials? The nonprofit’s exemption certificate does not pass through to the contractor in Kentucky. The nonprofit should purchase the materials directly from the Kentucky vendor to make tax-free purchases, or the contractor will be liable for use tax on the materials he purchased tax free in Kentucky.
Here are the rules for your reference:
Ohio: A construction contractor may purchase exempt from tax those materials or services that will be incorporated into 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 as defined in division (B)(12) of section 5739.02 of the Revised Code;
Kentucky: Construction contractors who enter into a contract with a tax-exempt governmental entity or with a tax-exempt religious, charitable or educational institution, to make improvements to real property, without regard to the type of contract (whether lump-sum, cost-plus-fixed fee, time and materials or other), are not permitted to use the tax-exempt status of the governmental entity or of the religious, charitable or educational institution to make tax-free purchases of materials, supplies and fixtures for use in fulfilling that contract. Property purchased for use in making improvements to real property qualifies for exemption only if sold directly to an exempt governmental entity or an exempt religious, charitable or educational institution.