Sales Tax Collection System for Construction Re-Written by SB 6173

SB 6173 would eliminate the use of Resale Certificates that exempt contractors from paying sales tax on purchases for most construction projects and require contractors to pay sales tax up front and then make a claim later for a credit from the State.

AGC members are encouraged to IMMEDIATELY contact the Legislature and express their opposition to this bill. This can be easily done via the AGC Grassroots Action Network.

This radical shift in the sales tax collection system was introduced on April 15 and given a hearing in the Senate Ways & Means Committee the very next morning.

This legislation will penalize those who have been playing by the rules said AGC Government Affairs Director Rick Slunaker in his testimony. Contractors would have to implement complicated tracking and accounting systems and language in the bill is so vague that securing an appropriate tax credit is not a sure thing. If there are problems with the Resale Certificates AGC is willing to explore fixes but introducing legislation to scrap the current system with only 10 days left in the legislative session makes it impossible to fully asses the impact of the change and to consider alternatives.

Below is information on the bill copied from the Senate Bill Report:

Background: Under current law persons purchasing goods or services for resale are exempt from the retail sales tax if they provide the seller with a resale certificate. The resale certificate is a document or combination of documents that substantiates the wholesale nature of a sale. Resale certificates are not issued by the Department of Revenue (Department) but can be obtained from the Departments website. When a buyer fills out a resale certificate among the information they need to supply is their name and unified business identifier or business registration number. The seller retains the resale certificate as evidence of the tax exempt sale.

Purchases of materials by contractors performing construction for consumers (custom construction) where the materials will become part of the completed project are purchases for resale (wholesale purchases). Such purchases are not subject to retail sales tax. Such contractors may also purchase subcontractor services for resale. To verify that material purchases and subcontractor services are for resale a contractor must give a valid resale certificate to the materials supplier or subcontractor. This tax treatment also applies to subcontractors working on custom construction projects.

Speculative contractors (spec construction) may not purchase materials that will become part of the project for resale and must pay sales tax. This is the same for the subcontractors that work for them. They are the end consumer of the materials or services and thus have to pay sales tax on these purchases.

Summary of Bill: Beginning January 1 2010 the requirement for a resale certificate to make purchases for resale exempt of the sales tax is eliminated and replaced with a sellers permit. The sellers permit will be issued by the Department to businesses registered with the Department if the business makes wholesale purchases. This will be determined based generally on industry type and reporting history. Businesses that do not make wholesale purchases as part of their business will not be issued a sellers permit.

The provision for wholesale purchases for custom contractors is eliminated. Custom contractors (prime and subcontractors) will be required to pay sales tax on their purchases of materials and services. To avoid the pyramiding of sales tax such contractors would claim a credit against sales and use taxes reported in the amount of sales and use taxes paid on materials and subcontractor services. Exemptions for materials and subcontractor services are provided for custom construction projects in which the end consumer is exempt from sales tax.

Sales and use tax exemptions are provided or modified so as not to affect the sales and use taxation of construction projects within the scope of a sales and use tax deferral certificate issued by the Department or a specific sales and use tax exemption. To receive the sales tax exemption the contractor must provide the seller with a copy of the sales and use tax deferral certificate issued by the Department for the project in which the exempt purchase relates.

Additionally contractors are exempt from sales tax on purchases of construction materials and services for the following types of projects in which the consumer is exempt from tax:

• construction for American Indians in Indian Country;
• hay sheds for farmers;
• livestock nutrient facilities;
• anaerobic digesters; and
• aerospace manufacturing facilities located on port property.

Businesses seeking a new sellers permit or to renew or reinstate a sellers permit must apply to the Department. The Department must rule on applications within 60 days.
Permits issued to taxpayers who register with the Department after January 1 2009 are valid for two years and may be renewed for four years.

Permits issued to taxpayers who registered with the Department on or before January 1
2009 are valid for four years. The misuse of a sellers permit penalty (currently applicable to resale certificates) is changed from 50 percent to 100 percent.