Under general sales tax policy, a retailer that sells tangible
personal property ("TPP") to a customer is required to
collect and remit sales tax on the price paid for the merchandise.
Separately, a contractor who purchases and affixes TPP to a
customer's home or office is providing a real property
improvement, which is not generally subject to sales tax. In these
projects, the contractor is deemed to be the final user or consumer
of the TPP, which then becomes incorporated into the real property,
so that the contractor is the one liable for paying sales tax. At
issue in many states is how to deal with home improvement retailers
that purchase their inventories for resale tax-free and that also
provide installed home improvements to their customers: Are these
installation transactions sales of real property interests, in
which the customers owe no sales tax and the contractor-retailer
self-assesses sales or use tax on the wholesale cost of the TPP? Or
are they retail sales of TPP to customers followed by a separate
installation service?
On June 4, 2015, the Indiana Supreme Court left intact a landmark
ruling from the Indiana Tax Court finding that Lowe's Home
Centers, LLC, a national home improvement retailer, properly
self-assessed and remitted use tax on materials it used in
performing home improvement contracting work for customers in
Indiana. Lowe's contended that when it was performing under an
installation contract with a customer, it was not selling TPP but
instead selling real property improvements, which are not subject
to sales tax. And as the contractor, Lowe's—not its
customer—was the final user and consumer of the TPP affixed
to the customer's home. It therefore remitted use tax on the
wholesale cost of construction materials it pulled from its
inventory.
The Indiana Department of Revenue disagreed and insisted that, in
such transactions, Lowe's was selling TPP to its customers at
retail, followed by a separate installation of the customers'
items. According to the Department, Lowe's should have been
collecting and remitting sales tax on the retail prices of the
construction materials listed in the installation contracts. The
Department assessed Lowe's for additional taxes, interest, and
penalties, and Lowe's appealed.
In a December 19, 2014, summary judgment order, the Indiana Tax
Court rejected the Department's position. In addition, the tax
court's order invalidated a distinction in the Department's
tax regulations saying that a customer owes sales tax on
construction materials supplied under a time and material contract
but a contractor must self-assess and remit use tax on materials
used in a lump sum contract. That discrepancy is not based in law,
the court said.
"The department has created an artificial distinction between
time and material contracts and lump sum contracts in its
regulations to convert a contractor's use tax liability under
[Indiana law] into a sales tax liability on the materials'
higher retail price," Indiana Tax Court Judge Martha Wentworth
said in the order. "Because [the law] does not impose use tax
liability contingent upon the type of contract a contractor uses,
that distinction as contained in [the regulations] is
invalid."
The case has national implications for retailers who also provide
contracting services. Similar disputes are being litigated in
states throughout the country.
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