by Carter Johnson
While most retail customers view sales tax as simply an additional charge paid at the counter for purchases at their favorite store, sales tax to business owners are viewed entirely different. The collection and remittance of tax is something most business owners deal with as a part of their daily operations. Sales tax rules can be complex and can vary based on many factors, including the industry and states in which the business participates. The construction industry is often considered one of the most difficult industries to maintain success due to the large amount of risk and heavy competition. It is also one of the most complex in terms of sales tax. In the construction industry, a contractor is a business or person who initiates and organizes the performance of work on real property. Contractors earn a living by developing contracts and carrying out the projects as designed. Contractors often have employees and/or sub-contractors that assist in the performance of the contracted duties. Sub-contractors are also considered contractors by the state and need to register with the Department of Labor.
As mentioned above, laws related to sales taxes vary from state to state. In the state of Nebraska, all contractors doing business in the state must register with the Department of Labor to allow the state to track all contractors doing construction work within its jurisdiction. The annual registration is a simple online process and includes a fee of $40. When completing the registration process, contractors are provided three options related to sales tax. On the surface, it may not seem like the options have much of a difference. However, it is important to understand the subtle variations between each option. Choosing the right option for your specific situation can save you valuable time and resources, as well as make your tax burden as light as possible.
A few important disclosures are the same regardless of what option the contractor chooses. These disclosures are related to the location of jobs, labor, and record keeping. First, the location of the project can layer an additional level of complexity. Whether the job is inside or outside city limits can alter the rate that should be applied for sales/use tax. Additionally, if the project is outside of Nebraska, the contractor is responsible for researching the state’s registration process and sales tax rules. Second, labor is not subject to sales tax but is required to be separately listed on the invoice provided to the client. Otherwise, the entire amount, including labor, is considered taxable. Lastly, while it is important to invoice properly, it is equally important to establish and maintain proper record retention policies to support the billings and materials used. While it may not be a requirement, today’s software and technology are becoming more sophisticated and capable of handling many of these complexities in the invoicing process.
Option 1: By electing Option 1, the contractor is choosing to retain a tax-free inventory of materials for construction purposes. In other words, the contractor is exempt from paying sales tax when purchasing materials and instead will collect sales tax on the materials used when invoicing its clients. Once sales tax is collected, the contractor must remit the sales tax back to the state. Option 1 may seem appealing to a contractor if they are working to minimize upfront contract costs because they do not owe any sales tax until the materials are used. However, Option 1 can increase complexity related to sales tax filings and may end up costing more long-term. Additionally, Option 1 comes with use tax implications. If a contractor uses its own inventory to make improvements to company property, they owe use tax on the materials used since they never paid or collected sales tax on those materials.
Option 2: Option 2, on the other hand, provides a much simpler process for contractors. With this option, the contractor pays sales tax on all materials at the time of purchase. A major benefit of this option is that it reduces the reliance on records to track inventory used on each project for sales tax purposes. This option also makes filing sales tax returns much easier because the contractors who select Option 2 typically do not have taxable sales since all tax is collected at the time of purchase and labor is considered non-taxable. While this option increases the upfront contract costs, it does save the contractor valuable time and energy in the future.
Option 3: Option 3 is similar to Option 1 in the fact that the contractor maintains a tax-free inventory of materials. However, the contractor is not responsible for collecting sales tax from the customer upon the completion of projects. Instead, the contractor pays the tax owed on the used materials in the form of a use tax. Essentially, the contractor pays the tax themselves each month when they fill out their sales and use tax return.
Contractors are required to file a sales tax return either monthly, quarterly or annually depending on the business’s gross revenue.
If a contractor neglects to register with the Department of Labor, Option 1 is the default option for contractors in Nebraska.
Depending on your industry niche, it may be more sensible to choose a particular option over another. Per our experience and review of the registered contractor database, most contractors in Nebraska elect to use Option 2 because of its overall simplicity. According to the Nebraska Department of Labor, there are over 15,000 contractors registered with the state. Almost 12,000 or 80% utilize Option 2. Option 1 is the second highest selected option with slightly over 2,000 registered contractors. The least selected is Option 3 with just over 1,500 registered contractors. While Option 2 is the most popular, it is important to discuss these options with an expert as it may make sense to elect Option 1 or 3. For instance, if a company maintains a very small inventory and often utilizes materials purchased by customers on-site (i.e. a cleaning business), then it may make sense to maintain a tax-free inventory.
In conclusion, every consumable item used by a contractor will result in either sales or use tax being remitted to the Nebraska Department of Revenue. The differences between the options listed above are the timing and form in which that tax is paid.
If you are a contractor who has not filed with the state or are looking to review the options to ensure that the option you selected is best for you, we are here to help. HBE is able to provide guidance as to which option is most advantageous for your specific situation. If we can be of assistance, please contact HBE to set up a consultation.
Nebraska Department of Labor Contractor Registration Link: https://dol.nebraska.gov/conreg/registration/CAProcessStart