Many companies are unaware of their obligation to obtain a use tax account and self remit use tax on a regular basis. Companies should review their purchases for potential risk to use tax. Reviewing a company's use-tax exposure is a specialized service tax we are able to offer to our clients.
Who does use tax affect?
Purchasers of tangible personal property or taxable services that are consumed, used or stored in Ohio can be subject to use tax when a vendor does not charge sales tax. However, there are exclusions and exemptions to this rule. An example is the manufacturing exemption which is an exemption for manufacturers buying materials to be used in a manufacturing process.
What if you don’t file use tax returns?
The longer it takes a company to determine whether or not they have been paying the tax, the greater the risk becomes. If a company has never filed use-tax returns, Ohio can audit back to its first day of business. If a company has been filing, there’s a four year statute of limitation from the date of filing. If a company owes money and never registered, they can approach the state through an adviser and possibly limit the audit look back period to thirty-nine months with no penalties. This type of procedure is known as a voluntary disclosure process.
Who is at risk?
Everyone who makes purchases of tangible personal property or taxable services for use, consumption or storage in Ohio and does not pay sales tax at the time of purchase is subject to use tax. Ohio has been aggressively pursuing construction businesses that do not have a use tax account. It seems more applicable to subcontractors and trade organizations than to general contractors because they are making more purchases of materials and equipment.
What areas are the state focusing on?
Exemption certificates – a contractor may do work for both tax exempt and taxable customers. When the contractor purchases the materials for the job, they may not know if it will be consumed on a taxable or exempt job; therefore, they provide the exemption certificate and do not pay sales tax on the purchase. However, any of those materials that are consumed in a taxable job are subject to use tax So the contractor should be self remitting that use tax on a regular basis.
What is a contract and what is not a contract?
Contractors are considered the consumers of the materials that they use in a construction contract. A construction contract is an agreement for the transfer of tangible personal property and its incorporation into real property. A construction contract is not considered a sale of the tangible personal property. A construction contractor is any person performing the contract whether as a prime contractor or subcontractor.
Machinery, equipment, tools, supplies, etc. purchased or leased by a contractor and used or consumed in performing the contract are taxable.
Since a contract can only be a construction contract if the tangible personal property becomes part of real property, the classification of the property usually determines the tax regime. For example, an agreement to sell and install a business fixture is a sale and not a construction contract because the business fixture is personal property. The statutes do list certain items that are always treated as the sale and installation of tangible personal property. They are:
- Agricultural land tiles
- Portable grain bins
- Tress, shrubs, sod, seed, fertilizer, mulch and other tangible personal property transferred during a landscaping and lawn care service
The following contracts are exempt:
- Contracts to Ohio, any of it political subdivisions, federal government or any of its agencies
- Horticulture structure of livestock structure for those in the business of horticulture or producing livestock
- House of public worship or religious education or a building used exclusively for charitable purposes
- Contracts with an organization exempt from taxation when used exclusively for that organization's purpose
- Contracts for incorporation into real property outside Ohio
- Contracts into the original construction of a sports facility as defined in the statute
A construction contractor who makes substantial sales of the same type of tangible personal property that is incorporated into realty may use the resale exemption. The contractor must obtain a consumer's use tax account and accrue and pay use tax on the price of all materials consumed in performing construction contracts.
Have questions about use tax? Contact our Real Estate and Construction Group at 440-449-6800.
Topics: Cleveland Construction Accounting, Akron Construction Accounting, Cleveland Tax Accountant, Akron Tax Accountant