Umair Gaines
Contractors in New York State (NYS) must comply with various forms of taxation, including federal and state income taxes and NYS sales tax. NYS sales tax is a complex area for contractors due to the many different rules and compliance obligations at play. Generally, contractors must pay sales tax to their suppliers when purchasing materials and collect sales tax on certain jobs performed for customers. However, there are instances when purchases may be exempt from sales tax or eligible for tax credits. This paragraph will explore the topic of whether electrical contractors are tax-exempt in NYS, delving into the intricacies of sales tax exemptions and credits for contractors in the state.
| Characteristics | Values |
|---|---|
| Taxable services | Repairs and maintenance, installation services |
| Non-taxable services | Capital improvements |
| Tax-exempt customers | Churches, private schools, charitable organizations, governmental entities |
| Tax credits | Available on some material purchases, e.g., building materials transferred to the customer |
| Tax forms | ST-120.1, ST-124, ST-350, ST-360, ST-770, ST-860, ST-910, ST-130 |
| Tax bulletins | TB-ST-104, TB-ST-130, TB-ST-240, TB-ST-350, TB-ST-360, TB-ST-700, TB-ST-770, TB-ST-860, TB-ST-910 |
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What You'll Learn
Tax exemption for electrical contractors in New York State
Electrical contractors in New York State must generally pay sales tax on all building materials and other tangible personal property they purchase. However, there are certain instances where these purchases may be exempt from sales tax or have offsetting credits available.
For example, if a contractor is working for an exempt organisation or government entity, they do not charge sales tax on the work, whether it is a capital improvement or repair and maintenance job. In this case, the exempt customer must provide the contractor with a properly completed Exempt Organisation Certificate. Examples of exempt organisations include churches, private schools, charitable organisations, and government entities.
Electrical contractors can also use Form ST-120.1, Contractor Exempt Purchase Certificate, to make purchases exempt from sales tax. This applies when building materials will be transferred to a tax-exempt customer as part of the project.
Capital improvements are the only form of service performed by a contractor that is not subject to New York State sales tax collection. A capital improvement substantially adds to the value of the real property, becomes part of the real property, or is intended to become a permanent installation. To be considered a capital improvement, the customer must provide the contractor with a completed Form ST-124, Certificate of Capital Improvement.
It is important to note that the New York State Department of Taxation and Finance generally views contractors as the consumer of the materials they buy and use to complete a project. Therefore, contractors must be proactive in their compliance with varying tax obligations and opportunities to claim refunds, credits, and exemptions.
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Sales tax credits for contractors
In New York State, contractors generally must pay sales tax to their suppliers when they buy materials and supplies, and they must collect sales tax on certain jobs they perform for their customers. If a contractor or subcontractor performs repair, maintenance, or installation work, they must charge sales tax to their customers.
Contractors and subcontractors must be registered for New York State sales tax purposes and have a valid Certificate of Authority to perform any services. They can claim credits for sales tax paid on some of the materials used in these jobs and apply the credits against the tax they owe on their sales tax return. This includes jobs that are classified as a taxable repair, maintenance, or installation service, but not when it is classified as a capital improvement.
If a contractor performs a job for an exempt organization or government entity, they do not charge sales tax on the work, whether it is a capital improvement or repair and maintenance job. Building materials transferred to the customer in performance of the job can be purchased without paying sales tax using Form ST-120.1, Contractor Exempt Purchase Certificate. If the exemption certificate was not used when the materials were purchased, the contractor may take a credit for the sales tax paid on the purchase of materials used in the project.
If a contractor purchases retail items for their customers, such as a washer and dryer, they can be purchased without paying sales tax using Form ST-120.1. The contractor will then have to collect sales tax from the customer on the sale of these items. The contractor can then take a credit for the sales tax paid on their purchase against the tax collected from the customer.
Contractors can claim their sales tax credit on their return and file it as they normally would, either by using Web File or by mail. They must claim their credit within three years from the date the sales tax return was due or two years from the date the tax was paid to the Tax Department, whichever is later.
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Capital improvements and tax exemption
In New York State, contractors are generally required to pay sales tax to their suppliers when they buy materials and supplies, and they must collect sales tax on certain jobs they perform for their customers. However, there are some instances where contractors are exempt from paying sales tax.
A capital improvement to real property is an addition or alteration that substantially adds to the value of the property or prolongs its useful life. It must become part of the real property or be permanently affixed so that removal would cause material damage. For work to be considered a capital improvement, it must meet all three of these requirements.
When performing capital improvement work, contractors are exempt from paying sales tax on the materials and labor for the project. The contractor should obtain a properly completed Form ST-124, Certificate of Capital Improvement, from the customer, which relieves them from liability for any tax due on the work. This form indicates that the work qualifies as a capital improvement, and the contractor should keep it in their records to show why no sales tax was collected. If a contractor does not receive Form ST-124, they may still use the contract or other project records to establish that the work constituted a capital improvement.
If a contractor hires a subcontractor for a capital improvement project, they should provide the subcontractor with a copy of the customer's Form ST-124. This ensures that the subcontractor's charges are also exempt from sales tax. All records related to the project, including the certificate of capital improvement, must be retained for a minimum of three years.
While building materials and tangible personal property purchased for capital improvement work are typically taxable, contractors can use Form ST-120.1, Contractor Exempt Purchase Certificate, to make tax-exempt purchases in certain circumstances. For example, when building a house, contractors may need to provide freestanding appliances such as a refrigerator, washer, and dryer, which can be purchased tax-free using Form ST-120.1. However, the contractor must then collect sales tax on the charge to the customer for these appliances.
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Taxable services for contractors
In New York State, sales of services are generally exempt from sales tax unless they are specifically taxable. Contractors and subcontractors must be registered for New York State sales tax purposes and have a valid Certificate of Authority to perform taxable services.
Contractors and subcontractors must charge sales tax to their customers if the work performed is repair, maintenance, or installation work. Installation services are taxable when the items installed do not become part of the real property. This includes the installation of items such as appliances, which do not qualify as a capital improvement as they are not permanently affixed to the real property.
If a contractor or subcontractor purchases building materials or other tangible personal property for a taxable repair, maintenance, or installation service, they may be able to take a credit for the sales tax they previously paid when filing their next sales tax return. To claim this credit, they must have adequate documentation, such as a purchase invoice showing the sales tax paid to a supplier or an invoice to the customer documenting the materials used on the project.
If a general contractor hires a subcontractor to perform taxable work, the general contractor can purchase the subcontractor's services for resale by using Form ST-120.1, Contractor Exempt Purchase Certificate. This allows the subcontractor's services to be tax-free to the general contractor, but the general contractor will still be required to collect sales tax on their total charge to the customer, including the subcontractor's fees.
Non-taxable services for contractors
Capital improvement work is the only form of service performed by a contractor that is not subject to New York State sales tax collection. To be considered a capital improvement, the customer must provide the contractor with a completed Certificate of Capital Improvement (Form ST-124). The contractor should keep this exemption certificate in their records to show why no sales tax was collected on the work.
If a contractor performs a job for an exempt organization or governmental entity, they will not charge sales tax on the work, whether it is a capital improvement or repair and maintenance job. Building materials transferred to the customer in performance of the job can be purchased without the payment of sales tax using Form ST-120.1, Contractor Exempt Purchase Certificate.
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Tax exemption certificates
In New York State, contractors generally must pay sales tax to suppliers when they buy materials and supplies, and they must collect sales tax on certain jobs they perform for their customers. However, there are certain tax exemption certificates that can be used in specific circumstances.
If a contractor is working for an exempt organisation or government entity, they do not charge sales tax on the work, whether it is a capital improvement or repair and maintenance job. In this case, the contractor can use Form ST-120.1, Contractor Exempt Purchase Certificate, to make purchases exempt from sales tax. For example, a contractor building a house may arrange for the purchase and delivery of a washer and dryer for the customer. The contractor can purchase these items without paying sales tax using Form ST-120.1, but they must then collect sales tax from the customer on the sale of these items.
Certificate of Capital Improvement
A property owner who hires a contractor to perform work that qualifies as a capital improvement should give the contractor a completed Form ST-124, Certificate of Capital Improvement. The contractor should not charge any sales tax to the customer for either the materials or labour for the project. Form ST-124 relieves the contractor from liability for any tax due on the work. The contractor should keep this exemption certificate in their records to show why no sales tax was collected on the work.
Resale Certificate
If a distributor does not collect sales tax from a purchaser, they may be held liable for the tax. Therefore, the purchaser must give a properly completed exemption certificate to the distributor (in this case, Form ST-120, Resale Certificate) within 90 days of the purchase. This certifies that the purchaser intends to resell the items they purchased. If the purchaser intends to use the supplies themselves, they cannot use a resale exemption certificate, and the distributor must collect sales tax from them.
Other Exemptions
Exemption certificates are very specific about what type of purchaser may use the certificate. Many exemption certificates require the purchaser to have a valid Certificate of Authority to use them. A properly completed exemption certificate protects the seller from liability for the sales tax not collected from the purchaser. Sellers have the right to refuse an exemption certificate, even if it is correct and properly completed. If a seller refuses an exemption certificate, they must charge the purchaser sales tax.
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Frequently asked questions
Electrical contractors are not always tax-exempt in New York State. However, there are certain instances when their purchases may be exempt from sales tax or have offsetting credits available. For example, if electrical contractors are working for an exempt organization or government entity, they do not charge sales tax on the work.
Examples of tax-exempt organizations include churches, private schools, charitable organizations, and government entities.
Taxable services for New York State sales tax purposes are categorized as repairs and maintenance or installation services. Repairs and maintenance services are taxable when they pertain to keeping real property in good working order, readiness, or safety, or restoring it to that condition. Installation services are also taxable.
A tax credit is when a contractor pays sales tax on certain materials used in a project and can then apply for a credit for the sales tax paid.
A capital improvement is an addition or alteration to real property that substantially adds to its value, becomes part of the real property, or is intended to become a permanent installation. A repair or maintenance service is a job that restores real property to good working order, readiness, or safety.
