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Page 12 — Retail Properties Quarterly — May 2015
Peter Schippits
Senior Managing Director
+ 1 720 528 6440
For more information on how CBRE can assist you with your
commercial real estate needs in Colorado please contact:
CBRE KNOWS RETAIL.
As the leader in the local retail market, we have the
insight and perspective to anticipate what’s next and
what it means for our retail clients.
With 259 retail transactions completed and more than
2.7 million square feet of retail space leased and sold
in 2014, CBRE is Colorado’s undisputed, leading
authority on the retail market.
R etail property managers
deal with a lot of headaches,
but generally sales and use
tax issues are not the most
obvious. After all, sales tax
is something that concerns retailers
in the development, not property
developers or managers, right?
While that should be the case,
several issues can arise resulting in
significant cost-saving opportuni-
ties, or expensive tax compliance
mistakes. Following are five of the
most common traps for retail prop-
erty developers and managers.
1. Repairs. In most states, includ-
ing Colorado, repairs to tangible
personal property billed on a time-
and-materials basis are taxable only
on the property or materials used
in the repair. Therefore, a repair to
a mall’s heating or air-conditioning
system, separately stated on an
invoice as $300 for parts and $500
for labor, would only have sales tax
on the $300 of parts. However, if the
repairperson mistakenly charges a
lump sum of $800 for the job, sales
tax will be imposed on the entire
$800. How something is billed on
an invoice often will determine
how sales tax is applied. Whenever
possible ask that repairs be stated
separately as time and materials, so
the tax is only on the materials.
2. Construction. Construction
contractors building the property
are the consumers of the tangible
personal property they use and
pay sales tax on the materials
consumed in the creation of real
property. However, there is a fine
line between repairs and construc-
tion. Leasehold
improvements
often are treated
not as construction
jobs on real prop-
erty, but instead
as installation
coupled with the
sale of tangible
personal property.
For example,
an auditor might
assess sales tax
on the contract
price paid to add
a bar or room
divider to a restaurant, or shelving
built into the wall. In addition, an
auditor might treat those items as
tangible personal property subject
to business personal property tax.
Be sure you understand the nature
of the work, how it is affixed to
real property, its permanence, the
item’s functionality and whether a
building permit was necessary for
the construction. Attention to these
details will prevent a minor irrita-
tion from becoming a big tax head-
ache.
3. Landscaping. Is your landscaper
charging you sales tax on every
bush and shrub that is replaced?
Landscaping is another area in
which the nature of a transaction
and how the transaction is billed
may determine its taxability. For
example, if you are purchasing
trees, bushes and flowers separate-
ly, you are probably paying sales tax
on the retail price of those items.
However, if you have a maintenance
contract with a landscaper at a set
monthly fee, you may be able to
minimize your tax. Maintenance
contracts on real property, unlike
similar contracts on tangible per-
sonal property, are not taxable as
retail sales. Instead, the landscaper
pays use tax on the materials used
in the contract. Please note the dif-
ference – while tax is paid, it is not
at the retail price charged to you,
but at the price paid by the land-
scaper.
4. Maintenance contracts. These
contracts may cover parts, services
or both. Contracts for services are
not taxable in Colorado. However,
if the monthly payment for that
maintenance contract includes
parts and labor, it can make the
entire payment subject to sales tax.
It is important to distinguish
between warranties and mainte-
nance contracts. Optional war-
ranties generally are nontaxable
because they are similar to an
insurance contract. The warrantor
is responsible for paying the sales
tax on any parts used to repair the
property.
5. Janitorial and cleaning services.
Sales of tangible personal property
at retail are presumed to be taxable.
Sales of services, however, are pre-
sumed to be nontaxable. Every state
imposes sales tax on some services,
such as lodging, utilities or telecom-
munications. A few states, such
as Hawaii, New Mexico, Texas and
South Dakota, tax a broad range
of services. But for the rest of the
states, unless the services are spe-
cifically enumerated in the statute
as taxable, the services are exempt.
People who provide services are the
consumers, not the retailers, of the
tangible personal property they use
in performing a service. Once again,
how the transaction is billed can
determine its taxability.
According to Colorado regulations,
items such as hand soaps, paper
towels, toilet tissue and disinfec-
tants, which are furnished under
a service contract and are billed
to the customer as a separate and
distinct item from the services
performed, are considered retail
sales of tangible personal property.
Sales tax has to be collected from
the customer and remitted by the
janitorial service. However, if such
consumable items are not sepa-
rately stated but rather included in
the janitorial service contract, the
janitorial service shall be deemed
to be the user or consumer of the
products and shall pay sales or
use tax at the time of purchase. No
sales or use tax is applicable to the
charge for service rendered. Notice
again that tax is paid in the first
instance on the marked-up retail
price charged to the mall manager,
but in the second instance by the
janitorial service on their cost to
purchase the items.
Although these tax situations may
seem to have minor differences,
retail property developers and
property managers should find a
little time to pay attention up front
to these activities in order to keep
taxes as small worries rather than
big headaches.s
Taxes
Bruce Nelson,
CPA
Tax director,
EKS&H, Fort
Collins