CREJ - Retail Properties Quarterly - May 2015
Retail 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 opportunities, or expensive tax compliance mistakes. Following are five of the most common traps for retail property developers and managers. 1. Repairs. In most states, including Colorado, repairs to tangible personal property billed on a timeand-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 construction. Leasehold improvements often are treated not as construction jobs on real property, 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 irritation from becoming a big tax headache. 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 separately, 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 personal property, are not taxable as retail sales. Instead, the landscaper pays use tax on the materials used in the contract. Please note the difference – while tax is paid, it is not at the retail price charged to you, but at the price paid by the landscaper. 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 maintenance contracts. Optional warranties 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 presumed to be nontaxable. Every state imposes sales tax on some services, such as lodging, utilities or telecommunications. 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 specifically 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 disinfectants, 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 separately 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.