In the landmark South Dakota v. Wayfair, Inc. case, the U.S. Supreme Court struck down the physical presence nexus standard established in the 1992 decision Quill Corp. v. North Dakota. This means states can require certain retailers, with no physical presence, to collect and remit the applicable sales or use tax on sales delivered in locations within their state. Due to this decision:
How does the Wayfair decision affect the construction industry?
- Remote sellers in the construction industry, who sell goods or services into Minnesota from other states, must register and begin collecting sales tax in Minnesota no later than October 1, 2018.
- Minnesota construction businesses, who remotely sell into other states, may also need to start collecting sales tax in those states.
- Minnesota law provides a Small Seller Exception, which does not require remote sellers to collect sales tax until their sales during a period of 12 consecutive months total either:
- 100 or more retail sales shipped to Minnesota
- 10 or more retail sales shipped to Minnesota that total more than $100,000
Note: When calculating this exception, do not include any sales where the purchaser is buying for resale. Purchaser should give you a completed Form ST3, Certificate of Exemption claiming an exemption for resale. August 2017 is the earliest month to include to calculate if the business qualifies for the Small Seller Exception.
What does this mean for your construction company?
The biggest impact of the Wayfair case on the construction industry is the requirement of all Minnesota sellers, regardless of their location, to collect state and local sales taxes based on where your customer receives the taxable product or service. Construction businesses tend to operate in multiple locations and construction sites and it will be important to determine if/when local sales taxes are payable. See examples below detailing how to source the sale and determine which taxes are applicable.
- Example 1: A construction business is physically located in St. Paul. A customer from Rochester visits the store in St. Paul and purchases materials. In this example, the customer takes the materials with them when they leave, so the possession of the items were transferred at the physical location of the store. The tax assessed on the materials is the Minnesota general rate sales tax plus any applicable local taxes for St. Paul.
- Example 2: A construction business is physically located in St. Paul. A customer from Rochester purchases materials online and has them shipped to their home in Rochester. The tax assessed on this sale would be Minnesota General Rate sales tax and any applicable local taxes for Rochester, since possession of the items were transferred when the items were received by the customer at their home. Sourcing would also be Rochester, if the customer went to the physical location and asked for the materials to be shipped to their home. Keep in mind, the cost to ship the materials should be included in the sales price and the entire amount taxed.
Note: Contractors or subcontractors must pay sales tax on the cost of all materials, supplies, and equipment to complete a construction contract.
Tax Tip: You may pass this tax on to your customers as part of the materials cost. Do not itemize it separately on customer invoices. Do not charge sales tax on construction contracts.
Credit for local tax paid
If you pay local sales tax in Minnesota to one locality, but use the items in another area that imposes local sales and use tax, you are allowed a credit for the local sales tax already paid.
When do you need to start collecting?
You must begin collecting no later than the beginning of your next filing cycle:
- Monthly and Quarterly filers: October 1, 2018
- Annual filers: January 1, 2019
Resources are available on the Minnesota Department of Revenue website, including a sales tax rate calculator and sales tax rate spreadsheet, among others, to help calculate local sales taxes.
Contracts outside Minnesota
Materials delivered to contractors in Minnesota for use in an out-of-state contract are subject to Minnesota tax, unless the materials are not subject to tax in the state or country where the contract work is done. You must give your vendor a completed Form ST3, Certificate of Exemption. For more information, see Fact Sheet 110, Items for Use Outside of Minnesota.
Materials delivered by a vendor directly to a construction site outside Minnesota are not subject to Minnesota tax. Those materials may be subject to sales tax in the state where the construction site is located.
What about the other states?
You are responsible for researching or contacting each state to determine your sales tax registration and reporting requirements. If you are not up to speed on all the changing and new state tax laws, it can put your company at risk for penalties and interest charges on unpaid tax liabilities – potentially in multiple states.
Smith Schafer works with construction industry businesses to identify where such tax liabilities exist. Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 500 Minnesota construction and real estate entities. Contact us today to learn tax saving strategies that best fit your situation.