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VRJones
VRJones, Tax Manager-Tax Div. Nat. Law Firm
Category: Tax
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I am a building contractor in Texas. I supply and ...

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I am a building contractor in Texas. I supply and install windows for homeowners primarily in Texas, but also to do-it-your-selfers in other states. I pay sales tax on wholesale goods and then resell as part of home improvement projects. On those projects I do not charge sales tax to the retail customer(homeowner). My question is... If I purchase windows from a supplier in Michigan and then resell them to homeowner in Texas, do I need to pay sales tax to out-of-state supplier and under what circumstances do I need to charge sales tax to retail customer? The key transactions in question are: 1)Texas Supplier to me to Texas Buyer.   2)Out of state Supplier to Me to Texas Buyer.   3)Out of state Supplier to Me to Out of state Buyer. Thanks!
Submitted: 6 years ago.
Category: Tax
Expert:  VRJones replied 6 years ago.
Fortunately, Texas law makes this fairly easy for you since you are the "purchaser" under all the three scenarios you give:

1)Texas Supplier to me to Texas Buyer.

You should not be paying sales tax since you will be reselling the windows at the customer job site. You then need to collect sales tax from the customer, at the rate in that locality. To file for a resale permit, use this link http://www.window.state.tx.us/taxpermit/

Lastly, please click here to see the form you must submit to your suppliers. Both can be filled out and printed online.

2) Out of state Supplier to Me to Texas Buyer.

Same procedure as 1)

3)Out of state Supplier to Me to Out of state Buyer.

Same procedure as 1) (Unless you actually have an office or physical presence in another State. If you do, then be sure to get back to me).

Please Remember: The certificate should be furnished to the supplier. Do not send the completed certificate to the Comptroller of Public Accounts.

If you found my answer helpful, please click on the GREEN ACCEPT button. Your question will not close, and you will still have the opportunity to follow-up if needed. Leaving a bonus and positive feedback is not required, but doing so is certainly appreciated!

Your Just Answer Expert,

VRJ

VRJones, Tax Manager-Tax Div. Nat. Law Firm
Category: Tax
Satisfied Customers: 180
Experience: 20 years preparing Business & Individual returns+ IRS Offers in Compromise for National Tax Law Firm
VRJones and 5 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Thank you. I appreciate your response, I have a quick followup...
I have worked for many companies over 20 years in the remodeling business and none of us charge tax to the customer.
It is my understanding that if I choose to pay sales tax to supplier at time of pourchase, then I am not required to charge sales tax at time of resale. Honestly, this has never made sense to me, but I just assumed that the State was satisfied not receiving tax on our labor and O&P. It doesn't make sense because, of course, no govt. agency is EVER satisfied in ANY situation that they cannot charge some kind of tax, but that's a conversation for another day.

It is also my understanding that if I choose to NOT pay sales tax at time of wholesale purchase, then I would be required to charge tax at resale.

Obviously, my preference is to avoid charging tax if possible because I would prefer to NOT have the extra bookkeeping and responsibility of keeping up with sales tax payments and if I don't have to pass on extra costs to the consumer in the form of higher taxes, I won't.

Additionally, if I charged tax on the total retail contract amount rather than only on the cost of the wholesale goods, my overall retail prices would reflect an increase of well over 10% to consumer because they would have to pay tax on our labor and O&P AND my O&P would obviously increase if I had to create a new position and processes to handle the sales tax reporting and accounting. (even if it takes one employee an extra 3 hours/month, that would result in $100 to $200 in extra monthly expenses.)

I know some smaller contractors who go the tax exempt route at the supplier purchase level and then charge tax to consumers, but they are not the norm nor are they my competition.

I think you get the idea so I guess my real question was...
Under the current industry-wide practice of NOT charging tax to consumer at the retail end of remodel jobs, can you re-answer my first set of questions?

Thank you very much for your time!

Expert:  VRJones replied 6 years ago.
the current industry-wide practice of NOT charging tax to consumer at the retail end of remodel jobs

I will certainly look into this for you, but can you tell me how often, if at all, your out of state purchases are contracted over the Internet?

I will try to respond as soon as I hear back from you. The issue seems to be why are the smaller companies choosing to not follow current industry-wide standards.

VRJ


Customer: replied 6 years ago.
Reply toCustomers Post: At the moment, very few (<2%) of all transactions are contracted over the internet.
That is something I began doing just a few weeks ago, but it is coming together fast. I predict I will reach my goal of 20% of our sales being online transactactions within six months. Total Gross sales at $2.5 million (approx.) x .20 = $500K online transactions.
I really do not have any way yet to predict what portion of those sales will be in or out of Texas.

When I say smaller contractors, I really mean glorified subcontractors. Most of these guys do at least some of their work as subcontractors for other companies.
They have a dba(maybe), typically work from home and generally are the low bidders on every job so they don't have the money to grow, hire additional staff, educate themselves or their customers, etc. These are the guys that we all HATE to love.

We (Homeowners) decide they want to remodel so, by God, they set out to find the best possible contractor in the world. They ask friends, search the internet, find the finest remodelers they can, demand luxury products and crafstmanship, get a couple of estimates from luxury contractors and realize that what we want is expensive. VERY Expensive.

So then all of a sudden it doesn't seem SO important that a contractor has an office or pulls permits or has insurance, etc. "I can handle this job" say the Homeowners and they go scour Craig's List and ask for referrals from their lawn men, etc.

They finally manage to find a subcontractor, show him/her the bids they recieved from the real contractors and the subcontractor says no problem... "I don't have all that silly overhead that those other guys have and I'll get you the same thing for half price!"

Then the subcontractor runs all over town to find the absolute cheapest stuff they can because they don't know the difference. Then they realize they have to pay tax and delivery and they have to buy all these extras they didn't think about to meet building codes or whatever. They didn't realize they were gonna waste 5 days getting everything ordered, etc.

They find out they can just fill out a form at the supplier and they don't have to pay tax, so they don't.
Then they go back to the homeowner and say: "gosh I'm sorry Mr./Mrs. Homeowner, I forgot to tell you I had to charge you for tax", But they underbid the job so much they can't afford to save the tax money to send to the state comptroller and they all get paid cash or as a 1099 sub so they don't save or withhold any money for income taxes either.

So, I'll quit blabbing... You get the idea. The smaller guys just don't know what to do and the rest of us have just always done it the other way to keep our costs down.

The problem is that now I have created a situation with so many different types of transactions, I'm not sure what to do either.

Thanks again for the help, I'm sorry to eat up so much of your time!
Expert:  VRJones replied 6 years ago.
Under the current industry-wide practice of NOT charging tax to consumer at the retail end of remodel jobs, can you re-answer my first set of questions?

Thanks for providing the extra information. The reason I asked about the Internet is because as you know, you can buy any product, including new windows from out of state and never be charged sales tax. What concerns me is that Texas may be cracking down as CA did, and not to far after that, the State of Washington did.

Both those states want their residents paying sales tax on products purchased outside of the State because they cannot count on other states' businesses to collect sales tax from those types of purchases. CA began this movement, and my State of Washington really had no choice but to start cracking down because they have no state income tax, and rely heavily on sales tax revenue. Sales tax not collected in state is called use tax. And both states want that. In fact, even individual buyers on E-bay who do not pay sales tax, are required to report the unpaid sale tax on their personal returns. After hearing what you said, it seems like if Texas is cracking down (and I do not know that at this point) those competitors you love to hate will be swallowed up by the state comptroller's red tape. You sound like you have an established growing business, that in itself is an asset, and I hate to see you lose that. So unfortunately, I cannot answer your question as of yet. I want to to a bit of research, perhaps even call the Texas comptroller's office, and then decide what information will best help you. This is going to take a bit longer than I thought, and I apologize for that, but I would like to be confident that I give you a correct answer to your question.

So basically, industry wide standards were the same in CA and Texas, until the Internet came along, and CA began to see a decrease in sales tax revenue, and so too as, I said, my state of Washington. Industry wide standards may be changing.

I will, however, get back to you tomorrow and let you know what I find out.

Do you have an accountant? Sales tax returns are not difficult to fill out. The problem is proper record keeping necessary to fill them out. BUT, I will still try to see if there is a legal and proper way to pay the sales tax at your level, the purchaser.

One last question I just thought of, and that is does your revenue from just selling windows to the "do it your-selfers" exceed the revenue from completed jobs, IE, purchase of windows and labor/installation?

VRJ




Customer: replied 6 years ago.
Reply toCustomers Post: Thanks again for all your help.
Is there a way for me to re-open this as a new question so you can get paid again?
I realize the fees paid on this site are not exactly making any experts rich, but every little bit helps.

Anyway. Thanks!

We do have part-time accountant/bookkeeper, but you're right...it is the interim record keeping that is a pain. The other pain is having to set up yet another account for sales tax savings and sending in the payments, etc. It seems like a small thing, but it's just one more thing to keep up with.

To answer your last question... No, the revenue from DIY sales does not and probably never will exceed the revenue from completed jobs.

Expert:  VRJones replied 6 years ago.
Okay, I believe I finally have a handle on this question. I do apologize for the delay. Those are not quite windows you are selling, as I visited your website. In any event, you are still remodeling and improving real property which is where I had to go to find the applicable law. And, your right, it makes no sense because if you pay sales tax at the wholesale level, isn't the state getting cheated out of retail sales tax? Apparently not in your situation:

Labor to repair, remodel, or restore residential real property is not taxable. Residential real property means family dwellings, including apartment complexes, nursing homes, condominiums, and retirement homes. It does not include hotels or residential properties rented for periods of less than 30 days. The property doesn't have to be the residence of the owner.

I believe you are an all residential contractor so this should not apply:

On the other hand, the total amount charged for remodeling, repairing, or restoring nonresidential real property is taxable. Examples of nonresidential real property are hospitals, office buildings, refineries, warehouses, parking garages, retail shops, restaurants, manufacturing facilities, and other commercial establishments.

Incidentally, everything in italics was retrieved from the official Texas source:
Please click here for reference.

Residential Repair and Remodeling

When you repair or remodel residential property, you are a contractor. As a contractor, you may have a lump-sum contract (one price for the entire job). Or, you may have a separated contract (you charge separately for materials and labor). Under a lump-sum contract, you pay tax on all your supplies, materials, equipment, and taxable services when you buy them. You don't charge your customer tax.

So there it is right in black and white. The three scenarios would still be answered the same as my original answer, except, you won't be collecting tax on the contracts where labor is involved (lump sum contracts, I am hoping).

Now we get to why I asked you all those other questions. The most important part being what method you should use when you only sell the windows, and do let the do it yourselfers handle the labor. This is no longer a lump some contract. You are buying from the wholesaler, and selling retail. It's essential, make that crucial you have an adequate record-keeping system to separate these sales. The IRS requires proper record keeping, and if they find your records in shambles if the dreaded Auditor comes knocking, you can get penalized. You are growing too, so you have even more incentive. I would think your business would be suffering a downturn in business based on the housing market, but that is why you do what you do. You know the business and market.

The following again is from the official Texas codes and does require you to use those forms on my original answer on "separate contracts". But this only applies to materials. I actually checked my new roof invoice and sales tax was itemized separately only for materials (nails, tape, etc). It is pretty clear here:

Under a separated contract, you give your suppliers resale certificates instead of paying tax on materials you incorporate into the customer's real property, and on certain services if the charges for the services are separately identified to the customer. These services are surveying, landscaping, final cleanup, and security systems that are incorporated into the customer's realty. You then collect state sales tax, plus any local tax, from your customer on the amount you charge for the materials and those services. Your charge for the materials must be at least as much as you paid for them. The construction labor charge is not taxable.

Again, I do not know if that even applies to you, but I am assuming it does not. The services do not seem to be similar to your type of construction. However, when you are not performing labor on the job, those retail "windows," you will need to collect tax on the DIY sales, and that appears to be a significant, but not majority of your business.


The problem is that now I have created a situation with so many different types of transactions, I'm not sure what to do either.

I know it is a pain, but you have too much to lose by not properly tracking your records. Once you get an automated bookkeeping system setup, I can tell you it is not all that bad. Setting it up is going to be rough, I can't lie to you.

So with all that, I am sure there is something I missed, and i want to make sure you let me know what else needs to be addressed.

1) Record keeping system - Just have to do it

2) Why is business booming in such a down market? Are these "windows" a relatively new concept? Have you worked on new construction sites/builders? Interesting business you have going, to say the least.

3)TEXAS SALES AND USE TAX RESALE CERTIFICATE That is an updated link.

4) Please click here for an interesting link I found very helpful (it may be one of your competitors).

5) Questions? I am sure you will have some.

Your Just Answer Expert,

VRJ

VRJones, Tax Manager-Tax Div. Nat. Law Firm
Category: Tax
Satisfied Customers: 180
Experience: 20 years preparing Business & Individual returns+ IRS Offers in Compromise for National Tax Law Firm
VRJones and 5 other Tax Specialists are ready to help you
Expert:  VRJones replied 6 years ago.
I hope I did not confuse you further Rick. That sometimes happens when I do not hear back from a customer. If you read the link from #4 above, you will see some changes to the law become effective this September of 2008.

So another great idea is to just call (I would suggest you or your bookkeeper go down to the comptrollers office (make an appointment actually) and see if you can explain your situation, and get a written ruling on how to handle sales tax on materials and the wholesale windows you deliver to DIYs.

For instance, come September 2008, in certain circumstances, you sales tax rate you use will now be based on the county where you business is located. That rate will apply to any out of county purchases within Texas. So, again, it may be prudent to get a concrete answer from the Comptrollers office.

If anything, it will give you a document to rely on, and peace of mind too.

Let me know how else I can help...

Your Just Answer Expert,

VRJ


Customer: replied 6 years ago.
No, not confused.
I have been out of town for a couple of days. I'm sorry it took me so long to respond.

You have been very helpful and I greatly appreciate all of your time.

We are planning to meet with someone at the comptroller's office to get some decisions as you suggested.

Thanks again,

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