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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2879
Experience:  Over 20 Years experience
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I am running a Landscaping company in Texas, and a good customer

Resolved Question:

I am running a Landscaping company in Texas, and a good customer has me in charge of almost all outdoor construction of a new home.
Am I correct in assuming that all labor that is considered construction is not taxable? We have built Gazebos, retaining walls, outdoor drains etc. Some of this was tractor work.
Where is the line drawn on tractor work that prepared the soil under the construction, and tractor work that prepared the landscaping areas? I know landscaping labor is taxed, but almost all tractor work was mainly for construction areas.

Also where can I find a list of Non taxed items? Fill Dirt is not taxed, but I am not sure on 'select fill' or other types of earth.
Submitted: 9 months ago.
Category: Tax
Expert:  R. Klein, EA replied 9 months ago.

 

R. Klein, EA :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

R. Klein, EA :

I am assuming you are asking about sales tax and not income taxes.

R. Klein, EA :

Information about taxable and non-taxable landscape services can be fond in state publication 112 here: http://www.window.state.tx.us/taxinfo/taxpubs/tx94_112.html

R. Klein, EA :

This is one of the relevant sections:

R. Klein, EA :

No tax is due on labor to repair or remodel residential real property or to build new structures (residential or nonresidential). The type of contract determines how tax is paid on the materials incorporated into the realty. If the construction contract is lump sum (one charge, including labor and materials), the contractor pays tax when purchasing the materials and does not collect tax from the customer. If the contract is separated (separate charges for labor and materials), the contractor collects sales tax from the customer on the charges for materials but not for labor. A separated contractor may purchase the building materials tax-free by issuing a resale certificate. Refer to Rule 3.291 on Contractors.

R. Klein, EA :

Publication 157 deals with housing construction: http://www.window.state.tx.us/taxinfo/taxpubs/tx94_157.html

Customer :

Yes, sales tax;Our contract is separated, not lump sum, and yes, the customer has been paying taxes on the material. We have also been charging tax on all tractor work. I believe

Customer :

that we should not have been charging taxes for this

R. Klein, EA :

Just keep in mind that if you charge sales tax, you MUST send it to the state, even if it is an overcharge.

R. Klein, EA :

The safe-harbor is to collect tax and send it in. The state can never penalize you for that.

Customer :

Alright, that is good to know; We are now under scrutiny from a state tax audit, and are trying to gather all facts together; the big factor we think will be the dirts we used; I'll explain

Customer :

We do not charge tax for Fill dirt; we never have in 30 or so years, because it is a 'waste' material and no labor has been applied to manufacture it (or something to that effect)

Customer :

We also did not charge tax though for Select Fill, which is a slightly refined fill dirt, but we don't know if this will result in a penalty

R. Klein, EA :

Materials, Supplies, and Equipment

Give a resale certificate to the supplier when purchasing fertilizer, plants, flowerbed edging, herbicides, and processed dirt, sand and gravel used in taxable landscaping or lawn care. These materials are transferred to the care, custody and control of your customer as part of your taxable service. When landscaping a new residential structure for a contractor or homebuilder, keep in mind the difference between lump sum and separated contracts in paying or collecting tax on these materials.

You must pay sales tax on the supplies and equipment used in landscaping and lawn care. There is no exemption for the purchase or rental of wheelbarrows, lawn mowers, string trimmers, gloves and other equipment, tools, and supplies.

Customer :

See that line there, 'processed dirt' is the question

Customer :

We are trying to determine what constitutes processed then

R. Klein, EA :

If you buy "fill dirt" and your receipt says "fill dirt", then it is fill dirt. If the receipt that you bought the stuff says something else, then it probably is taxable. The auditor isn't going through the dirt pile to figure it out!

Customer :

Good point

R. Klein, EA :

I, unfortunately, cannot render an official opinion in this forum.

R. Klein, EA :

You can hire me (or someone like me) to represent your position in an audit, but it is not something we can do within the forum here itself.

R. Klein, EA :

I ALWAYS recommend hiring a representative in an audit situation, no matter how simple of an audit it sounds like. The auditor knows how to drive you to say things that can get you into trouble--fast.

Customer :

We have a Cpa firm that we've used for years; my understanding is that CPAs do not specialize in State taxes but they are very capable people from our experience; the audit is happening there at their office

R. Klein, EA :

CPA = Accounting generalist.

R. Klein, EA :

A specific CPA MIGHT be an expert in sales tax audits and then again, might NOT be.

R. Klein, EA :

CPA does not specify any expertise in any one area of accounting.

R. Klein, EA :

CPAs do not specialize in ANYTHING by virtue of their license. They are considered ethical practitioners in the accounting field.

Customer :

Right, and that is how we treat ours; we have SEVERAL offers through the mail (that we saved) from people wanted to help with this Audit, and we informed the cpa not to sign any agreemesnts even in the auditer decides we are clear

R. Klein, EA :

You have the right to direct the representative no matter who you hire to represent you

Customer :

most of the solicitations stated that you shoudl get a second opinion from their offices to go through the same papers the audit did

Customer :

But where or who is the final arbitor on what dirt counts as unrefined?

R. Klein, EA :

The state.

Customer :

Im assuming the specifics don't really get worked out unless it becomes a case

R. Klein, EA :

Correct.

R. Klein, EA :

Of course, if you are talking about whether or not there needs to be an adjustment for less than $1000, then the issue is usually tabled by the auditor and it is ignored as insignificant.

R. Klein, EA :

In this case, it would take at least $12K of taxable items to generate a tax of $1000

Customer :

So our best chance may be to give over all papers showing fill dirt and possibly add notes specifying and 'reminding' the auditor that those dirts are non processed

R. Klein, EA :

I wouldn't even bring it up at all unless that auditor mentions it first or states that you did it wrong.

Customer :

Well.. we have easily billed the customer over 6 million, and this is just one customer; we are being audited for the last 4 years, sadly

R. Klein, EA :

Why shed light on something that is not an issue?

Customer :

That is an excellent point.

R. Klein, EA :

If your company is this big, representation is key.

Customer :

We are fairly certain this audit came about from this job; it has tripled our annual income for the last few years, and we think someone else on the job might have been audited sending a red flag to the others

Customer :

it is likely this job is over 80% of our gross so it is likely to be scrutinized

Customer :

Should we wait until after the auditor makes a decision to look for representation? I'm assuming offices like yourself have a grace period afterward to say "no, this isn't quite right"

R. Klein, EA :

NO! You should not even be talking with the auditor personally in the first place! The representative gives a good barrier!

R. Klein, EA :

I NEVER want the client in the same room when I meet with the IRS or the state tax authorities!

R. Klein, EA :

All clients suffer from Foot-In-Mouth disease.

R. Klein, EA :

When I am with the auditor, I purposely direct their attention to where I want them to be looking. (Which isn't always where they SHOULD be looking)!!

Customer :

Haha. Like I mentioned, our Cpa is the only person that has even contacted or dealt with them; we are just trying to decide when it is opportune or necessary to replace them with someone more specialized

Customer :

I say Person, the Cpa is a firm

R. Klein, EA :

Auditors are dumb. They can't think creatively. They are masters at asking the right questions, though, to uncover your mistakes.

Customer :

That is somewhat reassuring. I am not entirely positive our CPA knows the full extent (or even where) our problems are. We have never discussed with them. My understanding is that we are gathering a huge pile of papers, reciepts etc and handing them to the auditor. Then he has one week to comb through it how he pleases

R. Klein, EA :

Ay! Carumba!

Customer :

That response is less assuring

R. Klein, EA :

Using a forklift and dropping off your dirty laundry! Shame on you!

R. Klein, EA :

The CORRECT method is 1. Auditor asks for some information. You give him the SPECIFIC item he requests. MAKE him be specific in the request.

R. Klein, EA :

There usually is no value in just opening everything and say "look!"

R. Klein, EA :

This is just ANY audit advice; not specific to this case.

Customer :

Well I believe he specifically asked for every invoice, every reciept, and every sales tax reciept for the last 4 1/2 years. That isn't a small sum

R. Klein, EA :

He has no time to look through EVERYTHING, unless there is just one document per month.

R. Klein, EA :

In any case, sounds like Mr. Auditor is on a paper chase.

Customer :

What does that mean?

Customer :

just looking blankly for anything

R. Klein, EA :

Or more like a Fishing Expedition

Customer :

I see. Well hopefully, to continue the metaphor, he doesn't get a bite. There are some extrodinary fish in this lake

R. Klein, EA :

The auditor either has a plan (which he is not sharing with you) OR he has no idea what he is looking for and he might come across ANYTHING

Customer :

Well, I think I have everyhting I want to know; I am more than satisfied, but I have one last request

R. Klein, EA :

Yes!

Customer :

You've been so helpful, If I wanted to to hire specifically your firm, how would I go about that process (though it would not be immediate)

R. Klein, EA :

I don't mean to scare you in my responses. It's just that I don't like fishing expeditions. When we're "out on the lake", I want to know what kind of bait, line, and tackle I need to capture what game I want to catch

R. Klein, EA :

Which also means, if I am helping the "fish", knowing what is coming in the water makes the defense that much better.

Customer :

Well, in our case, the only real trouble, I suppose is that we did cahrge for a LOT of fill dirt

R. Klein, EA :

In the past, we were unable to provide additional services. The folks at Pearl/JustAnswer have added a new feature that allows me to offer additional services. This feature was just added recently, so I am not certain how to make it work here..........

R. Klein, EA :

What part of the state are you in>?

Customer :

Dallas

Customer :

Specifically Cedar Hill, both the job and company

R. Klein, EA :
(Edited by Moderator)
R. Klein, EA :

I specialize in audit defense (as well as general business consulting) rather than preparing returns or doing bookkeeping.

R. Klein, EA :

I am NOT a CPA, but federally licensed as a tax representative and as a state tax representative.

Customer :

Well regardless I appreciate the help. This gives me a mindset going into this I can share with my computer illiterate boss.

R. Klein, EA :

Good luck! The state tries hard. Just try harder.

Maria-Moderator41548.6207888657
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2879
Experience: Over 20 Years experience
R. Klein, EA and 2 other Tax Specialists are ready to help you

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