CONTRACTORS TAX OVERVIEW Department of Revenue Todd Stoner

CONTRACTOR’S TAX OVERVIEW Department of Revenue Todd Stoner Fall 2013

What is Contractor’s Tax? � Contractor’s tax is generally a 3. 5% tax levied by MCA § 27 -65 -21 to the contractor on the gross proceeds of all commercial, non-residential construction projects for the construction, renovation, or repair of real property that exceed $10, 000 dollars, including constructive receipts. � Consider: (1) Type of job on real property, and if (2) Residential or commercial, and if (3) Total Contractor’s compensation > $10, 000 Tax Overview v Fall 2013 2

Real Property vs Tangible Personal Property *** MOST IMPORTANT*** To be qualifiable for contractor’s tax, the job must involve real property. If tangible personal property is involved, then as a result of the construction activity, it must be permanently attached to real property and lose its identity as tangible personal property to be subject to contractor’s tax. Contractor’s Tax Overview v Fall 2013 3

Who Pays Contractor’s Tax? � The contractor is responsible to pay this tax to DOR. �The project (job) owner cannot pay the contractor’s tax. �Direct pay permit holders cannot accrue and pay contractor’s tax for the contractor. Exceptions: Casinos/floating structures (CCPC – Casino Construction Permit Certificate) Refineries (RPC – Refinery Permit Certificate) Contractor’s Tax Overview v Fall 2013 4

How Does a Contractor Pay Its Contractor’s Tax? All general or prime contractors and subcontractors improving real property subject to contractor’s tax in the state of Mississippi are required to obtain a sales and use tax certificate of registration for the remittance of any sales and use taxes that may be due, regardless of the number of jobs they are performing. Registration must be made even if the contractor’s tax due on the job is being prepaid with the MPC application submitted. Payment of contractor’s tax is either prepaid with payment submitted with the MPC application or paid on a long version sales tax return either by paper or on TAP – regardless of whether the taxpayer receives a contractor’s or retailer’ sales tax permit. Contractor’s Tax Overview v Fall 2013 5

REGISTRATION APPLICATION The registration application is available on the DOR website under the “I want to” section of the home page. Or the taxpayer can simply click on TAP on the DOR main webpage and register. Contractor’s Tax Overview v Fall 2013 6

Contractor’s Sales Tax Permit - General Construction � � Contractors who are issued a contractor’s sales tax permit must have an MPC number in order to purchase component materials and services exempt. Examples of contractors with contractor’s sales tax permits: � Contractors of building construction � Contractors of construction other than buildings � Drillers of oil and gas wells Contractor’s Tax Overview v Fall 2013 7

Retail Sales Tax Number – Construction and Retail Sales � Examples of contractors with retail (resale) tax permits: � Electrical contractors � Elevator or escalator contractors � Excavating, grading & landscaping contractors � Insulation contractors � Mechanical contractors – plumbing and heating � Water well drilling contractors � & air Contractors performing taxable services or in the business of installations of materials, or selling materials in addition to construction activities, are provided a resales tax permit. Contractor’s Tax Overview v Fall 2013 8

Contracts and Contractors � � Prime contractor is the one who directly receives the payment or benefit from the owner and generally is responsible for performance of the job. The prime contractor is the one responsible for the contractor’s tax. A prime contractor can have one or more sub-contractors performing all or part of the work. The prime pays the subcontractor. The prime contractor remains primarily responsible for the contractor’s tax due on the job and for obtaining the MPC on each qualifiable job. Any sub-contractor can use the prime contractor’s MPC number in order to purchase component materials exempt from tax for the related MPC job. � If the prime contractor did not obtain an MPC on a qualifiable job, the sub-contractor can be held secondarily liable for the contractor’s tax due on the payments or benefits received for its portion of the job. � Any sub-contractor who receives payment or benefits directly from the job owner becomes the prime contractor for that portion of the payment or benefit. � Contractor’s Tax Overview v Fall 2013 9

Contracts and Contractors � A contract can be in written form or be by verbal agreement. �A prime contract is based on a contract between a contractor (prime or sub) and the job owner (owner of the project). � A subcontract is based on a contract between a contractor (prime or sub) and another contractor (not the owner of the project). � An owner of the job is the one who “owns” the property and is the one who pays to have the work done. An entity cannot contract with itself and have the job qualifiable – must be separate entities (arm’s length transaction). Contractor’s Tax Overview v Fall 2013 10

Contracts and Contractors � � A management contract is a contract whereby a liaison is employed on a fee basis to oversee the job but the liaison does not handle paying any of the contractors for work accomplished. Continuous contracts embrace construction activities for a definite time period, a definite amount, and are generally in the same adjacent area. � The individual job receipts can be of varied amounts, even amounts less than $10, 000, but still subject to contractor’s tax when the total compensation exceeds $10, 000 for a commercial, non-residential job on real property. Contractor’s Tax Overview v Fall 2013 11

Contracts and Contractors � Contracts subject to contractor’s tax, except those for oil or gas well drillers, must be qualified prior to beginning work or be subject to a late filing fee of 10%. Oil or gas well drillers qualify jobs using Form 72 -410, Mississippi Oil and Gas Well Driller’s Qualification of Well or on TAP; DR- number must be issued in order to remit contractor taxes due. � All other jobs are qualified using Form 72 -405, Contractor’s Application for Material Purchase Certificate and/or Contract Qualification. � � � All contracts subject to contractor’s tax are qualified under the sales tax section of the law. Contractor’s tax and any use tax due must be paid prior to beginning work on qualified jobs exceeding $75, 000 (>$10, 000 if an out-of-state contractor) unless a surety bond is filed with DOR. Contractor’s Tax Overview v Fall 2013 12

How Does a Contractor Qualify a Job? OUT-OF-STATE CONTRACTOR IN-STATE CONTRACTOR � � MPC Application (Form 72 -405) Bond or Prepayment for Jobs greater than $75, 000 Job Bond (Form 72 -441) � Blanket Bond (Form 72 -442) � Tax Rider (Form 72 -440) � � � MPC Application (Form 72 -405) Bond or Prepayment for ALL Jobs Job Bond (Form 72 -441) � Blanket Bond (Form 72442) � Tax Rider (Form 72 -440) � Taxpayers, either in-state or out-of-state, can apply for an MPC through TAP. The MPC requested will be issued by the Sales & Use Tax bureau after all required documentation has been approved by the bureau. Contractor’s Tax Overview v Fall 2013 13

Contractor’s Tax Overview v Fall 2013 14

Discussion of the MPC Application � Estimated start date � Estimated completion date (change order, rain delays, etc can affect this date) � Cannot be prior to the contract date � � � Description of work (should provide sufficient detail to determine if the described job is subject to this tax) Owner name (must be a different entity than that of the prime contractor) Contract amount Prepaid sales or use tax (taxes paid with the MPC application) is applied to the sales tax account with an MPC payment type. Subcontractors are expected to be listed by the prime contractor on the MPC application. Contractor’s Tax Overview v Fall 2013 15

Bond Requirements � Mississippi contractors are generally authorized to file and pay contractor’s tax as receipts are realized for qualified jobs equal to or less than $75, 000. �A surety bond is required on any job exceeding $75, 000 unless the job is prepaid. � � All out-of-state contractors either prepay the tax due on the job or bond the job for any contract in excess of ten thousand dollars ($10, 000) which is subject to contractor’s tax. The bond must be a job bond or a blanket bond. Contractor’s Tax Overview v Fall 2013 16

Bond Requirements � � Bonding of the job must cover any liabilities resulting from sales, use, income, withholding, and motor fuel taxes due. A bonding company (or surety of the tax bond) can be held secondarily liable for all taxes due on the contract covered by the bond. This includes the contractor’s tax and other taxes such as withholding, use, income, and motor fuel taxes when the taxpayer does not pay the tax due the state. Contractor’s Tax Overview v Fall 2013 17

Job Bond (Form 72 -441) The job bond form names the job but does not describe a dollar amount on the bond. The bond “guarantees” payment of any amount of the taxes, damages, interest and penalties for the named job – in the event the taxpayer does not pay the taxes due. Contractor’s Tax Overview v Fall 2013 18

Blanket Bond (Form 72 -442) The blanket bond form specifies a dollar amount – required to cover at least (a minimum of) 4% of the stated contract amounts of the jobs covered under this bond. As the contractor pays the tax due on one job, the bond coverage is freed up to allow the contractor to include another job up to the contract amount reduced with proper authorization. Contractor’s Tax Overview v Fall 2013 19

Bond (Tax) Rider (Form 72 -440) Contractor’s Tax Overview v Fall 2013 20

Job Qualification: Issuance of MPC – Material Purchase Certificate � An MPC is issued by the Department of Revenue after a contractor has qualified a project (upon meeting requirements). � The certificate allows the prime or general contractor and its sub-contractors to purchase component building materials and component services exempt from sales or use tax. � Component - becomes an integral part of the structure being erected. � Component does not include equipment, tools, or consumables. � The MPC is job specific. Contractor’s Tax Overview v Fall 2013 21

MPC Number � This number will be shown on the MPC. It will be shown on the list of MPCs issued to the taxpayer in MARS, on the approved MPC application, and if the image is available, it will be on the scanned copy of the MPC application in MDA. � Currently, these certificates are issued with these designations: � MP – Material Purchase Certificate � DR – Oil/Well Driller’s Permit � The MPC number should be indicated by vendors on applicable purchase invoices in the taxpayer’s records. Contractor’s Tax Overview v Fall 2013 22

MPC Number � The MPC number is valid until the job is completed. � The estimated completion date indicated on the MPC application could be extended for a variety of reasons including, but not limited to, rain delays, change orders, etc. � The MPC number can be used for warranty issues up to a year after the completion of the job. Allows contractor & subs to purchase component items exempt, NOT tools, equipment, supplies or consumables. � The MPC allows the contractor and the subcontractors to purchase component items exempt from retail tax, but does not allow exemption for tools, equipment, supplies, or consumables used by the contractor. Contractor’s Tax Overview v Fall 2013 23

MPC – Pre-R 3 Example Contractor’s Tax Overview v Fall 2013 24

MPC Tax Calculation - Formula Contractors can calculate their bid to account for the contractor’s tax with the following formula. � To calculate the contract bid the contractor should submit to the job owner which will account for (include) the contractor’s tax in the bid amount, the contractor should utilize the following formula: � Contract amount (without the contractor’s tax expense) x 1. 0362694 = total contract bid � Example: $100, 000 x 1. 0362694 = $103, 626. 94 total contract bid Contractor’s Tax Overview v Fall 2013 25

MPC Tax Calculation - Formula � Then the contractor would compute the tax to report to DOR by the following calculation: � Total contract x. 035 = contractor’s tax where total contract = total compensation � Example: $103, 626. 94 x. 035 = $3, 626. 94 contractor’s tax � The $103, 626. 94 will be the amount of the job receipt from the owner, and the contractor will tax it at 3. 5% and report $3, 626. 94 to the DOR. Contractor’s Tax Overview v Fall 2013 26

Sales Tax Return (Form 72 -010) � Vendor’s Discount is not applicable on contractor’s tax due. MPC jobs are reported using either tax code 60 or 61, as applicable Taxpayers reporting and accounting for all compensation received in the business can also report non-taxable receipts. Prepaid receipts for which no tax is due (contract did not have change orders increasing the contract amount) would be reflected as deductions in the general sales tax location section under tax code 74 (7% tax code) as sales to MPC holders. Contractor’s Tax Overview v Fall 2013 27

Contractor’s Tax Calculation – Factors to Consider � � Tangible personal property included in the contract should be deducted from the contractor’s tax calculation and taxed at retail (i. e. , 7%) as a separate calculation. This deduction includes items such as, but not limited to, the following: � Church pews � Storage racking systems � Other tangible personal property that is either only bolted in or is free-standing Contractor’s Tax Overview v Fall 2013 28

Contractor’s Tax Calculation – Factors to Consider � Component tangible personal property that is considered to become real property and taxed as part of the contract subject to contractor’s tax includes, but is not limited to, the following: � Commodes � Sinks � Other property which is built into a wall, flushmounted, or hooked up to the plumbing Does not include appliances which are simply hooked up to an electrical or gas lines, such as a commercial type stove – these remain tangible personal property. Contractor’s Tax Overview v Fall 2013 29

Commercial Includes Jobs on Real Property Which Exceed $10, 000, such as the following: � � � Agricultural jobs, such as, but not limited to, barn construction, pond construction, and terracing Apartments and condominiums Churches Dormitories, fraternity and sorority houses Government agencies (any government jobs; i. e. , federal, state, county, city agencies) Contractor’s Tax Overview v Fall 2013 30

Commercial Includes Jobs on Real Property Which Exceed $10, 000, continued � � Hospitals, hotels, military barracks Installation sales of tangible personal property which qualify under MCA § 27 -65 -21 (real property transactions) and according to MCA § 27 -65 -3(k) (installation sales), such as but not limited to, roofing, siding, tile setting, floor covering, and fence installation Nursing or retirement homes, tourist cottages, and other commercial establishments Quad-plexes with common use areas with a common ownership rented to tenants Contractor’s Tax Overview v Fall 2013 31

Commercial Includes Jobs on Real Property Which Exceed $10, 000, continued � Constructing, building, erecting, repairing, grading, excavating, drilling, exploring, testing, or adding to or improving any real property structures with the exception of those activities which are classified as residential � This includes those activities that fall under MCA § 27 -65 -23 (miscellaneous services), such as, but not limited to, air conditioning work, electrical or plumbing work, elevator work, grading or other dirt work, insulation work, tin and sheet metal work, and welding. Contractor’s Tax Overview v Fall 2013 32

Residential Includes, But is Not Limited to, the Following Applications: � � Fishing and hunting camp buildings Homes, including: � Church parsonages � College or University President’s home � � Mobile homes Summer cottages and similar buildings Contractor’s Tax Overview v Fall 2013 33

Non-Taxable Jobs or Activities � � � Construction jobs equal to or less than $10, 000 and not part of a continuous contract which exceeds $10, 000 in the aggregate (however, these may be subject to retail tax if listed in MCA § 27 -65 -23 unless noted for exemption) Design and engineering fees if the total contract price exceeds $100 million Land clearing, grass cutting, and tree trimming when these activities are the main job and not incidental activities Liquidating damages withheld by the owner of the project Snow or debris removal Contractor’s Tax Overview v Fall 2013 34

Non-Taxable Jobs or Activities � Receipts for sub-contract work when an MPC number for the job to be performed was provided by the prime contractor � NOTE: The subcontractor can be held liable for the contractor’s tax due on receipts received from the prime contractor where the prime contractor failed to pay the contractor’s tax due. � Residential construction � NOTE: Purchases of component parts and services listed in MCA § 27 -65 -23 by the residential contractor are taxable at retail and tax is paid to vendor Contractor’s Tax Overview v Fall 2013 35

Casino (Floating Structure) Construction & CCPC � Forms are generally the same as general construction where the casino did not provide a direct pay permit. � All qualified Floating Structure owners are required to obtain both a Direct Pay Permit (DPP) and Casino Construction Permit Certificate (CCPC) where part of the property is water based. � � Law change after Hurricane Katrina in 2005 now allows coastal casinos to build 800 feet inland. MCA § 87 -1 -5 & § 97 -33 -1 The job must be determined to be either water-based, landbased, or a combination of water- and land-based construction where the water-based portion is not clearly identifiable in order to ascertain the correct tax rate application. Contractor’s Tax Overview v Fall 2013 36

Casino (Floating Structure) Construction & CCPC � Water-Based Construction: � � Water-Based and Land-Based Construction: � � The contractor is not required to qualify water-based real property construction activities exceeding $10, 000 because the floating structure owner reports 3. 5% casino tax on all construction activities on its use tax return. The contractor may qualify the total job when the land-based portion and the water-based portion are not clearly identifiable AND the land-based portion of the contract exceeds $10, 000. Land-Based Construction: The contractor is subject to contractor’s tax on the land-based real property. � Examples include, but are not limited to, construction of parking lots, waiting areas, or any other land-based construction. Some casinos are located entirely on land. � Contractor’s Tax Overview v Fall 2013 37

Refineries (RPC) � Qualified refineries obtain an RPC (Refinery Permit Certificate) which allow them to pay taxes on construction activities directly to the state. � Upon receipt of the refinery’s RPC, the contractor is relieved of the duty to collect sales taxes due on sales and services related to manufacturing machinery and of the responsibility to report contractor’s taxes on construction activities performed for the refinery. Contractor’s Tax Overview v Fall 2013 38

Other Tax Implications for Contractors � Use Tax – The contractor must report use tax on any equipment brought into Mississippi for use on the job (tax is due one time) on TAP. � Tax is due on the taxable value of the property at time of service in Mississippi (value cannot be less than 20% of the original cost after a straight-line depreciation has been allowed, similar to a residual value amount). � Tax credit is allowed on the taxable value at time of service in MS up to the amount due MS (Schedule of Equipment for use in Mississippi – Form 72 -335 – TAP ONLY) � A working paper showing the determination of taxable value along with the related tax credits allowed for taxes paid other states should be included in the working papers (utilizing other applicable states’ rates applied to the taxable value). Contractor’s Tax Overview v Fall 2013 39

Other Tax Implications for Contractors, continued � Withholding Tax � Income earned in Mississippi is subject to withholding (income) tax � Job cost detail for jobs performed in Mississippi can indicate specific employees and income received for Mississippi work � Other payroll documentation should be reviewed � Income Tax � Income is required to be reported on a direct accounting basis. Contractor’s Tax Overview v Fall 2013 40

Other Tax Implications for Contractors, continued � Petroleum Tax � Highway rate of tax applies on diesel (special fuel) fuel gallons purchased for motorized equipment (dozers, backhoes, etc. ) which is used on state (or city or county) jobs in Mississippi (generally, non -highway rate is for off-road use) Highway rate due per gallon less the non-highway rate paid per gallon when purchased multiplied by the number of gallons of diesel used on the state job equals the additional tax due. $0. 18 - $0. 0575 = $0. 1225 difference x # of gallons = additional tax due for special fuel (diesel) Generally, if the diesel was purchased at a fuel pump (i. e. , at a gasoline station), the highway rate was already included in the purchase and no additional tax would be due for special fuel tax. � See district management for additional assistance in these circumstances. Contractor’s Tax Overview v Fall 2013 41

Questions or Comments Contractor’s Tax Overview v Fall 2013 42