Determining and collecting sales tax can be complicated and time consuming – not to mention the recording and reporting that must be done. Making mistakes at any point in the process means that proper business practices are no longer being followed; mistakes can also cause major problems during a sales tax audit. (We know of at least two integrators going through an audit right now – they eat up massive amounts of time and resources.)
We’ve outlined five things that every integrator needs to know about sales tax. By following these five rules, you ensure that your business is handling sales tax the correct way. And, if an audit ever occurs, your business will be ready – and in compliance.
1. Your Organization is a Contractor
While you consider your organization to be a systems integrator or technology solutions provider, the IRS considers you to be a contractor. In almost every instance, this means that your business should follow contracting laws for the collection and remittance of use and sales tax.
An integrator’s work generally involves purchasing tangible property, assembling a portion of it at the shop, installing the remainder of the system (often using wiring that will never be removed), and then transferring system ownership as real property as we turn the technology or system over to the owner of the facility. To the IRS, that process is contracting.
2. Different States Have Different Tax Treatment
Our industry uses subcontractors and outsourced labor providers quite frequently. When this happens, it’s very important to know in which state(s) materials are purchased and work is performed – both for your organization and your subcontractors/outsourced labor.
Several states have different tax treatments for pass-through or exemption of sales tax from subcontractors. If your subcontractor doesn’t pay its taxes properly, you’re not off the hook if you’re audited.
3. Labor Isn’t Always Exempt
Even in states where we think labor is exempt, there are situations where tax should be billed on materials and labor. Where the services are performed – onsite or in your shop – can modify the sales tax process. Case in point: When equipment racks are assembled in your shop and then shipped as a complete assembly to another state (which happens quite often), then tax should be billed on materials and labor.
In most states, managed service providers may need to charge sales tax on services to tangible products (states also treat this differently).
4. Know How Customers Treat the Systems
Are your customers treating their technology systems as capital improvements or tangible assets? If they claim an exemption – or if they don’t – it can impact you during a sales tax audit. Be sure to obtain an exemption certificate if the customer claims exemption, and ensure that it is properly completed.
The majority of systems are now considered building systems or “key building systems,” and become a part of the tangible building property. Yet, as we move into the wireless domain, making systems more transferable between locations, the exemptions disappear. The IRS only cares whether or not the exemption was taken. It doesn’t care if you state that it’s the “owner’s responsibility to pay any applicable taxes.”
Questions often arise about the taxation of licenses and fees for system usage as well. When customers rent systems from you, those leases require you to know which state the end user is in.
5. Don’t Submit a Proposal without Knowing Sales Tax
Make sure your sales team knows exactly how to handle sales tax prior to submitting a proposal. The IRS doesn’t acknowledge or show compassion toward the “plus any applicable sales tax” argument. That won’t stand up in an audit; all the IRS wants to know is whether you collected and remitted sales tax per the local, state, and federal tax codes. Placing responsibility on the building owner or end user and hoping for the best is risky business.
We encourage all of our members to follow appropriate business practices when it comes to sales tax. We also hope that none of our members ever have to go through a sales tax audit; they’re extremely time consuming. The best advice we can offer is to educate your sales and accounting teams on these issues, and treat sales tax on every invoice as if you will be audited.
NSCA also has some good case laws and best practices to share if you find yourself in an audit situation. Just let us know. -Chuck Wilson, NSCA Executive Director
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