Iowa Administrative Code › Agency 701 - Revenue Department › Title III - Sales, Use, and Excise Tax › Chapter 219 - Sales and Use Tax on Construction Activities › Rule 701-219.4 - Contractors, Subcontractors or Builders Who Are Retailers

Current through Register Vol. 47, No. 3, July 24, 2024
In some instances, contractors, subcontractors and builders
				  are in a dual business which includes reselling to the general public on a
				  recurring "over-the-counter" basis the same type of building materials and
				  supplies which are used by the contractors, subcontractors and builders in
				  their own construction work. A person operating in such a manner is referred to
				  in this rule as a contractor-retailer Any person who is engaged in the
				  performance of construction contracts and who also sells building materials or
				  other items at retail is obligated to examine the person's business and
				  determine if it is that of a contractor or a contractor-retailer A sale by a
				  contractor-retailer of building materials, supplies and equipment which does
				  not provide for installation of the merchandise sold is considered a retail
				  sale and subject to sales tax. Conversely, a sale by a contractor-retailer of
				  building supplies, materials and equipment which provides for installation of
				  the merchandise is considered a construction contract and tax shall be paid by
				  the contractor-retailer based upon the cost of materials at the time the
				  materials are withdrawn from inventory for use in a construction contract
				  performed in Iowa. When a contractor-retailer does repair work, the
				  contractor-retailer is acting as a retailer and not a contractor and must
				  collect tax on the sales price charged for materials used in the repair and on
				  the sales price charged for any labor used in the repair which is a taxable
				  service or on the entire charge if materials and labor are not separately
				  invoiced. Reference rule
				  701-1831.
				  (422,423) and rule 219.13(423).
The following is a list of the characteristics of the usual
				  contractor-retailer:
1. A
				contractor-retailer is a business which makes frequent retail sales to the
				public or to other contractors and also engages in the performance of
				construction contracts (see rule 219.8(423)). In determining whether a business
				is a contractor-retailer or a retailer only, the department looks to the
				totality of business activity and not only to one portion of the business's
				activity. Thus, the maintenance of a small retail outlet does not automatically
				transform a contractor-retailer into a retailer, and a large number of retail
				sales without a retail outlet can qualify a business as a
				contractor-retailer
2. A business
				cannot claim the status of a contractor-retailer unless the business is in
				possession of a valid sales tax permit to report tax due from retail sales and
				from withdrawals of materials or supplies from inventory for use in
				construction contracts.
3. A
				contractor-retailer must purchase building materials, supplies, and equipment
				placed in its inventory for resale; the contractor-retailer should not pay
				sales or use tax to its suppliers for these items. Instead, the
				contractor-retailer should provide suppliers with valid resale exemption
				certificates. When a valid certificate is furnished, the vendor is relieved
				from the responsibility of collecting the tax if the purchaser has demonstrated
				that the purchaser is a contractor-retailer under the provisions of this rule.
				Reference rule
				701-153.
				(422,423) and rule 219.19(423) for a detailed explanation of this
				matter
4. A contractor-retailer
				purchasing construction material which will not be placed in its inventory must
				purchase that material subject to Iowa sales or use tax. For example, if a
				contractor-retailer purchases wet concrete for use in a construction project,
				that purchase is taxable.
5. A
				contractor-retailer usually has a retail outlet, but if not, frequent sales to
				individuals or other contractors qualify a business as a
				contractor-retailer
6.
				Contractor-retailers do not pay tax on materials withdrawn from inventory for
				use in construction projects performed outside Iowa. See 2005 Iowa Code
				subsection
				4232(1).
"b."
The business records of a contractor-retailer must clearly
				  reflect the use made of items purchased, and the records must be in such form
				  that the director can readily determine that the proper sales and use tax
				  liability is being reported and paid.
The following examples are offered to illustrate the
				  responsibility for paying and remitting sales tax under this rule:
EXAMPLE 1. ABC company operates a retail outlet that sells
				  lumber and other building materials and supplies. ABC company is also a
				  contractor which builds residential and commercial structures. ABC company
				  would be considered a contractor-retailer and would, therefore, purchase all
				  inventory items for resale. Those items which are used in the performance of a
				  construction contract would be subject to tax in the period that they are
				  withdrawn from inventory. The tax would be computed on the cost of the items
				  withdrawn from inventory. Those items which are sold over the counter in the
				  retail outlets would be subject to tax at the time of sale. The tax would be
				  computed on the over-the-counter sales price.
EXAMPLE 2. EFG company is a mechanical contractor and has no
				  retail outlets. EFG company rarely sells any of its inventory to other persons
				  or to other contractors. EFG company would not be considered a
				  contractor-retailer under this rule. However, EFG company would be considered a
				  contractor and must pay tax to its vendor at the time it purchases any building
				  materials, supplies and equipment. However, on those rare occasions when an
				  inventory item is sold to another person or to another contractor, tax must be
				  collected at the time of sale; therefore, EFG company should have a sales tax
				  permit. An adjustment can be made to the sales tax report by taking a credit
				  for tax previously paid on the item sold.
EXAMPLE 3. Home Town Construction company is owned and
				  operated by two individuals in a rural Iowa farming community. They do not have
				  a retail outlet but they frequently make sales of building materials which are
				  in their inventory to local residents. Home Town Construction company would be
				  a contractor-retailer and could purchase all inventory items for resale. Those
				  items which are used in the performance of a construction contract would be
				  subject to tax in the period they are withdrawn from inventory. The tax would
				  be computed on the cost of the items withdrawn from inventory. Those items
				  which are sold to residents would be subject to the tax at the time of sale.
				  The tax would be computed on the sales price of the items.
EXAMPLE 4. Down Home Construction company is operated by two
				  individuals in a rural Iowa farming community. They do not have a retail outlet
				  and rarely make sales of building materials from their inventory to local
				  residents. Down Home Construction company would not be considered a
				  contractor-retailer under this rule. Rather, Down Home Construction company
				  would be considered a contractor and must pay tax to its vendor at the time it
				  purchases any building materials, supplies and equipment. When sales are made
				  to local residents, tax must be collected at the time of sale; therefore, Down
				  Home Construction company should have a sales tax permit. However, Down Home
				  Construction company can adjust its sales tax report by taking a credit for tax
				  paid to its vendor on an item sold to a local resident.
EXAMPLE 5. In town Home Construction company places modular
				  homes on slabs or basement foundations; makes electrical, plumbing and other
				  connections; and otherwise prepares the modular homes for sale as real estate.
				  In town also has a sales tax permit, maintains an inventory of modular homes
				  for sale, and sells homes from the inventory as tangible personal property to
				  owners who later convert the property to real estate. In town is a
				  contractor-retailer and is obligated to pay or collect sales tax, respectively,
				  at the time a modular home is withdrawn from inventory for use as material in a
				  construction contract or at the time a modular home is withdrawn from inventory
				  for sale to an owner See rule 701-231.11(423) for an explanation of the basis
				  on which tax is computed.
EXAMPLE 6. Smith's Plumbing has a retail store in Davenport,
				  but it also installs plumbing fixtures and lines in new construction and
				  remodeling projects. Plumbing supplies that are taken from an inventory in
				  Davenport for a new home being built in Rock Island, Illinois, are withdrawn
				  exempt from Iowa sales tax because the construction contract is performed
				  outside Iowa. However, those supplies may be subject to Illinois sales or use
				  tax.