Notice to Construction Industry: Obligation of Sub-Contractor to Collect Sales Tax for Taxable Capital Improvements in the Performance of Multi-Trade Construction Contracts

by Sukhvir Boparai, CPA

As you already know, as of October 1, 2006, certain landscaping services, installation of carpeting and other flooring, installation of security and burglar and fire alarm systems became taxable capital improvement services under the State of New Jersey Tax Code N.J.A.C., 18:24-5.6(b)(2).

The State of New Jersey at that time also waived the requirement to separately state the sales tax on the invoices. However, the State of New Jersey has rescinded its waiver effective December 1, 2008.

Effective December 1, 2008, the State of New Jersey requires that any contractor or subcontractor performing a taxable capital improvement is required to separately state and collect the sales tax from the person that they are performing the service for, regardless of whether such person is a contractor as in the multi-trade contract or the property owner.

For example: XYZ Real Estate Developer is constructing a home to sell to the public. XYZ Real Estate Developer hires PC Prime Contractor. PC Prime Contractor hires ABC Landscaper as a subcontractor to perform taxable landscaping services. ABC Landscaper pays $1,000 for new shrubs, plus $70 in sales tax. The bill to PC Prime Contractor from ABC Landscaper is as follows:

ABC Landscaper collects and remits sales tax in the amount of $140 on the taxable labor charge from PC Prime Contractor; the actual cost of the materials ($1,070) is not taxable to PC Prime Contractor. The amount charged by PC Prime Contractor to XYZ Developer is not taxable.

If the subcontractor is a floor covering dealer (maintains a retail store with inventory that was purchased for resale), in addition to collecting sales tax on the taxable flooring installation charge, the subcontractor is required to collect tax from the prime contractor on the charges for the floor covering materials.

Therefore, we suggest that you establish a procedure to review your invoices submitted by the subcontractor, to avoid any future complications with the State of New Jersey regarding collection and submission of the sales tax.

If you receive an invoice from a subcontractor without the sales tax separately stated, you will be held responsible to pay sales tax at seven percent on the entire invoice amount to the State.

Should you have any questions, please do not hesitate to contact our office.