This bulletin will serve as MITA’s annual reminder to our contractor members of the issue of tax liability on construction materials that are being incorporated in projects of tax-exempt owners. Contractors performing work for public agencies, nonprofits, churches and schools are often faced with this precarious issue.
Many of these owners believe that their tax-exempt status allows them to purchase the materials that will be incorporated in their construction projects tax free, thus saving money for those represented by that owner. However, unless those owners are performing the work of installing the materials on the project themselves, this belief is misguided and completely false.
As a contractor installing these “owner perceived tax free” materials, you will bear the full responsibility of the use and sales tax that is due once the project is completed. A contractor need not purchase or own the materials being incorporated in a project to incur a use tax liability. Use tax is due in situations where the contractor receives the materials from its customer when the customer has purchased the materials without the payment of sales or use tax. So beware, because this issue often doesn’t arise until after you have closed out the job and final payment has been made.
In order to avoid any confusion or financial hardship, please do not hesitate to share this bulletin with owners that seem to believe otherwise on this issue. Contractors should convey the fact that their quantity discount is likely a better buy than any single purchase price that an owner could ever hope to get.
Sales Tax on Delivery Charges
To view MITA’s January 2018, bulletin about “Sales Tax Treatment for Delivery Provided by Retailers” click here.
In late 2019, MITA and the Michigan Aggregate Association (MAA) learned that a co-member had received an adverse Michigan Department of Treasury (Treasury) tax audit finding that subjected them to thousands of dollars of potential tax liability on delivery services they had provided. Upon investigation, MITA and MAA learned that the member was in fact, following the guidance of MITA’s January 2018 bulletin,Sales Tax Treatment for Delivery Provided by Retailers, and identical guidance issued by MAA.
In a subsequent meeting with Treasury, the Treasury representatives did acknowledge that the MITA and MAA guidance was not wrong or incorrect, but that there are various factors Treasury will consider in determining whether delivery charges are taxable or not, and that none of the factors individually or in combination with others conclusively determines the taxability of delivery charges. Unfortunately, what we have learned is that the Treasury auditors have significant latitude and discretion in how they apply these factors from audit to audit.
In an effort to fine tune and provide more tailored guidance to our memberships, MITA and MAA enlisted the assistance and expertise of Martin and Michael Leavitt, of the Law Offices of Sullivan and Leavitt, and counsel to the Aggregate Carriers of Michigan, Inc.
The Leavitt’s supplemental guidance (addressed to MAA since primarily MAA issue) to the previously issued MITA and MAA guidance on sales tax on delivery charges, can be found by clicking here.