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In FL, we have no state income tax, so we are able to claim a sales tax deduction on our federal return. The IRS allows you to take a base amount from a table based on your income and then add in further amounts for "major purchases" made during the year. Major purchases can include vehicles, boats, building materials, etc.

We replaced all of the windows in our house in 2006, to the tune of ~$16k. On our contract, a single dollar amount was quoted for the entire job. We called the contractor's office and asked for a breakdown of materials, labor, and tax. The secretary who is handling our request said they don't add tax to their contracts. Huh? What?

Under state (FL) law, they have to collect/pay sales tax when they sell me something, right? I presume that the contract price is simply inclusive of tax, and she was just confused. Maybe they don't add tax on top of the contract, because it's already included in the price? Am I missing something?

If I get a breakdown telling me the actual material cost, should I just work backwards from that number to calculate the tax portion? At the same time, what if they didn't pay sales tax on the sale, even if they were supposed to? BTW, this isn't some fly-by-night contractor. It's a local, well-established company with a stellar reputation.

What would you do in this scenario? If the materials are $12k of the total, the sales tax portion is $680, meaning a difference of ~$175 on my tax bill.
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It depends much on state law. It may be possible that contractor work is not subject to sales tax. I would try to find a Florida state sales tax brochure/explanation on the web and see if you can determine if there may be any exemption.

Perhaps someone more familiar with Florida can clarify too.
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In many states, the sales tax does not apply to real estate improvements; only to sales of personal property.

In some states, repair-type work may or may not be.
In some states, charges for materials are taxable, but labor isn't.

I don't know how FL works. Sorry.

Bill


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I did look into the FL sales tax info, Dept. of Revenue:

http://dor.myflorida.com/dor/taxes/sales_tax.html

Who Must Register to Collect Tax?

--------------------------------------------------------------------------------

Before you open a business in Florida, you must first find out whether your business activity, product use, or consumption will be subject to Florida sales tax. Some government agencies require you to register with the Department of Revenue before they will issue a license.

Here are some examples of business activities, product uses, and consumptions requiring the collection of sales tax or the payment of use tax:

Sales of taxable items at retail.
Repairs or alterations of tangible personal property.
Rentals, leases, or licenses to use real property (for example, commercial office space, mini-warehouses, or short-term living accommodations).
Rental or lease of personal property (for example, vehicles, machinery, equipment, or other goods).
Charges for admission to any place of amusement, sport, or recreation.
Operating private membership clubs that provide recreational or physical fitness facilities.
Manufacturing or producing goods for sale at retail.
Importing goods from any state or foreign country, for sale at retail or for use in the business.
Selling service warranty contracts.
Ordering and using, on a regular basis, mail-order products on which no sales tax was charged.
Operating vending or amusement machines.
Providing taxable services (for example, investigative and crime protection services, interior nonresidential cleaning services, and nonresidential pest control services).

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And, another link (even more on point)
http://www.abcflorida.com/wmspage.cfm?parm1=42

Sales and Use Tax on Building Contractors
The purchase of materials used to improve, alter or repair land, buildings, homes, or other real property is subject to tax. The responsibility for payment of the tax depends on the way material is used or installed and on the type of contract.

Contractors pay tax to their suppliers when purchasing materials used in performing lump sum, cost plus, fixed fee, or guaranteed price for real property contracts. This applies even if the customer is tax exempt such as governmental entities, religious, educational or charitable institutions. These contractors include electrical, plumbing, heating and air conditioning, painting, decorating, ventilating, paper hanging, sheet metal, bridge, road, landscape, and roofing contractors.

If a contractor agrees to sell itemized materials at a per unit price and separately states the charge for labor, the tax is collected only on the materials. The only time a contractor should charge sales tax when real property is being altered or improved, is on an itemized contract. When the customer provides a valid Consumer's Certificate of Exemption, sales tax is not charged. Contractors who itemize contracts are required to obtain a Certificate of Registration (Form DR-11), by completing an Application to Collect Tax in Florida (Form DR-1). The contractor must furnish a resale certificate to the supplier when making purchases for resale.

Use of Materials

Tax is due on the use of goods by the contractor. If sales tax was not paid at the time of purchase, the contractor becomes responsible for the tax.

If a contractor purchases materials from a nonregistered business, the contractor is liable for tax when the materials are imported into this state.

Contractors may manufacture or fabricate a finished product from raw materials for use in a contract. Contractors owe tax on the manufactured cost of such products. For example, a cabinet maker is required to pay tax on the manufactured cost of the cabinet. The tax is computed based on the rate in the county where it was manufactured or fabricated.

If the product is fabricated at the job site, fabrication labor is exempt from tax. Only the cost of the materials is subject to tax.

*******************************************

So, perhaps the contractor paid sales tax to the manufacturer when my windows were ordered. I don't know if that's the same as saying I paid the tax or not. I mean, I did, at least indirectly, but I don't know if that's deductible for me. Hmmmm, this is rather interesting...
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I consulted with my attorney (happens to be my wife) and she turned up the following:

From IRS Pub 600, page 4

c. Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly.

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So, perhaps the contractor paid sales tax to the manufacturer when my windows were ordered.

Given the information you've provided, that's highly likely.

I don't know if that's the same as saying I paid the tax or not.

Apparently, under FL statutes, it is not. The contractor paid the tax, not you.

I mean, I did, at least indirectly, but I don't know if that's deductible for me.

I would say that it is not deductible.

--Peter
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Peter, did you see my last post from IRS Pub 600? I was thinking the same as you, until I read that. In essence, if the contrator purchased materials as my agent, then it is as if I paid the sales tax directly.
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Peter, did you see my last post from IRS Pub 600? I was thinking the same as you, until I read that. In essence, if the contrator purchased materials as my agent, then it is as if I paid the sales tax directly.

I disagree with your analysis because I don't believe the contractor acted as your agent. Did your contract explicitly authorize the contractor to act in your name or did you contract to have him do the job, but purchases were made in his name? Purchases for "use on the jeffbrig job" aren't the same as purchases "by jeffbrig". Perhaps more important, if you were to withhold payment for the windows, who would the window manufacturer go after for payment, the contractor or you?

Ira
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Peter, did you see my last post from IRS Pub 600?

No - we were composing posts at the same time.

And now, having read that, I'm still not certain of the correct answer. But that is because some important facts are missing.

You bolded the conclusion reached. But I'm not sure you considered the condition necessary to reach that conclusion. Let's repeat it:
The contract must state that the contractor is authorized to act in your name ...

So did your contract with the contractor contain such a provision? If not, you cannot reach the conclusion that follows.

--Peter
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You may be right, IRA. I'm going to defer to the attorney in the family on this one so I don't screw anything up. She's the expert on contracts and agent relationships, and she's going to look over the contract tonight.

Thanks (again) for the sanity check.
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jeffbrig: "I consulted with my attorney (happens to be my wife) and she turned up the following:

From IRS Pub 600, page 4

c. Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly."


I doubt that very many construction contacts satisfy either of the conditions that I bolded for emphasis.

Possibly some standard Florida form construction contract does, but certainly standard AIA contracts do not.

AIA A-107 - 8.2.1 in part --- "The Contractor shall supervise and direct the Work, using the Contractor's best skill and attention. The Contractor shall be solely responsible for and have control over construction means, methods, techniques, sequences and procedures, and for coordinating all portions of the Work under the Contract, unless the Contract Documents give other specific instructions concerning these matters."

And the second condition would more or less make holding the contractor liable for anyting very difficult because it would a huge excuse for the contractor punting all difficult construction decisions to the owner and what court would ever find against a contractor who followed the owners instructions when the contractor was leally obligagted to follow the owner's directions on consgtruction decisions?

This post is not legal advice.

Regards, JAFO

Disclaimer

Yes, I am a lawyer, BUT THIS IS NOT LEGAL ADVICE; it is only general information. NO CLIENT RELATIONSHIP IS INTENDED TO BE CREATED, NOR IS ANY SUCH RELATIONSHIP SO CREATED. FOR SPECIFIC LEGAL ADVICE YOU SHOULD TALK TO A LAWYER IN YOUR AREA.








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DW tells me that under FL law, a contractor is not legally an agent of the client, regardless of the language of the contract. Her firm does a lot of construction litigation, and this opinion was confirmed by one of the partners she works closely with.

On the other hand, she spoke with a local accountant (the father of one of the other attorneys), and he said this question has come up a few times. He said its very common for people to take the sales tax deduction in this scenario, even if the contractor paid the sales tax for the materials. He suggested we go ahead and claim it. I'm not sure to what extent he's trying to trying to gauge the "intent" of the rule vs. the true legal definition.

I have another good friend from college who is an accountant, and I think I'm going to solicit his opinon before I wrap up this year's taxes.

At the moment, I am leaning towards skipping this deduction, just to play it safe.
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He suggested we go ahead and claim it. I'm not sure to what extent he's trying to trying to gauge the "intent" of the rule vs. the true legal definition.

I'd suggest he's probably thinking more along the lines of "its only a problem if you get caught". He wouldn't be the first, nor the last, to think like that. But then you are submitting a false return, even if you're okay with it.


At the moment, I am leaning towards skipping this deduction, just to play it safe.

Unless you learn something new, that sounds like the right answer.
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Let me try a practical example, from my own experience.

A few years ago, we did some remodeling on our house. Part of the job consisted of replacing a window and sliding glass door. We picked out the items from a catalog, then the contractor went to his supply house and ordered the window and door. He came back with an invoice from the supply house and asked us to pay them directly. (Which is not a bad idea, as it limits exposure to mechanic's leins.) The invoice had our name on it, not the contractor's.

In that setting, I would not hesitate about deducting the sales tax.

--Peter
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