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TAX SUBJECT |
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ISSUE |
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SOLUTION |
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Contracting
Methods
Process tanks like
these may be furnished and installed by a mechanical
contractor. Sales/use taxes range from 4% to 10% of material
costs. If these costs are avoidable, isn't it wise to perform
tax planning to reduce these costs?
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Most states designate the contractor
as the consumer and require it to pay these taxes. Suppliers
are prohibited in a considerable number of states from selling
materials to a contractor free of tax. Unless contracting and
tax administration practices are in place at the inception of
the project, avoidable taxes will be paid by mechanical,
electrical, HVAC, and other contractors to suppliers. Recovery
of these taxes is difficult and costly. |
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Alternatives in the form of
agreements with state revenue agencies to allow the owner to
pay the taxes should be explored. Another option is for the
owner to declare the contractor as its agent for the purpose
of purchasing exempt materials. While this may be complicated
and bear other risks to be considered, millions of dollars in
taxes can be avoided. For example a paper manufacturer avoided
payment of more than $5 million using an agency agreement.
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Labor and
Services
A concrete
finisher at work. Sloppy procurement could cost taxes on his
labor!
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Contracted labor and services are
exempt in many states. Fabrication labor is taxable in many of
these states. Considerable care must be taken during the
contracting process to prevent costly confusion as to the type
of service performed. |
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On-site contractors can provide
exempt services which might be otherwise taxable as
fabrication had the constructed component been purchased from
an outside vendor as a fabricated unit. Careful structuring of
one contract saved a forest products manufacturer more than
$350 thousand on a large project.
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Taxable vs.
Exempt?
Steam piping is
frequently exempt if the steam is used in the manufacturing
process. Such piping is typically taxable if the use is
building heating.
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An industrial project is comprised
of thousands of purchases. Accurately paying sales/use tax is
difficult, with varying rules for equipment, construction
materials (including piping), systems, and facilities. Without
a tax guide to direct purchasing and accounts payable,
substantial errors occur. Unnecessary tax payments are likely. |
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A CRW client engaged the firm to
evaluate tax issues for its $130 million project, establish
tax accounting procedures, and to provide a comprehensive tax
manual to facilitate tax administration. The system provided a
nearly complete solution to the project's tax administration
needs. |
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Tax
Increases
A tax increase
during the construction of this facility would certainly hurt!
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Many taxing jurisdictions provide
protections to contractors from unanticipated tax increases
which may be enacted after the contracting phase. For a major
project the savings can be significant. It is important for
tax managers or project auditors to understand these
provisions. |
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The project auditor recognized that
the State of Georgia provides protection from tax increases.
It was confirmed that the existing general contract was
sufficient to protect the project from rate increases. The
project was protected from two rate increases, resulting in
savings of more than $325,000. |
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Project Tax Accounting Systems
Inadequate systems
are a chasm to which recoverable taxes are lost! |
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The tax accounting systems are often
overlooked at the start of a project. If the owners and/or
contractor's systems are inadequate to track taxes, unforeseen
cost overruns will occur due to the unanticipated costs of tax
and it may become difficult to secure refunds. |
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A new company CFO engaged CRW to
restate the tax accounting for several projects of $5 million
to $35 million. As a result , net tax recoveries of more than
$295,000 were secured. |
Reviewing the project scope to identify work which is eligible for
sales and use tax exemptions, beneficial property tax accounting
methods, revenue bond financing, or accelerated tax depreciation.