Subpart 1.
General rule.
Under Minnesota Statutes, section
297A.61, subdivision
4, paragraph (d), sales of building materials, supplies, and equipment to
owners, contractors, subcontractors, or builders constitute retail sales and
are thus taxable.
A. The term
"building materials, supplies, and equipment," as used in these rules, refers
to property intended to become part of a new building, structure, road or an
addition, repair, improvement, or alteration to roads or real estate. A partial
list of such materials includes gravel, blacktop, bricks, cement, steel beams
and rods, electrical supplies, glass, woodwork, paint and paint supplies, pipes
and valves, aluminum sheathing, wood and composition sheathing, lumber,
plastics, roofing, and wallboards. Other property usually incorporated into a
building or other types of real property includes lighting fixtures, plumbing
and bathroom fixtures, furnaces, boilers and heating units for space heating,
prefabricated cabinets, and central air conditioning units (for space
cooling).
B. The term "real
property" includes structures that are permanently affixed to real estate, such
as buildings, fixtures, machinery, fences, railroad tracks, grain elevators,
bridges, storage bins, silos, outdoor advertising signs, and
billboards.
C. Other types of
equipment may be incorporated into a new structure or added to an existing
structure undergoing repairs, alterations, or improvements in order to enhance
the attractiveness of the structure or to increase its rental or sales value.
Examples of such equipment are built-in dishwashers, stoves and ranges, garbage
disposal units, and air-conditioners installed in openings in outer
walls.
Subp. 2.
Contractors and construction activities.
Contractors are generally classified into two broad groups:
general contractors and subcontractors.
A. A "general contractor" is a person who
contracts to furnish the necessary materials and labor for the performance of a
construction contract, and generally is one who contracts to build the entire
project or a major portion thereof, or who contracts to install special
building equipment, or who repairs or remodels a limited area in a structure at
a price that includes machinery, equipment, and installation charges. The
person for whom the general contractor performs the work is generally the
owner.
B. A "subcontractor" is a
person who contracts to furnish the necessary materials and labor for the
completion of a portion of the general construction contract at the job site.
The subcontractor ordinarily contracts with the general contractor to perform a
certain part of the work which the general contractor has undertaken to perform
under the general construction contract.
C. The terms "contractor" and "subcontractor"
are not applicable to persons who merely sell tangible personal property in the
form of building materials, supplies, or equipment to construction contractors,
for delivery at the job site without any requirement that they install such
tangible personal property.
D. The
term "construction contract" as used herein refers to a contract under the
terms of which a contractor agrees to perform construction activities resulting
in an alteration, repair, or improvement of real property. Where machinery or
equipment is attached to real property in such a manner and with the intent
that it becomes a nontemporary accession to the real property, the contract
pursuant to which it is attached shall be regarded as a "construction
contract." Any attachment of property by or for a lessor thereof to realty not
owned by the lessor where the lessor retains title and ownership of the
property shall be considered a temporary accession to the real property and
such property therefore retains its character as tangible personal property.
The term "construction contract" shall not include any
contract for a sale of machinery or equipment which the seller, pursuant to the
contract, will attach to or install upon real property if:
(1) the machinery or equipment is of such
size and installed in such a manner that it retains its character as personal
property; or
(2) the purchaser is
not the owner of the real property to which the property will be attached, and
the machinery or equipment can be removed without material injury to the
realty; or
(3) the title to the
machinery or equipment passes from the seller to the purchaser prior to
attachment to or installation on the real property.
E. Such construction activities do not
include the sale and installation of an appliance, machinery, equipment, or
other item of tangible personal property in such a manner as not to become a
permanent part of the real estate. Computers shall be considered to retain
their classification and identification as personal property when installed
because of such factors as industry standards, custom and practice, usage, and
uniqueness. Where a fixed price or lump sum construction contract provides for
the incidental transfer of certain tangible personal property and the
contractor sells such items only as a part of the construction project, the
contractor is not regarded as a retailer provided that such personal property
comprises an insubstantial portion of the total contract price.
Example 1. A dealer agrees to replace the old refrigerators
with new models in a four-unit dwelling. The sale and installation of the
refrigerators does not constitute a construction contract. The transaction
represents a sale at retail to the owner of the four-unit dwelling.
Example 2. A computer manufacturer sells and leases computers
and also installs them on the customer's property. The sale or lease of a
computer, regardless of size, is a sale or lease of tangible personal property
and the installation does not constitute a construction contract.
Example 3. A leasing company purchases a piece of equipment
from company A and leases it to company B. Company A installs the equipment on
the property of company B. The sale and installation of the equipment does not
constitute a construction contract, since the owner of the equipment is not the
same as the owner of the property to which the equipment was installed. The
equipment is considered to be tangible personal property and the leasing
company purchases the property exempt for resale and collects the sales tax on
the lease payments from company B.
Subp. 3.
Construction contracts with
exempt entities.
For construction contracts with exempt entities:
A. The exemption from the tax on the sale of
tangible personal property to the United States, as well as to corporations and
other institutions exempt under Minnesota Statutes, sections
297A.67 to
297A.71,
does not extend to building materials, supplies, and equipment purchased by a
contractor under an agreement to erect a building or to alter, repair, or
improve real estate for such exempt entity unless the sale is specifically
exempted under section
297A.71.
However, purchases of such building materials, supplies, and equipment by
exempt entities are exempt from the sales and use tax.
Example. A school district enters into a contract with a
contractor for school construction. The contractor purchases materials for this
job from various suppliers. The construction is clearly an alteration or
improvement to real property with material purchased by the contractor for use
in constructing the school. These transactions constitute retail sales and are
subject to the sales tax. Had the school district purchased the materials
directly, the purchase of the materials by the school district would have been
exempt.
B. If an exempt
entity has entered into a fixed price construction contract which covers the
complete structure including the materials, and the exempt entity furnishes
some or all of the materials to the contractor for a credit against the
contract price, a taxable sale occurs when the exempt entity transfers the
materials to the contractor.
Example. A school district enters into a contract with a
contractor for the construction of a school building. The contractor not only
specified the price at which the contractor agreed to deliver the completed
school, but made known to the school district the portion of the total cost of
construction allocated to building materials and supplies. In addition, the
contractor furnished the school district with the names of the several
suppliers and the descriptions and price of each item or items furnished by
each of such suppliers. Thereafter, the school district purchased the specified
items at the price furnished by the contractor and made payments from its own
funds to the suppliers. The material and supplies so purchased were thereafter
delivered to the contractor and, in return, the school district received credit
against the contract price for the payments made by it.
Although the initial purchase of the material and supplies by
the school district is exempt, the transfer to the contractor is a transfer of
title or possession and taxable as such for the following reason: the
contractor has agreed to deliver a completed structure which necessarily
includes the materials; during construction of the building the materials will
be in the possession of the contractor, who bears the risk of any loss of such
materials during construction; and a portion of the contract price is
correspondingly reduced by the cost of the materials paid to the supplier by
the school district.
C. The
transfer of building materials by an exempt entity to its contractor for use in
connection with a contract for the erection, alteration, repair, or improvement
of realty is not deemed a retail sale (and is thus exempt from the sales or use
tax) provided:
(1) the contract is for labor
only;
(2) all incidents of
ownership to the building materials remain in the exempt entity at all
times;
(3) the contractor bears no
responsibility for inherent defects in the building materials; and
(4) the contractor bears no risk of loss of
any of the building materials.
D. An exempt entity, in addition to
contracting with a contractor for the erection of a building or the alteration
or repair of real estate, may appoint and designate the contractor as
purchasing agent for such exempt entity in connection with the construction
contract. In such situations the department will recognize the agency
relationship asserted only if the written contract clearly sets forth:
(1) that such appointment has been
made;
(2) that title to all
materials and supplies purchased pursuant to such appointment shall immediately
vest in the owner or principal at point of delivery;
(3) that the risk of loss with respect to
such materials and supplies is that of the owner or principal; and
(4) that the owner or principal, and not the
agent, shall have responsibility for all defective materials and supplies,
including those incorporated into realty purchased in such manner.
In the event that the contract in question does not specify
as to risk of loss, other competent evidence, such as insurance coverage, will
suffice.
Any contractor who has been appointed agent for the purchase
of materials and supplies, as specified above, shall furnish adequate
notification to all vendors and suppliers of such agency relationship and shall
make it clear to such vendors that the obligation for payment is that of the
owner and not the contractor-agent. All purchase orders and other documents
furnished to the vendor shall clearly reflect the agency relationship.
Subp. 4.
Contractor-retailer.
A "contractor-retailer" is a person using building materials,
supplies, and equipment in the performance of construction contracts, and in
addition, is engaged in making retail sales of building materials, supplies,
and equipment.
A. A sale by a
contractor-retailer of building supplies, materials, and equipment which sales
does not provide for installation of the merchandise sold is a sales at
retail.
B. A sale by a
contractor-retailer of building supplies, materials, and equipment which sale
provides for installation of the merchandise is a construction contract and tax
shall be paid by the contractor-retailer based upon the cost of materials. Two
separate contracts executed contemporaneously by a contractor-retailer
providing individually for the sale and installation of building materials,
supplies, and equipment shall be considered to be a single unified construction
contract if that was the intent of the parties as evidenced by their actions. A
contractor-retailer who enters into a construction contract with an exempt
entity shall pay tax based upon the cost of materials.
C. A contractor-retailer sells property under
both of the following two circumstances.
(1)
When certain property is sold without providing for installation, the sale
constitutes a sale at retail. For example, the sale by a plumbing contractor of
a water heater without installation is a sale at retail.
(2) When a contractor-retailer sells certain
property either installed or without installation, at the purchasers' option,
and such property is sold with installation which causes it to become
incorporated as a part of the realty, that sale shall be regarded as a
construction contract and tax shall be paid by the contractor-retailer upon the
cost of materials. For the purposes of such a transaction, retailer is deemed
to be contractor and the purchase of the supplies and equipment used in
installing the property constitutes a retail sale to the contractor.
D. Persons primarily engaged in
the making of retail sales of building materials, supplies, and equipment used
in construction, alteration, repair, or improvement of real property, and who
are also engaged as contractors in building, altering, repairing, or improving
real property, shall report and pay their sales or use tax liability in
accordance with the following.
(1) If at the
time such person makes a purchase of specific items and knows of the use to
which such items are to be put, the person shall either:
(a) furnish an exemption certificate if such
items are being acquired for the purpose of resale; or
(b) pay the sales tax to the seller if the
items in question are to be used by such person in the construction,
alteration, repair, or improvement of real property.
(2) If at the time such person makes a
purchase of certain items but does not know the precise utilization of such
items, and if business activities during the prior calendar year reflect that
50 percent or less of such purchases were sold at retail, then the person shall
pay the sales tax to the supplier on all such purchases. If the person later
sells any of such items at retail, he or she may take a proper deduction on the
sales and use tax return.
(3) If
the person's business activities during the prior calendar year reflect that
more than 50 percent of such purchases were sold at retail, he or she may use a
fully completed resale exemption certificate for the purchase of all such
items.
E. The accounting
records of a contractor-retailer must clearly reflect the use made of items
purchased for both the preceding and current calendar year. These records must
be in such form that the commissioner may determine readily that the proper
sales and use tax liability is being reported and paid.
Example 1. In March, a contractor-retailer purchased ten
bathtubs at $150 each and 20 bathroom sinks at $40 each. As primarily a
contractor, the contractor-retailer paid the sales tax due. During this same
month, the contractor-retailer sold at retail two bathtubs at $200 each and
five bathroom sinks at $55 each. The contractor-retailer reports gross receipts
from retail sales of $675. The sales tax due and owing from the
contractor-retailer is $43.88 (6.5 percent of $675). Since the
contractor-retailer is entitled to offset the tax paid on the property sold at
retail, the following calculation is made for the sales and use tax reported
for the month of March:
Gross sales |
$ 675.00 |
|
Deductions |
$ 500.00 |
|
|
_____ |
|
Net sales |
$ 175.00 |
|
Purchases subject to use tax |
$ -0- |
|
Total taxable amount |
$ 175.00 |
|
Total tax due |
$ 11.38 |
|
Deductions are calculated as follows:
Cost of goods sold: |
|
|
|
|
|
2 bathtubs at $150.00 each |
$ 300.00 |
|
5 bathroom sinks at $40.00 each |
$ 200.00 |
|
|
_____ |
|
Total cost of goods sold |
$ 500.00 |
|
Example 2. A contractor-retailer purchased ten bathtubs at
$150 each and 20 bathroom sinks at $40 each. Being primarily a retailer, the
contractor-retailer paid no tax at time of purchase, but gave the supplier an
exemption certificate. Thereafter, in March, the contractor-retailer sold at
retail two bathtubs at $200 each and five bathroom sinks at $55 each. In
addition, the contractor-retailer utilized three bathtubs and six bathroom
sinks in contracting activities. The contractor-retailer makes the following
calculation for the sales and use tax reported for the month of March (for
purposes of this example, it is assumed that in March no other sales were made
at retail and no other material, etc., were used in contracting
activities):
Gross sales |
$ 675.00 |
|
Deductions |
$ -0- |
|
|
_____ |
|
Net sales |
$ 675.00 |
|
Purchases subject to use tax* |
$ 690.00 |
|
|
_____ |
|
Total taxable amount |
$ 1,365.00 |
|
Total tax due |
$ 88.73 |
|
*The amount subject to use tax is calculated as
follows:
3 bathtubs purchased at $150 each |
$ 450.00 |
|
6 bathroom sinks purchased at $40 each |
$ 240.00 |
|
|
_____ |
|
Total |
$ 690.00 |
|
Subp.
5. [Repealed,
L
2005 c 151 art 7
s
23]
Subp.
6. [Repealed,
L
2005 c 151 art 7
s
23]