Unless your business only operates in the five states that do not impose sales and use tax, you are likely aware of the significant impact that it can have on your business.
For those in the sign industry, interpreting application of sales and use tax laws, regulations, and administrative tax guidance can result in a migraine.
Due to ambiguous laws and regulations, taxpayers frequently rely on a patchwork of informal guidance scattered on the Internet that is often too vague to draw a conclusion. Failing to collect sales tax often leaves the seller unpleasantly exposed to tax liability.
Deciding whether to charge your customer sales tax is fraught with risk and should be undertaken with very careful consideration.
Charging sales tax incorrectly or inaccurately may put a business at a competitive disadvantage as well as expose it to a legal liability through class action lawsuits, qui tam actions, and tax assessments.
Similarly a failure to properly accrue and remit use tax on taxable purchases may also result in a tax liability.
This article provides a general overview of potential issues businesses in the sign industry may encounter and recommends that businesses review their sales and use tax function annually to stay compliant with the law.
General Taxability Concepts
In order to make a correct taxability determination, sellers should evaluate relevant tax definitions, the terms of the contract, how the sign is going to be installed and utilized, how the invoice reflects the charge for the sign and any labor, as well as the tax status of their customer (i.e., nonprofit or for profit).
In most states, sales tax applies to the sales of “tangible personal property” and certain enumerated services. Tangible personal property generally means personal property that can be seen, weighed, measured, felt, or touched or that is in any manner perceptible to the senses.
The taxability determination may change to the extent that a sign is going to be incorporated into a real property, which is not subject to sales tax. Real property is commonly defined as fixed property that is attached to land. With respect to the sale of interior and exterior signage, the line is often blurred between what constitutes real property and tangible personal property.
Some states require that tangible personal property be “permanently affixed” to real estate in order to become real property. In this case, the seller of such property is not obligated to collect sales tax from the purchaser. However the seller is required to pay sales or use tax on the cost price of the materials installed.
Conversely, if the sale of installed property is deemed to remain tangible personal property, the seller is obligated to collect sales tax from the customer.
Most sellers will not owe sales tax on the purchase price of the items resold to the customer due to the sale-for-resale exemption.
Contract form is often key to determining the proper tax treatment. A number of states require contractors working under a “time and materials” contract to collect sales tax on the price of materials transferred to customers, even when the project is classified as real property.
For instance, Nebraska has a particularly complicated series of elections that contractors are required to make, choosing whether to pay tax on their materials or collect sales tax on the invoiced materials from customers.
Sales of Material
In determining if sales tax applies to a sale of a sign that is going to be attached to real property, it is often challenging to determine when the attachment can be deemed to be “permanently affixed” for the purposes of taxation.
Given that the taxability of materials is often dictated by the level of attachment of the material, contractors must give careful consideration to how material is installed and the overall nature of the project.
California, for example, has issued guidance stating that “on-premise” electric signs are considered “fixtures” and are subsequently treated as taxable tangible personal property even if installed by a contractor (Citation: California SBE Information Publication No. 9, 03/01/2016). Therefore it becomes the contractor’s responsibility to collect sales tax on the sale of such signs.
Interestingly California makes a distinction between on-premise electric signs and outdoor advertising signs.
Signs attached to buildings are generally considered taxable fixtures, similar to on premise electric signs. However outdoor advertising signs built upon land are considered “structures” and thus real property.
Therefore a contractor who furnishes and installs an outdoor advertising sign is not obligated to collect sales tax on the materials. The contractor will owe sales or use tax on the purchase of materials used to create the sign.
In some states, where the sale and installation of signage is considered real property, the contractor may owe tax on more than just its cost of materials for the sign. Michigan requires contractors to pay use tax on the full sale price of items they manufacture or fabricate when affixed to realty, if these items are also sold to customers without installation.
Sales of materials are not the only concern. Sellers should also evaluate the taxability of separately stated services such as installation labor.
Often times, if separately stated services are provided in conjunction with the sales of tangible personal property, any corresponding services will be taxable. However, if the installed material is deemed to become a part of real property, then the installation services may be exempt from tax.
For example, in Pennsylvania, the taxability of separately stated installation labor will follow the taxability of the item being sold (Citation: 72 P.S. § 7201(k)(4); 61 Pa. Code §31.5(c)).
However, in other states, installation labor may not be subject to sales tax regardless of the taxability of the item being sold as long as such charges are separately stated.
Maryland and Illinois, for example, are among the states that do not require sales tax to be charged on installation labor even if the items being installed are subject to tax (Citation: Md. Code Ann. Tax-Gen. § 11-101(m); Maryland Tax Tip 18; Ill. Admin. Code tit. 86, §130.120(d)).
Sellers of signs and associated services should pay close attention to how such charges are stated on their invoice.
Combining material and service charges may be subject to tax in their entirety, while separately stated services may be exempt.
Installation charges are deductible from total receipts when computing the amount of sales tax charged to the purchaser if such charges are separately invoiced from the selling price of the material.
However installation labor is subject to sales tax if the charges are included in a lump sum price (Citation: Ill. Admin. Code tit. 86, §130.2140(b)(2); Illinois General Information Letter ST 15-0063-GIL, Oct. 29. 2015).
Purchaser’s Tax Status
Sellers should also pay close attention to the tax status of the customer.
If the customer is a governmental or nonprofit entity, some states (e.g., Illinois and Wisconsin) permit the exempt status of such entities to pass through to contractors performing real property construction.
To substantiate favorable tax treatment, the sellers should ensure that they meet requirements imposed by each jurisdiction as well as obtain essential documentation.
For example, if a seller is presented with a properly completed exemption certificate and accepts the certificate in good faith, then the seller is normally relieved of its obligation to collect the sales tax.
However it is recommended that the seller carefully review exemption certificates to confirm that all required information is included. A failure to comply can result in the sign company being assessed for tax on its material costs.
Battling Tax Exposure
If state and local sales/use tax exposures exist, taxpayers can effectively manage the costs of compliance by proactively identifying areas of underpayment and pursuing remediation through voluntary disclosure agreements (VDAs) and tax amnesty programs.
Utilizing VDA and tax amnesty programs can help delinquent taxpayers achieve compliance as quickly as possible with the added benefits of reduced penalties, interest, and administrative costs.
As most states have their own unique quirks related to application of sales tax to signs and associate service components, the taxability should be determined on a per job basis.
The ultimate taxability of installed signage is closely linked to each state’s definitions of real and personal property, case law, and other administrative guidance.
Since labor and service fees are often a material part of the sign sale, their taxability and appearance on an invoice is an important component of taxability review and determination.
In addition, unbundling a contract might yield tax savings.
For example, a large outdoor sign contract could separate real property components (e.g., excavation of base, pouring a concrete pad, underground electrical wiring) and personal property (e.g., sign display, pylon, above-ground wiring).
In a state like Wisconsin, the sign installer would owe use tax on its costs for the real estate portion of the contract and would collect sales tax on the personal property portion (price of materials plus installation). Failure to assess which revenues are taxable can leave your business exposed to sales and use tax liability if audited by a state or locality.
Consulting with a sales and use tax professional can serve as a valuable investment by potentially providing assurance of substantial compliance and/or exposure in the many jurisdictions in which your business operates.
By Ilya A. Lipin & Chuck Lukens. Lipin is a manager in the state and local tax (SALT) practice of Baker Tilly Virchow Krause, LLP in Philadelphia, Pennsylvania. He may be reached at [email protected]. Lukens is a SALT senior associate in Philadelphia and may be reached at [email protected].