Businesses must often decide whether they are liable for sales or use tax on certain property. Sales tax applies to goods purchased for resale to the final consumer, while use tax is assessed when the business uses the property to provide another service. An Indiana court recently questioned sales verses use tax on home improvement contracts with respect to the well-known chain Lowes.
Lowes sells building supplies to retail customers. It also performs home improvement services as a general contractor. Lowes paid use taxes on the wholesale price of the building supplies used in its contractor jobs. The Indiana Department of State Revenue claimed Lowes should have paid sales tax on the higher retail price of those supplies.
The Indiana Department of State Revenue argued Lowes’ Home Improvement contracts only covered “time and installation” of materials; customers were therefore still liable for sales tax on the retail price of the materials themselves. Lowes replied its contracts charged a “lump sum” for all materials and labor, and under Indiana law, it was therefore only liable for use tax on the former.
A judge agreed with Lowes. In a Dec. 19 decision, Judge Martha Wentworth of the Indiana Tax Court said the department was attempting to manufacture “an artificial distinction between time and material contracts and lump sum contracts in its regulations to convert a contractor’s use tax liability … into a sales tax liability on the materials’ higher retail price.” Wentworth said Lowes’ construction contracts were clearly understood by it and its customers to be “lump sum” agreements. Customers paid a “singularly stated price” upon signing a contract. More to the point, customers were not separately billed for materials, and in fact, any “surplus” materials leftover following construction were returned to Lowes, not retained by the customer.
The department may appeal Wentworth’s decision to the Indiana Court of Appeals.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.
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