Under general sales tax policy, a retailer that sells tangible personal property ("TPP") to a customer is required to collect and remit sales tax on the price paid for the merchandise. Separately, a contractor who purchases and affixes TPP to a customer's home or office is providing a real property improvement, which is not generally subject to sales tax. In these projects, the contractor is deemed to be the final user or consumer of the TPP, which then becomes incorporated into the real property, so that the contractor is the one liable for paying sales tax. At issue in many states is how to deal with home improvement retailers that purchase their inventories for resale tax-free and that also provide installed home improvements to their customers: Are these installation transactions sales of real property interests, in which the customers owe no sales tax and the contractor-retailer self-assesses sales or use tax on the wholesale cost of the TPP? Or are they retail sales of TPP to customers followed by a separate installation service?
On June 4, 2015, the Indiana Supreme Court left intact a landmark ruling from the Indiana Tax Court finding that Lowe's Home Centers, LLC, a national home improvement retailer, properly self-assessed and remitted use tax on materials it used in performing home improvement contracting work for customers in Indiana. Lowe's contended that when it was performing under an installation contract with a customer, it was not selling TPP but instead selling real property improvements, which are not subject to sales tax. And as the contractor, Lowe's—not its customer—was the final user and consumer of the TPP affixed to the customer's home. It therefore remitted use tax on the wholesale cost of construction materials it pulled from its inventory.
The Indiana Department of Revenue disagreed and insisted that, in such transactions, Lowe's was selling TPP to its customers at retail, followed by a separate installation of the customers' items. According to the Department, Lowe's should have been collecting and remitting sales tax on the retail prices of the construction materials listed in the installation contracts. The Department assessed Lowe's for additional taxes, interest, and penalties, and Lowe's appealed.
In a December 19, 2014, summary judgment order, the Indiana Tax Court rejected the Department's position. In addition, the tax court's order invalidated a distinction in the Department's tax regulations saying that a customer owes sales tax on construction materials supplied under a time and material contract but a contractor must self-assess and remit use tax on materials used in a lump sum contract. That discrepancy is not based in law, the court said.
"The department has created an artificial distinction between time and material contracts and lump sum contracts in its regulations to convert a contractor's use tax liability under [Indiana law] into a sales tax liability on the materials' higher retail price," Indiana Tax Court Judge Martha Wentworth said in the order. "Because [the law] does not impose use tax liability contingent upon the type of contract a contractor uses, that distinction as contained in [the regulations] is invalid."
The case has national implications for retailers who also provide contracting services. Similar disputes are being litigated in states throughout the country.