By ILYA A. LIPIN & CHUCK LUKENS
Taxing Considerations The impact of sales and use tax on the sign industry.
Photo: Shutterstock/Zadorozhnyi Viktor.
nless 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. signshop.com
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 per-
ceptible 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-forresale 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 June 2018
Sign Builder Illustrated