MEMORANDUM CONTROL NO: ES 11-94-2-P

Topic Code: C336Construction (ST)          Document Reference:

MEMORANDUM CONTROL NO: ES 11-94-2-P

TO: GREG LEE, TAXPAYER SERVICES

FROM: DARWIN CLUPPER, TAX SPECIALIST, POLICY SECTION

DATE: NOVEMBER 22, 1994

RE: CONSTRUCTION CONTRACTS, YOUR MEMO, 11/7/94

FACTS: A contractor installs a single new window, garage door or a single door in a residence. The contractor's charges are either itemized separately for labor and materials or stated in one lump sum.

ISSUE: What are the consequences, for the purposes of Iowa sales tax law, of the above transactions?

STATUTES & RULES INVOLVED: Department rules 701-15.14; 19.13 and 26.12.

DISCUSSION: To understand the sales tax consequences of the facts you describe we must first determine if the activity in question involves the performance of a taxable service. Department rule 701-26.12 reads as follows:

701-26.12(422) Carpentry. Persons engaged in the business of repairing, as a carpenter. as the trade is known in the usual course of business, are rendering, furnishing or performing a service, the gross receipts from which are subject to tax. Such structures may be either real or personal property.

The rule mentions only carpentry services involving "repair". I think this is permissible because, as I am certain you are well aware by now, only construction services which are part of repair are taxable as opposed to exempt from tax if part of "new construction", etc. Replacing a window or door (which I have done) involves sawing, hammering of nails, insertion of screws into wood, planing and chiseling, and all of these activities would, in my judgment, involve "the business of ...a carpenter. as the trade is known in the usual course of business". However, that said, would the activities you describe involve "the business of repairing, as a carpenter. Department subrule 19.13(1) states most emphatically yes. See "repair situations" 2 and 5 of the subrule. I assume that if replacement of a garage door alone is repair rather than reconstruction that replacement of an ordinary door would be the same.

If a contractor is performing taxable repair service and using building materials in the process, the following quotation from subrule 19.13(1) explains the sale tax consequences:

Iowa Code section 422.42(5) [now 422.42(10)] defines a person engaged in the business of making taxable services as a retailer. Since retailers may purchase building materials, supplies and equipment for resale, persons making taxable repairs (handymen and service men) are not considered to be contractors and are not subject to the provisions of Iowa Code section 422.42(9) [now 422.42(12)]. In addition, such persons are not considered to be owners, subcontractors, or builders. However, contractors, subcontractors or builders who may make repairs are subject to section 422.;42(9) and must pay tax at the time building materials, supplies and equipment are purchased from their vendor even though they hold a valid sales tax permit. See rules 19.2(422,423) and 19.3(422,423). When contractors do repair work, sales tax should be collected on labor charges only. (Emphasis added)

If a contractor has properly itemized labor and material costs (and both are reasonable in amount) then the sales tax "should" be collected on the labor costs only; since the contractor "should" have earlier paid tax on the building materials purchased. This is a result of the contractor's dual status as a retailer of taxable services but a consumer or user only of building materials. If the contractor's billing is in one lump sum for taxable labor and exempt material charges, then it is the Department's policy to compute tax on the entire amount charged. This is standard Department practice, and rule 15.14 is an example of it. The rule, however, does not involve a contractor's use of building material in performing a repair contract, and this should be clear after reading subrule 19.13(1).