New Jersey Sales and Use Tax: A Contractor’s Guide to Reasonable Compliance
Let’s take a shallow dive into the New Jersey sales and use tax (S&UT) rules and responsibilities associated with contractors who perform services in the state.
By definition, a contractor is an individual or a business entity who engages in the business of improving, altering, repairing or maintaining the real property (land, buildings and other types of realty) of others. All contractors doing business in New Jersey must be licensed and registered.
Services performed by contractors may be subject to sales tax (e.g., repair, maintenance, taxable capital improvement), exempt from sales tax (e.g., exempt capital improvement) or a combination of both taxable and nontaxable services.
Unless working on a tax-exempt job, contractors (and subcontractors) must pay sales or use tax on all purchases of materials and supplies as the contractor is considered the consumer (end user) of the goods purchased.
A great source of free contractor information is available on the New Jersey Division of Taxation’s website at state.nj.us/treasury/taxation. The site contains numerous tax publications that are not only well written and on point, but also are of tremendous value when researching contractor S&UT issues and concerns. Several of the more prominent publications include the following:
- S&U-3 — Contractors & NJ Taxes (very important)
- NJAC — 18:24-5.1 / 5.19
- TB-67 — Tax Exemptions – Ex Orgs
- S&U-6 — Sales Tax Exemption Admin
The appropriate stakeholders of the business entity should consider spending some time reading and absorbing these publications along with their associated information. Upon doing so, most questions and concerns with respect to a contractor’s S&UT will be answered and addressed.
Key Issues and Considerations
If a New Jersey S&UT compliance review has not been recently performed, now would be an appropriate time to do so. Consider engaging a New Jersey S&UT practitioner for guidance through the review process. Clearly, it’s better to proactively detect areas of noncompliance, prior to a possible audit, and then timely correct any deficiencies.
Is the business entity registered for New Jersey S&UT? If not, then consider doing so. Again, consider engaging a S&UT practitioner to guide you through this process. Additionally, it may be beneficial to apply for a Voluntary Disclosure Agreement (VDA) to minimize the historical tax exposure (four years with a VDA versus seven or more years without one) if audited.
Defining what qualifies as a tax-exempt capital improvement can, at times, be difficult. Pages 3 and 4 of the S&U-3 publication provides a reasonable framework to assist in making the determination. Figuring out billing is key. Are the contractor’s sales invoice amounts billed in a lump-sum format or do the invoices separately state materials and labor? This issue may have a significant and adverse effect on the calculation of the S&UT and the associated liability to the contractor upon audit. Refer to pages 8 and 9 of S&U-3 for a complete analysis. Just because sales tax may have been collected on the total invoice amount, the contractor is not relieved of paying sales or use tax on all purchases of materials and supplies.
Proper and fully completed exemption certificates should be timely obtained and retained. Refer to the information contained in the S&U-3 and S&U-6 publications.
Best Practices and Valuable Tips
Appoint someone qualified to handle the business’s S&UT responsibilities. Things like answering internal questions, contract review, developing policies and procedures, reviewing purchases for use tax, and maintaining compliance are but a few of the tasks that should be regularly performed.
Here are some tips:
- At least annually, review your exemption certificate file for completion and accuracy.
- Seek and obtain Letter Rulings from the Division of Taxation when uncertain taxability issues arise.
- Maintain a fixed asset binder containing all F/A purchase invoices.
Have materials and supplies that are to be used for out-of-state jobs delivered to the job site. If received in New Jersey, then the purchases are subject to New Jersey S&UT.
Victor P. Treglia
Services performed by contractors may be subject to sales tax (e.g., repair, maintenance, taxable capital improvement), exempt from sales tax (e.g., exempt capital improvement) or a combination of both taxable and nontaxable services. Find out some key issues.
This article appeared in the March/April 2019 issue of New Jersey CPA magazine. Read the full issue.