The issue of sales and use tax on purchases of materials comes up regularly on NJ tax audits sometimes resulting in a substantial assessment. NJ contractors are considered the consumers of materials that they purchase. They are required to pay sales tax to the sellers or self-assess use tax and pay tax directly to NJ on purchases of materials. There is an exception if the purchase is for a contract performed for a tax exempt or government entity and the contractor has documented that exemption. Different rules apply to floor covering installations and hard-wired alarm or security systems.
Many contractors perform work for both taxable and tax-exempt entities. Oftentimes, when the contractor makes its purchases, the seller does not distinguish between sales that are taxable and those that are exempt. Therefore, no tax is charged even when the purchase of materials is for a taxable project. If that happens, the contractor has a duty to self-assess and pay use tax to NJ on these taxable purchases.
Purchases of materials by a subcontractor are subject to sales tax in the same manner as purchases made by a prime contractor. A subcontractor who performs taxable services for a prime contractor does not charge the prime contractor sales tax on the labor portion of the bill. The prime contractor is responsible for collecting any sales tax due from the property owner for work performed by the subcontractor.
In addition, if materials or other items such as tools are purchased outside of New Jersey and the seller is not required to collect NJ sales tax, then no sales tax is collected. If the purchase is not exempt, the contractor must self-assess and pay use tax to NJ on these taxable purchases.
For further information on sales and use tax for contractors, follow this link to NJ Division of Taxation: http://www.state.nj.us/treasury/taxation/index.html?su_15.htm~mainFrame
If you have any questions regarding your tax liability for sales and use taxes in New Jersey, please contact Peggy Tilles at ptilles@smf-cpa.com.
