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Iowa Contractors Guide

Definitions:
Construction Contract The term construction contract is defined as an agreement that provides labor and materials to erect a structure for a second party. The provider is sometimes referred to as the first party. The contractor can be an individual, corporation, partnership, or other entity. The second party is known as a sponsor. The tax liabilities of a sponsor are discussed under Liability of Sponsors. A construction contract always involves changing tangible, personal, or moveable property into real estate; for example, a change of concrete block and mortar into a foundation. This includes, but is not limited to, lump sum contracts, cost plus contracts, time and material contracts, unit price contracts, guaranteed maximum or upset price contracts, construction management contracts, design built contracts, and turnkey contracts. For a list of activities and items that could fall within the meaning of a construction contract or are generally associated with a construction contract, see Appendix C. Contractor Anyone who provides labor and materials to erect a structure is considered to be a construction contractor for that job, even if his/her usual occupation or profession is something else, such as a repairer or odd-job laborer. Contractor includes a general contractor, special contractor, subcontractor, or builder. Building Materials and Supplies Explanations and examples of what constitutes building materials, supplies, and equipment are found in Appendix B. Building Equipment Construction equipment that is intended for use in the performance of an Iowa construction contract is subject to the Iowa sales, use, or excise tax. However, all equipment rental is exempt when the equipment is used on or in connection with new construction, reconstruction, alteration, expansion, or remodeling of a building or structure. See Appendix B.

First..
In order to correctly pay and charge Iowa sales tax, you must first ask yourself the following questions.

y y y y

Is the service you are providing a taxable one? Is your project (1) a repair or (2) new construction, reconstruction, alteration, expansion, or remodeling? Are you a contractor or a contractor-retailer? Is your contract with the government, a school, or a museum?

How these questions are answered will determine if you pay sales tax to your suppliers or if you charge sales tax to your customers. The following information explains when sales tax is due.

Labor: Is it taxable?
Certain enumerated (taxable) services are commonly performed with construction contracts or with the repair or maintenance of real estate.

When these services are performed on or connected with new construction, reconstruction, alteration, expansion, or remodeling of buildings or structures, they are exempt from sales tax. When these services are a repair job, sales tax must be charged.

Enumerated services related to construction contracts

y y y y y y y y y y

carpentry electrical and electronic repair and installation excavating and grading moving houses or buildings landscaping, lawn care, and tree trimming and removal painting, papering, and interior decorating pipe fitting and plumbing sign construction and installation welding well drilling

Services never subject to sales tax

y y y y y

brick laying concrete finishing siding installation laying vinyl, wood, and other flooring carpet installation

Taxable services performed in repairing real property are not exempt from tax. The repair of machinery on the job site is subject to sales tax.

Is the job a repair or new construction?


The distinction between (1) repair and (2) new construction, reconstruction, alteration, expansion, and remodeling activities can be difficult. The intent of the parties and the scope of the project determines whether certain services are taxable. When in doubt, a construction contract should be treated as being a taxable repair rather than a nontaxable reconstruction. If it is later determined that reconstruction rather than repair was the purpose of the contract, the purchaser may file for a refund of tax paid.

Repair
Repair is synonymous with mend, restore, maintain, replace, and service. A repair constitutes the restoration of an original existing structure that has been damaged. Repair work that is not a construction activity is subject to sales or use tax. Examples of taxable repair situations include:

y y y y y y y

Replacement or repair of broken or defective glass/windows Replacement or repair of individual or damaged roof shingles Replacement or repair of a defective garage door or garage door opener Replacement or repair of a defective kitchen cabinet Replacement or repair of a defective tub, shower, or faucet Replacement or repair of a defective water heater, furnace, or central air conditioning compressor Restoration of original wiring in a house or building

New construction, reconstruction, alteration, expansion, and remodeling

This exemption applies to real property and structures only. It does not apply to tangible personal property. The following are examples of new construction, reconstruction, alteration, expansion, and remodeling activities. In these examples, the contractor is responsible for paying tax to the supplier on materials; however, the contractor does not charge tax on his/her services and materials.

y y y y y y y y y y y y y y
Additional circumstances...

The building of a garage or the adding of a garage to an existing building is new construction. Adding a redwood deck to an existing structure is new construction. Replacing a complete roof on an existing structure is reconstruction. Adding a new room to an existing building is new construction. Adding a new room by building interior walls is alteration. Replacing kitchen cabinets that are not defective is an alteration or remodeling. Paneling existing walls is an alteration or remodeling. Laying a new floor over an existing floor is an alteration or remodeling. Rebuilding a structure damaged by flood, fire, or other uncontrollable disaster or casualty is reconstruction. Building a new wing to an existing building is an expansion. Rearranging the interior structure of a building is remodeling. Installing a modular or mobile home on a foundation is considered new construction. Replacing an entire water heater, water softener, furnace, or central air conditioning unit that is not defective is reconstruction or remodeling. Sign installation and well-drilling services are exempt when performed in connection with new construction.

used to determine whether or not a project is construction or repair: 1. A service that is usually taxable may be exempt if it is performed closely with a construction activity. For example, the service of excavating and grading of land to clear the land for construction of a building becomes an exempt service because it is being done in conjunction with new construction. However, excavating and grading land without the intent of construction is taxable, even if at a later date plans are made to construct a building and a structure is actually built. 2. Time can also be a factor in determining whether or not a service is taxable or exempt. For example, if the land is graded for the purpose of seeding a new lawn following construction, the service is exempt from tax. If, however, the lawn does not grow and the land is regraded the following year, the service is taxable because it is not performed in conjunction with new construction. 3. The physical relationship is also considered. If a building is constructed for machinery, installation of the machinery is exempt. For example, piping services that join two pieces of equipment in separate buildings are exempt if the equipment in either building is installed while new construction, reconstruction, alteration, expansion, or remodeling to the structure is also taking place. 4. The magnitude of the job can be a factor. The size of a job should be considered when deciding if the job is a repair or new construction. For example, replacing damaged or missing shingles on a roof is repair and taxable; recovering an entire roof is construction and exempt. 5. Whether an item being replaced is defective can be another factor.

For example, if a buildings existing furnace is not defective, but the owner of the building has a new more energy efficient furnace installed, this would be considered reconstruction or remodeling. However, if the buildings furnace has become defective and is replaced, the replacement of the defective furnace will be considered a repair.

What if both construction and repair are occurring?


It may not be possible to categorize an entire job as repair only or new construction only. If this happens, the contractor will have to itemize the bill and charge sales tax on repair labor. For example, a homeowner hires a contractor to add a new room to the existing home. This is new construction, which is not subject to tax. However, the home is also in need of the restoration of its original wiring and replacement of a broken window. These are repairs and the labor is a taxable service.

Types of construction contractors in Iowa


How a person is classified as a contractor, contractor-retailer, manufacturer-contractor, or repair person is the basis for determining many tax obligations. It can be difficult for a person starting a business to determine if that business will be engaged in contracting, retailing, a combination of the two, or providing repair services. However, one status must be chosen. A status should not be changed unless it becomes clear that the business has become another status. For instance, if a business begins as a contracting business only, but the owner finds he must sell construction materials at retail if the business is to continue, the status can change to contractor-retailer. Note, however, that a significant portion of the business income must come from retail sales in order to have this classification.

Repair companies
To determine if your business is strictly repair, see Is the job a repair or new construction? Businesses that perform only repair jobs may not need to pay sales tax on their purchases of building materials and supplies. Instead, they may make their purchases for resale and give their supplier a valid exemption certificate as long as materials and labor are itemized separately on the bill to the customer. If the repair person does not itemize materials and labor on billings, the repair person will pay tax on the materials purchased and collect tax on the total bill.

Construction contractors
Construction contractors are considered to be the consumers of building materials and supplies purchased for use in construction contracts. They are responsible for paying sales tax at the time the purchases are made. If tax is not collected by their supplier, the contractor is responsible for paying it directly to the Department. A contractors purchase of materials delivered in Iowa for use in a construction contract is subject to tax whether the materials are purchased for use in construction contracts performed in Iowa or outside this state. Suppliers should not accept sales tax exemption certificates from contractors, except those certificates provided to a contractor by a Designated Exempt Entity. Contractors are not allowed to make purchases for resale merely because they have a sales tax permit number. There is no exemption to contractors when their job is for nonprofit organizations, including churches. Please refer to the section later in this publication regarding contracts with governmental units, schools, or museums.

Typical contractor situations:

1. 2. 3.

A contractor performs new construction. The contractor must pay tax on materials at the time they are purchased. The contractor does not collect any tax from the final customer. A contractor performs a taxable service. The contractor must pay tax on the materials at the time they are purchased. The contractor collects tax on both the labor and the materials. The contractor may take credit for tax paid on materials on the sales tax return. A person who is not in the construction business is building his/her own house. The person must pay sales tax on the purchase price of the materials, supplies, and equipment. Owners are considered final consumers in the same way as contractors.

Contractor-retailers
In some cases, a contractor may also sell supplies and materials. This contractor is referred to as a contractor-retailer. A contractorretailer is an individual or business that makes frequent retail sales to the public or other contractors and builds residential or commercial structures. A contractor-retailer must purchase tax free the supplies and materials to be resold. The contractor-retailer provides the supplier with a valid sales tax exemption certificate. The contractor-retailer then charges sales tax when the items are resold or pays tax if inventory is removed for use by the business. When a contractor-retailer sells materials, supplies, and equipment but does not install them, sales tax must be collected on the selling price. When a contractor-retailer installs the items being sold, it can be a construction contract. A contractor-retailer purchasing materials that will be used in a construction contract must pay the sales tax on them at the time of purchase. These are materials that will not be placed in inventory. For example, sales tax must be paid when wet concrete is purchased. A contractor-retailer performing a construction contract does not collect sales tax from the final customer. Contractor-retailers do not pay tax on materials withdrawn from inventory for use in construction projects performed outside Iowa. A contractor-retailer performing a taxable service (repairs) must charge his customers sales tax on the labor and materials. A contractor-retailer must obtain a tax permit to report sales tax from retail sales and taxable repairs and to pay tax on materials withdrawn from inventory for use in a construction contract. A contractor who rarely makes sales to individuals or other contractors is not considered a contractor-retailer and must pay sales tax to suppliers on all purchases or a corresponding use tax. Consider the following examples:
Example 1

ABC Company operates a retail outlet that sells lumber and other building materials and supplies. ABC is also a contractor that builds residential and commercial structures. Since ABC is a contractor-retailer, it purchases all inventory items for resale. When using materials to fulfill a construction contract, however, ABC will need to pay tax on the acquisition price of the materials. This should be reported as goods consumed on the sales tax return. Items that are sold by ABC are subject to sales tax at the over-the-counter selling price.

Is the contract with a governmental unit, private nonprofit educational institution, museum, business in an economic development area, or rural water district?

Designated exempt entities may issue exemption certificates to contractors and subcontractors, allowing them to purchase or withdraw from inventory building materials for the contract free from sales tax. This special exemption certificate would also allow a manufacturer of building materials to consume materials in the performance of a construction contract with a designated exempt entity, without owing tax on the fabricated cost of those materials. Designated exempt entities include only the following:

y y y y y y y

private nonprofit educational institution in Iowa nonprofit private museum in Iowa tax-certifying or tax-levying body or governmental subdivision of Iowa, including the state board of regents, state department of human services, state department of transportation municipally-owned solid waste facility which sells all or part of its processed waste as fuel to a municipally-owned public utility all divisions, boards, commissions, agencies, or instrumentalities of state, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder Habitat for Humanity rural water districts organized under Iowa Code chapter 357A

NOTE: Nonprofit hospitals are NOT designated exempt entities. The exemption certificate process works as follows: 1. 2. 3. 4. Designated exempt entities register contracts, including information on contractors and subcontractors, through an online application developed by the Iowa Department of Revenue. Designated exempt entities provide each contractor/subcontractor with an exemption certificate/authorization letter developed exclusively for this purpose. These are printed directly from the online application. The letter/certificate can be obtained only through this application. Contractors and subcontractors give a copy of the certificate to each of their material suppliers. This allows them to purchase building materials for the contract free from sales tax. Suppliers should retain this certificate in their records for at least three years.

The exemption certificate option benefits designated exempt entities in several ways:

y y y

Contracts with designated exempt entities will not include Iowa sales tax, which will lower the dollar amount of bids. Designated exempt entities will not need to obtain Contractor Statements after the project is completed. Designated exempt entities will not need to apply to the Iowa Department of Revenue for a refund of Iowa sales tax.

The exemption certificate process is an option; designated exempt entities may also use a claim for refund process. The claim for refund process works as follows: 1. 2. 3. The contractor pays Iowa sales tax on all building materials and includes that cost in the bid. The contractor then submits a Contractors Statement (35-002 pdf) to the exempt entity documenting the amount of Iowa sales/use tax paid on the contract materials incorporated into real property. The exempt entity applies to the Iowa Department of Revenue for a refund of that tax by using the Construction Contract Claim for Refund (35-003 pdf).

NOTE: The claim for refund process must be used when the contract is with businesses in economic development areas or rural water districts organized under Iowa Code chapter 504A. They do not qualify as designated exempt entities. If the contract includes machinery or equipment, the contractor must purchase it for resale and give the supplier a regular exemption certificate. The contractor should not charge sales tax on machinery and equipment sold to governmental entities, nonprofit hospitals, nonprofit private museums, and private nonprofit educational institutions. The same exemption applies to businesses in economic development areas unless the equipment is furniture or furnishings.

Machinery and Equipment


Contractors who sell machinery or equipment that is not exempt from tax must purchase it for resale and then charge sales tax as part of the contract. The contract must either itemize sales tax separately or state that sales tax is included in the contract price. When a construction contract is mingled with a machinery and equipment sales contract (a mixed contract), the two parts should be separated for sales tax purposes. Contracts with Machinery and Equipment Construction contracts with machinery and equipment sales, commonly known as mixed contracts, place a dual burden on the contractor. In these contract situations, the contractor is the consumer of the construction materials and is also a retailer of the machinery and equipment. The contractor must have a sales tax permit. A contractor is required to pay tax on building materials to the supplier at the time of purchase or remit use tax to the Department if the purchases are made from an out-of-state vendor that did not charge Iowa sales or use tax. Machinery and equipment that do not become real property (remains tangible personal property after installation) must be purchased for resale.
Example:

Company A contracts with Company B to build a new building and install all of the machinery and equipment. Company B pays its suppliers sales tax on all building materials and supplies. Company B also purchases refrigeration units that will remain tangible personal property after installation. Company B buys these units tax-free for resale since they will be resold to Company A; Company B will then charge Company A sales tax on the units. Distinguishing Machinery and Equipment from Real Property "Machinery and equipment" includes property that is tangible personal property when it is purchased and remains tangible personal property after installation. Generally, tangible personal property can be moved without causing damage or injury to itself or to the structure, and it does not in any other manner constitute an integral part of a structure. Machinery and equipment that is not permanently annexed to the realty remains tangible personal property after installation. For a list of property that under normal conditions remains tangible personal property after installation, see Appendix D. Tangible Personal Property that Become Structures Items that are manufactured as tangible personal property can, by their nature, become structures. However, the determination must be made on an item-by-item basis. Following is a list of standards courts have used to make these decisions.

y y y y y y
Example:

The degree of architectural and engineering skills necessary to design and construct the structure The overall scope of the business and the contractual obligations of the person designing and building the structure The amount and variety of materials needed to complete the structure, including the identity of materials prior to assembly and the complexity of assembly The size and weight of the structure The permanency or degree of annexation of the structure to other real property that would affect its mobility The cost of building, moving, or dismantling the structure

A farm silo, which is a prefabricated glass-lined structure, is intended to be permanently installed. The silo is 70 feet high and 20 feet around, weighs 30 tons, and is affixed to a concrete foundation weighing 60 tons that is set into the ground for the specific purpose of supporting the silo. The assembly kit includes 105 steel sheets and 7,000 bolts. The silo can be removed without material injury to the realty or to the unit itself at a cost of $7,000. In view of its massive size, the firm and permanent manner in which it is erected on a

substantial foundation, its purpose and function, the expense and size of the task, and the difficulty of removal, it is considered a structure and not machinery or equipment. Hand Tools All equipment rental is exempt when used on or in connection with new construction, reconstruction, alteration, expansion, or remodeling of a building or structure. Hand tools purchased by contractors are taxable.

Tax Responsibilities
Sales Tax and Use Tax When the tax is imposed determines whether it is a sales tax or a use tax. The sales tax is imposed when property is delivered in Iowa. The use tax is imposed when property is purchased for use in Iowa and no Iowa sales tax has been paid. Sales tax is applied at the time of delivery of taxable goods and when taxable services are rendered, furnished, or performed. The Iowa seller of the items must obtain a sales tax permit and is primarily responsible for collecting, reporting, and remitting the tax to the Iowa Department of Revenue. In addition, a local option sales tax may apply to sales or services, depending upon where the sale is occurring. Two types of use tax are recognized by the State of Iowa: retailers use tax and consumers use tax. The difference between the two is the person responsible for remitting the tax. Iowa retailers use tax is collected by out-of-state retailers on their sales of goods and taxable services to persons who will use those goods and services in Iowa. If the state of Iowa cannot require an out-of-state retailer to collect Iowa tax, anyone purchasing goods or taxable services from that retailer for use in Iowa is obligated to pay consumers use tax when those goods or services arrive in this state. Sales or use tax is always computed on the actual selling price of the taxable purchase. The state sales tax rate is 6 percent and the state use tax rate is 6 percent. Local Option Sales Tax In addition to the 6 percent state sales tax, local jurisdictions may impose a local option sales tax (LOST). There is no local option use tax. Within a county, some cities may have the local option tax, some may not. Also, the unincorporated area of a county may or may not have the tax. The rate is 1 percent. The list of local option tax jurisdictions is updated in June and December. If a contractor receives taxable goods or services in a local option jurisdiction, the tax must be paid. If a contractor receives taxable goods or services outside a local option jurisdiction for use inside a jurisdiction, the local option tax of the jurisdiction in which the taxable goods or services are delivered or performed is due.

Transportation and Delivery Charges

Transportation and delivery charges are not subject to Iowa sales or use tax if a separate written contract exists or if no written contract exists but the charges are separately itemized on the bill.

Keeping Records
All businesses should keep records for at least three years. Business records of contractor-retailers must clearly show whether or not inventory items taken out of stock were retail sales or used in construction contracts.

Appendix A
The following are exempt from Iowa sales or use tax when they are performed on or in conjunction with new construction, reconstruction, alteration, expansion, or remodeling of a building or structure. In all other circumstances, such as repair work, they are taxable. carpentry roof, shingle and glass repair electrical and electronic repair and installation janitorial and building maintenance or cleaning excavating and grading house and building moving landscaping machine operator services oilers and lubricators painting papering and interior decorating pipe fitting and plumbing rental of machinery/equipment termite, bug, roach, and pest eradicators tin and sheet metal repair tree trimming and removal welding well drilling wood preparations wrecking /demolition

y y y y y y y y y

y y y y y y y y y y y

General contractor services: If the service is not taxable, list separately on bill Architect services: Never taxable, list separately on bill Engineer services: Never taxable, list separately on bill Repair of machinery used on the job site: Taxable.

Appendix B
Building Materials The term building materials means materials used in construction work and incorporated into real property. It is not limited to materials used in constructing a building. It may also include any type of materials used for improvement of the premises or anything essential to the completion of a building or structure for the use intended. Carpeting is not considered to be a building material. Building Supplies The term building supplies means anything that is furnished for and used directly in the carrying out of the work of an owner, contractor, subcontractor, or builder and is consumed entirely. Such items do not have to enter into and become a physical part of the structure like materials, but they do become as much a part of the structure as the labor performed on it. The following is a partial list of building materials and supplies: asphalt bricks builders hardware oil paint paper

y y y

y y y

y y y y y y y y y y y y y y y y y y y y y y y y y

caulking material cement central air conditioning cleaning compounds conduit doors ducts electric wiring, connections, and switching devices fencing materials floor covering other than carpeting flooring glass gravel insulation lath lead lighting fixtures lime linoleum lubricants lumber macadam millwork modular and mobile homes mortar

y y y y y y y y y y y y y y y y y y y y y y y y y

piping, valves, and pipe fittings plaster plates and rods to anchor masonry foundations plumbing supplies polyethylene covers power poles, towers, and lines putty reinforcing mesh rock salt roofing rope sand sheet metal steel stone stucco tile wall coping wallboard water conditioners weather stripping windows window screens wire netting and screen wood preserver

Building Equipment The term building equipment means any vehicle, machine, tool, implement, or other device used by a contractor in erecting structures for others, or reconstructing, altering, expanding, or remodeling property of others that does not become a physical component part of the property upon which work is performed and is not necessarily consumed in the performance of such work. The contractor must pay sales, use, or excise* tax on any purchases of building equipment but may rent building equipment exempt from tax. Rental of the following are exempt when used in new construction, reconstruction, alteration, expansion, or remodeling. This list is illustrative, not exclusive.

y y y y y y y y y y y y y y y

self-propelled building equipment (does not include vehicles subject to registration) self-constructed cranes pile drivers structural concrete forms regular and motorized scaffolding generators attachments customarily drawn or attached to the above auxiliary attachments which improve the performance, safety, operation, or efficiency of the equipment and replacement parts tools, including hand tools compressors drill presses forms other than structural concrete forms lathes trailers for storage or a business office portable toilets

*Instead of the 6% state sales/use tax (and local option tax where applicable), a 5% state excise tax applies to purchases of the following specific construction machinery and equipment:

y y y y y

self-propelled building equipment pile drivers motorized scaffolding auxiliary attachments which improve the performance, safety, operation, or efficiency of the equipment replacement parts for the equipment

Appendix C
The following is a partial list of activities and items that could fall within the meaning of a construction contract or are generally associated with a construction contract. The list is provided merely for the purposes of illustration and should not be used to distinguish machinery and equipment from real property or structures since those determinations are based upon the facts of each situation. ash removal equipment, installed automatic sprinkler systems for fire protection awnings and venetian blinds that are attached to real property boilers, installed brick work builders hardware burglar alarm and fire alarm fixtures caulking materials work cement work central air conditioning installation coal handling equipment, installed concrete work conveying systems, installed drapery installation electric conduit work and related items electric distribution lines electric transmission lines flooring work floor covering installation, permanent furnaces, heating boilers, and heating units glass and glazing work gravel work lathing work lead work lighting fixtures lime work lumber and carpenter work macadam work millwork installation modular home installation onto foundation mortar work oil work paint booths and spray booths, installed painting work paneling work papering work passenger and freight elevators piping valves and pipe fitting work plastering work plumbing work prefabricated cabinets, counters, and lockers, installed putty work refrigeration units, central plants installation reinforcing mesh work road construction roofing work sheet metal work signs, other than portable steel work stone work stucco work tile work, ceiling, floor, and walls underground gas mains underground sewage disposal underground water mains vault doors and equipment wallboard work wall coping work wallpaper work water heater and softener installation weather stripping work wire net screen work wood preserving work

y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y

y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y

The following is a list of property which under normal circumstances becomes a part of realty. The list is not complete and is offered for illustrative purposes only.

y y y

boilers and furnaces for space heating built-in household items such as kitchen cabinets, dishwashers, sinks (including faucets), exhaust and ceiling fans, garbage disposals, and incinerators buildings and structural and other improvements to buildings, including awnings, canopies, foundations for machinery, floors (including computer room floors), walls, general wiring and

y y y y y y y y y y y y
78-527 (08/03/09)

lighting facilities, roofs, stairways, stair lifts, sprinkler systems, storm doors and windows, door controls, air curtains, loading platforms, central air conditioning units, building elevators, sanitation and plumbing systems, and heating, cooling, and ventilation systems fixed (year-round) wharves and dock mobile and modular homes installed on foundations improvements to land including patios, retaining walls, roads, walks, bridges, fencing, railway switch tracks, ponds, dams, ditches, wells, underground irrigation systems, drainage, storm and sanitary sewers, and water supply lines for drinking water, sanitary purposes, and fire protection planted nursery stock residential water heaters, water softeners, intercoms, garage door opening equipment, pneumatic tube systems, and music and sound equipment (except portable equipment) safe deposit boxes, drive up and walk up windows, night depository equipment, remote television, auto teller systems, vault doors, and camera security equipment except portable equipment) seating in auditoriums and theaters and theater stage lights (except portable seating and lighting) silos and grain storage bins storage tanks constructed on the site swimming pools (wholly or partially underground, except portable pools) truck platform scale foundations walk-in cold storage units becoming a component part of a building