(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the August 2012 Housing Journal)
New Gross Receipts Tax Rules: Progress Report
For many years our industry has been allowed to use Non Taxable Transaction Certificates (NTTCs) to avoid tax “pyramiding” between general contractors and the subs and suppliers on a building project. The theory was that gross receipts taxes would be paid once, by the general contractor, on the final full sales price, when the “improvement” was sold to the owner for their beneficial use. Businesses that were paid by the general contractor for contributing their efforts to the project could skip paying Gross Receipts Tax (GRT) on the income received from working on that project. Except that, (with a few exceptions) this worked only with materials that became a physical part of the project. If a business contributed only a “service” (think about rental of a job site crane, for instance) then NTTC’s could not be used for that expense and the business providing the crane would pay full GRT on the rental income. That will soon change.
During the latest Legislative Session, the construction industry, legislators, and the Governor teamed up to draft and pass a bill allowing a new gross receipts tax deduction for construction-related services. My experience over the years has taught me that changing tax law is often the easy part. Getting the Taxation and Revenue Department (TRD) to write appropriate rules for the new law is the more difficult and frustrating part!
In preparation for the rules part of the change, NMHBA met with various construction-related industry reps, and our members, as we compiled our “wish list” for the new rules. We then drafted our own version of what we wanted and submitted these to TRD. Many of you attended local HBA meetings during the spring where I presented our ideas and distributed CDs of our version of the rules for your comments. Your subsequent comments and ideas were useful and appreciated. We then met with TRD officials and handed over our version of what we felt the new rules should look like. In general, TRD officials were positive and helpful this time around, and they agreed with our timeline of having new rules finished and ready for distribution no later than November.
There are, however, several sticking points, with two issues being especially troubling. In spite of the fact that the advertised goal of the legislative effort was to “stop pyramiding of GRT on construction projects”, TRD has recently decided another part of the law declares that gross receipts can only be deducted if the NEXT SALE is taxable. For most residential construction this isn’t really a problem because the vast majority of the subs and suppliers work directly for the general contractor, who eventually sells the home and pays GRT on the sale. No problem for the subs and suppliers here as the “next sale” generates the tax, so subs and suppliers can declare the job-related income as “non taxable”. This does, however, become a problem with the more complicated commercial projects, where there are sub-contractors and sub-sub contractors. In the case of work by a sub-sub the “next sale” is to another subcontractor, and not directly to the general contractor (think about an air conditioning and heating test and balance service company working for a mechanical subcontractor), and TRD has stated that because of the “next sale” requirement NTTCs may not be used between these two sub-contractors. If this interpretation stands, the “fix” for tax pyramiding will be more limited than was intended by proponents of the change.
The second problem is TRD’s refusal, so far, to clearly define a “Project”. When the tax break only applied to materials which eventually became a part of the actual building, this wasn’t a big deal. However, now that receipts from services are deductible, knowing TRD’s interpretation of when a “project” starts and stops is more critical. For instance, are environmental and other feasibility services deductible? These services usually occur prior to a building permit. The new law says services for a specific “project” are deductible, but will TRD go along with that? At this point we have suggested language for a start and end date for any specific “project” because we feel it is critical to define, however TRD has resisted creating a definition. We will continue to press our case.
NMHBA has submitted yet another set of suggestions, and negotiations continue. The Housing Journal will keep you informed. The effective date of the actual change is January 1, 2013 so anyone wishing to take advantage of this new tax break must be ready to switch their internal accounting for GRT at that time.