(Originally published in the May 2012 Housing Journal)
Gross Receipts Tax FAQs for the Construction Industry
During the 30-day Legislative Session this January the construction industry was successful in helping Governor Martinez pass HB 184 which sought to curtail “Tax Pyramiding” for the construction industry. The bill passed, was signed into law, and will become effective on January 1, 2013. Construction industry representatives have been meeting with Tax and Revenue Department (TRD) leadership and staff to ensure implementation of the law change for the construction industry can begin on January 1.
Over the past few months, NMHBA Senior Officers have traveled around the state to update local HBAs and, during discussions with various members, it has become apparent that our industry members have many questions about the process of compliance with the Gross Receipts and Compensating Tax Act. These FAQs have been prepared by NMHBA staff to help clear up a few points:
Q.: I construct buildings, so is my construction business considered a manufacturing business?
A.: No. While it may be a shock to most in the construction industry, for GRT tax purposes the building of improvements upon land to create real property is considered a service, and not a manufacturing process.
Q.: I paid sales tax when I purchased the construction materials from the lumber yard, and I paid taxes on each of the bills from my subcontractors; I’ve paid all I need to, right?
A.: WRONG. New Mexico does not have a “sales tax” like other states – we have a “Gross Receipts Tax” which means businesses pay a tax on their total receipts minus any non-taxable deductions. If you missed the explanation in Jack’s April Housing Journal article, you can read it online at http://www.nmhba.org/pages/memberservices.html .
Q.: How does the NTTC process work?
A.: Put simply, a buyer (construction business or construction-related business) of goods or services issues a Non-Taxable Transaction Certificate (NTTC) to the seller of the goods or services, certifying why the entire (or portion of a) transaction is deductible from the gross receipts of the seller’s business. The seller keeps these on file and reports their gross receipts (minus the deductions) to TRD. The seller keeps the actual NTTCs and must present them to TRD when requested (usually during an audit).
Q.: I am a mechanical contractor whose company also manufactures mechanical components that are sold to other mechanical contractors. Am I a service or a manufacturing company for GRT purposes?
A.: Both. When performing mechanical contracting services for a general contractor or homeowner you are subject to the sections of the NM Gross Receipts and Compensating Tax Act that apply to construction businesses. All activities related to purchasing materials, manufacturing mechanical components and selling them wholesale to other mechanical construction businesses are subject to the sections concerning manufacturers.
Q.: Does my construction activity have to be my “primary” business, or can I issue NTTCs for my construction business activities when my primary business is something else?
A.: In the current economic climate there is sometimes not enough work to allow a business to perform only construction activities, and many companies have had to diversify to keep the doors open. Your company may issue NTTCs when you are performing construction activities.
Q.: Is there a benefit to identifying some of my activities as “manufacturing” instead of “construction service?
A.: Not under today’s regulations – but stay tuned. Sometime in 2013 it is expected that TRD will complete the new regulations for the manufacturing industry to implement their much broader deductions from GRT that allow deductions for utilities and materials “consumed” in the manufacturing process and are not subject to the “taxable on next sale” restriction placed on service businesses in 7-9-48 NMSA. In 2013, if you are manufacturing construction materials such as ducting for mechanical systems, there may be quite a benefit to identifying that portion of your business as manufacturing, even though you are required by the Construction Industries Division to hold an MM-3 or MM98 contractor’s license to manufacture HVAC ductwork.
Q.: Do I need to be a state-licensed contractor to be a “construction business”?
A.: TRD rules define a “construction business” as someone who holds a contractor’s license issued by the state. TRD doesn’t seem to be concerned about whether the license listed on an NTTC is the correct license for the work billed, but listing a license number when it is not “attached” to the company involved in the transaction is fraudulent activity punishable by TRD. The Construction Industries Licensing Act (CILA) in 60-13-12 NMSA lists construction activities that require one to become licensed, and failing to comply with the CILA is a violation of that state law.
Q.: I am a licensed contractor who renovates or remodels instead of building “new” projects. Is my company entitled to the same deductions as a “construction business”?
A.: Yes, because your company is a “construction business”. The rules and laws for GRT apply to construction projects subject to GRT payment upon their “completion” or upon their “sale” or if they are on Indian lands. A remodel/renovation project that is subject to GRT upon its completion would meet the requirement for GRT deductions.
Q.: I understand I don’t have to pay GRT on the construction materials I sell to a construction business, but how about the labor to install them?
A.: The installation labor is the “service” you provide to the construction business and receipts for those services are deductible when billed to a construction business who installs those materials as an ingredient or component of a construction project that is subject to GRT upon completion, sale, or if it is on Indian land. Be sure you or your accountant checks which NTTC is applicable for deductions under 7-9-48 “Sale of a service for resale.”
Q.: I am a stucco contractor who owns his own scaffolding. Can I issue an NTTC to the general contractor for the rental of my scaffolding?
A.: No. Lease or rent of construction equipment is not deductible at this time. If you are utilizing your company-owned scaffolding while working as a stucco contractor, any cost you choose to include in your billing to a construction business is deductible from your GRT. It would be counter-productive to separate out the use of your scaffolding in your billing. If you list the use of your scaffolding as “rent” or “lease” to another contractor for a construction project he is working on, there would be GRT due because as a “construction business” you are not a construction equipment rental company.
However, when the new regulations take effect around January 1, 2013, the rental of construction equipment will be a deductible service, and if you “rent” or “lease” to another contractor you would be performing a “construction-related service” as defined in the changes due to HB 184.
Q.: When I rent a crane for my construction business the crane operator’s time is billed separately. Is the crane operator’s time deductible?
A.: None of the transaction is deductible at this time. The crane lease is not deductible, and the operator’s services are considered employee leasing, and those transactions are not deductible either.
However, when the new regulations take effect around January 1, 2013, the rental of construction equipment will be a “construction-related” service. Included in that service would normally be the delivery/pick-up of the equipment to/from the jobsite and set-up. The Hoisting Operator’s Act requires the crane be operated by someone with a specific license depending upon the classification of the crane, which is deductible as a “service required to comply with governmental construction-related regulations” in accordance with the new changes to 7-9-52(C) NMSA.
Q.: I travel all over the state to construct buildings in multiple communities. How do I know which GRT rate to use?
A.: For a construction business, your tax rate is determined by the location of each construction project.
Q.: I design homes to be built in communities all across the state. How do I know which GRT rate to use?
A.: If you sell your designs to a consumer, your tax rate is determined by the location of your main office. If you sell your designs to a construction business whose project is taxable upon completion or sale, or located on Indian land, you would issue an NTTC and it will be up to the construction business to pay taxes at the rate of GRT in the community in which the project is built.
Q.: I have to rent scaffolding for my employees to use when installing drywall inside a building. The scaffolding rental agreement includes the delivery/pick-up charges and the labor to erect the scaffolding. What parts of that bill are deductible?
A.: None of it at this time. Receipts from leasing construction equipment are not deductible by the rental/leasing company because they are not a “construction business.”
However, under the new regulations expected to take effect January 1, 2013, all of the transaction should be deductible. Federal and state regulations specify the restrictions on the type of scaffolding and even the grade of wood to be used in scaffolding erected to comply with OSHA fall protection law. Failure to properly erect the scaffolding is a violation of federal and state laws. Erecting the scaffolding is deductible as a “service required to comply with governmental construction-related regulations” in 7-9-52(C) that was added by HB 184.
Simplification, But Not Total Elimination of Pyramiding
Many contractors have gotten caught making mistakes on the issues addressed in these FAQs during TRD tax audits, and simplification of the process and elimination of Tax Pyramiding are the two main reasons the construction industry promoted HB 184. While work progresses on drafting the TRD regulations to implement the law change as a result of HB 184, it is was discovered that not all Tax Pyramiding has been eliminated. We are finding a few areas where amendments to other sections of law will be needed in the future to further reduce the impact of Tax Pyramiding on the construction industry. The best result of HB 184 becoming law will be that the new law and regulations will be simpler for the industry to understand and comply with.
Please remember the goal of TRD and the construction industry is to have the new regulations for the reduction of Tax Pyramiding in place by January 1, 2013 but there is no guarantee some stumbling block won’t pop up and push that date back. Stay tuned to find out the actual effective date of the new rules.
DISCLAIMER: This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The author and the publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.