I got a notice in the mail this past week from one of my subcontractors. It stated that he had not included sales tax in his proposal/invoice for work he completed for me last year. He is now requesting compensation for this tax burden.
In preparing his tax returns, someone red flagged the fact that, here in IA, you must charge sales tax on remodeling/repair work. Now if this tax had been included in the bid, I would’ve passed that expense along to my customer. However, now I am in the position of:
1. denying his request
2. eating this unexpected cost for the job
3. invoicing the customer for the addt’l cost ( I won’t do this)
The tax itself is relatively small, so I can absorb the cost, but I just thought I would offer the situation up for comment. I can see both sides. In his shoes, if my acct. told me that I owed an additional 5% of my gross sales to Uncle Sam that could put a hurt on my business, if I wasn’t planning for it.
OTOH, isn’t this part of the risk of being in business? Isn’t this one reason why we are entitled to profit? Everything I read says that you need to have profit to protect the risks of being in business. Is this one of those risks that is paid for through your profit or just an honest oversight that should be paid for by the customers (me)?
Comments welcome.
Replies
Do sub in general and this sub in particualr break out the sales taxe in their bid and in the bills?
Or do they just give a single price?
If they they normally show a sales tax on the bid and did not in this case then it would have been a warning to you. Not saying how much of a warning.
But if is normally that all hidden then it would be like him coming back and saying that he forgot that his WC went up 20% when he figured the bid.
Now saying between the bid and the start of the job that he forgot some or made a mistake is a MUCH MUCH different thing.
.
A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Bill,
As a general rule, most bids I get from subs are lump sum with no line items for permit, taxes, labor, materials, etc. I don't really care how they allocate their money to get the job done, so long as they deliver the work stated in their proposal or my spec's.
To clarify, the work was done last spring and I just got notification last week.
"I don't really care how they allocate their money to get the job done, so long as they deliver the work stated in their proposal or my spec's. "That goes along with my thoughs. As I said it would be the same it he came back after that amount of time and realized that the forget cost fo the plastic boxes or the increase in WC.I say no. Just personal opinion..
.
A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Uhmm.. let see.. he screws up in terms of running his business properly, but he figures it would be kind of nice if you took responsibility rather than himself. If someone is going to be in business for themselves I happen to think they are obliged to know basic things like when tax should be collected. In the real world there is no way that you are going to go back to a client a year later and say "oops you gotta pay some tax that was forgotten".
My nature is to always try to work with people to fix mistakes, however in this case there is no way you should bear responsibility for an oversight like this, and frankly it seems incredible to me that your sub thinks he can pass on this responsibility to someone other than himself.
I would simply tell him that you are sorry to hear that he made such a mistake but there is no way you are going to go back to the client and ask them to cover this mistake almost a year after the fact. Similarly he cannot, with any degree of fairness expect you to cover a mistake like this either. It was his mistake, so unfortunately for him, it is his cost to bear.
I say if he hung out his shingle as a business it's his responsibility to understand whatever taxes, fees or other 'required' charges he's supposed to be billing. His negligence (or ignorance) isn't your problem.
I'll bet if his supply house cut him an end-of-year rebate check as a thank you for his business that he wouldn't be issuing you a refund check today.
-Norm
I consulted for an attorney and his client on an issue just like this, where another contractor had built a house for the attorney's client. In the course of building the client's house he had forgotten to charge tax on part of it. The state audited him and he was able to prove that he had been paid for goods and services in accordance with the breakdown accompanying a construction loan. The state construed this to mean that he had not collected the sales tax. I think they were fining him some amount for his bungled paperwork, but they were preparing to lien the house for the actual tax.
If at all possible go back to the owner and collect the tax. It could be argued that you should have spotted the mistake on the sub's part. I have regularly dealt with issues like this in terms of who should charge me tax and who shouldn't, when, why, etc. It is necessary to read everyone proposals and make sure they are not jeopardizing your position. That's why you're making the big bucks(!)
That's a good point. The seller (subcontractor in this case) doesn't "charge" the buyer tax and "pay" it to the state, he "collects" it on behalf of the state. If he didn't collect it, he screwed up, but the buyer still owes the tax.Socks to be the buyer in that case.RebeccahEdited 2/12/2007 5:17 pm by Rebeccah
Edited 2/12/2007 5:17 pm by Rebeccah
Rebeccah,
How do I know that he didn't collect the tax?
Maybe I should ask all subs to show a line item for sales tax, but as a general rule I don't ask for this.
Isn't there some burden on him to know what work he does is taxable and not taxable?
curious, what did you charge sales tax on?
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
--- How do I know that he didn't collect the tax? ---
Well, you don't.As a practical matter, unless he gets audited, I don't see how you'll know for sure.If, as a previous poster suggested, the norm is that sales tax is not called out on a line item, then I would assume it was included, and my fist reaction would be to refuse to pay it again. But if he got audited and the taxing authority determined that he didn't collect the sales tax, then as David mentioned, that taxing body is likely to fine him and charge sales tax to whoever bought the product of his labor. Did you pay the subcontractor, or did the HO?
--- Maybe I should ask all subs to show a line item for sales tax, but as a general rule I don't ask for this. ---
It might not be a bad idea, now that you're getting stung.--- Isn't there some burden on him to know what work he does is taxable and not taxable? ---
I would sure hope so. But the tax, at least in Illinois and California, is owed by the buyer and only collected by the seller.Rebeccahbtw I am not a lawyer, nor do I pretend to be one.
Did you see the answers to my question.He nevers see the taxes.He get a statement showing the total amounts..
.
A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
This is a no-brainer. Someone screwed up here...it wasn't you & it wasn't the homeowner.....so who do you think should pay the piper??
I believe each person in the supply/work chain has the obligation to collect the sales tax due and forward it to the state.
The homeowner has no obligations except to pay what is asked. I expect the homeowner has a receipt marked paid in full.
That makes the contractor responsible for paying the tax (I guess you can compute the tax from the amount paid to reduce your burden).
"I believe each person in the supply/work chain has the obligation to collect the sales tax due and forward it to the state.The homeowner has no obligations except to pay what is asked. I expect the homeowner has a receipt marked paid in full.That makes the contractor responsible for paying the tax (I guess you can compute the tax from the amount paid to reduce your burden)."What if the contractor has a receipt showing that he paid the sub in full?.
.
A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
"The homeowner has no obligations except to pay what is asked. I expect the homeowner has a receipt marked paid in full."
That is not what is happening to the homeowner I met with about this. She had receipts marked paid and a contract that had been performed and paid in full. The taxing authority determined that she still owed the tax. The contractor had not collected it, and they did not take a pound of his flesh. Apparently they did fine him, but they did not make him pay the tax he should have collected but did not.
Likely this scenario does not apply to the OP. His sub will not be able to show that he did not collect it, unless he gave the OP a contract that showed sales tax as a line item and then shows that he only collected the base taxable amount. If that's the case the problem could flow directly thru to the property (owner).
I have dealt with the sales tax authorities in two states, both for reasonably long periods. You do not want to mess with those folks. There is no simple means of recourse once they decide what they are going to do.
I think others have missed an important part of this.
You're first up. It was your responsibility to collect sales tax on the completed installation of what ever it was as you are the general contractor.
You paid the sub from funds received from the HO that SHOULD HAVE included the proper amount of sales tax that you collected from them.
I think your sub is pulling a fast one on you and all the rest of the guys he is subbing for.
He's fishing.
[email protected]
It's Never Too Late To Become What You Might Have Been
If this was a sub that I wanted to use again, I would tell him that I was not going to try to collect from the HO but that I would split the difference with him.
obviously the sub never gave you a breakdown of his expenses or you "could have" noticed he was neglectful in his duty to collect the tax. he should be greatful that you did'nt ask for a breakdown
you paid him the amount he billed you, how were you supposed to know he was'nt putting aside a percentage to cover his tax burden.
likewise if he came to you and said "I forgot that I have to pay income tax..." would you give him a 25% bump?
sales and use taxes are due from the end user, but vendors are typically required to collect and remit for the taxing authority. regardless of who collected or who did not, the tax is due from the end user. If you buy a car from a dealer, they collect and remit taxes when they do the title work. if you choose to do the title yourself, or buy from an individual, you'll pay the sales and use tax when you transfer title.
That's pretty much my point. The property owes the tax. As some others are alluding, the sub didn't break out tax, and as a GC on a job where tax might be do that would be a red flag. He could definitely be fishing. In the situation I saw, the contractor was able to demonstrate that he had not collected tax (he had collected in accordance with a budget given to the bank), so the state was sending letters to the owner notifying her to pay or be liened.
If I were the GC in the OP's situation I would not pay anything unless the state had already indicated their intention to lien. That would be my proof that they had audited the sub and found he didn't collect the tax. In most cases it would be very hard for the sub to prove this.
I have no idea what the rules are in IA, but in California invoices show the tax due as a separate line item.
When you billed the job, how do you show these amounts?
Is the whole thing, labor and material taxed? Or materials only?
Do you collect a tax on the total job, and then pay the tax owed on your markup portion, figuring the tax on the amount you paid the sub included taxes to be accounted for and paid by the sub?
How the hell do you keep all this crap straight?
The same job could have taxes paid by multiple subs and fabricators providing something like cabinets to subs paying taxes too?
Who thought of this?
Never mind.......I know who.
Joe H
I'm sorry.It seemed like a good idea at the time...
when you here commerical saying "Dont try this at home" they are talking to me. they have been to my house. ~brownbagg
You should be.
Apology accepted, but don't let it happen again.
Joe H
Hey folks,
I got pulled away from the computer last night so I'll try to answer all of the questions posted to me now.
I charged sales tax on the materials I furnished for the job. I don't line item things in my proposal, I just say "$xx for job yy". I passed the sales tax along as a cost in that total amount. In this case, my vendor collected the tax from me for the materials purchased and paid it to the state.
As Barry pointed out, typically most of the work I do (my labor) in Iowa is not taxable unless it is repair work. We replaced all of the interior doors and millwork in the house and then had it painted. This was in conjunction with full window and siding replacement. I don't consider that to be a repair.
The sub was the painter. His proposal was also lump sum. "I will paint all interior woodwork for $xx. " He has been in business for over a decade so I assume that he isn't fishing for extra cash, too much of a reputation to jeopardize for 5%.
I will call my acct. and see what he says, then I will call the sub and talk with him. The outcome of my first phone call will probably determine the outcome of the second.
Thanks
"I charged sales tax on the materials I furnished for the job. I don't line item things in my proposal, I just say "$xx for job yy". I passed the sales tax along as a cost in that total amount. In this case, my vendor collected the tax from me for the materials purchased and paid it to the state."
Waitamint.... did YOU charge sales tax AND your vendor charged it, on the same materials?
After seeing this thread, I looked on the Wisconsin Dept of Revenue site for a definitive version of what is taxable and who charges/pays the tax. For anyone who is in this position, I suggest they do the same because it doesn't matter at all what we think- it matters how the state mandates that it be done. In WI, if I build a house, I pay tax as the customer because I'm providing a finished product. I would charge the tax rate, in addition to the other expenses so I don't end up eating it. If I sell the person a home theater system and all of the other parts for that, I don't pay sales or use tax on the equipment or materials and parts because I'm reselling them. What I'm installing/working on isn't actually part of the house. If I build a room to house the equipment or modify the house, there's a difference. I would check with the state and find out for sure. I still think he screwed up by not knowing if he is/isn't liable for the tax and I suspect that the state where this is happening is similar or the same as WI in this case. The builder is seen as the customer for the materials. If he's re-selling appliances to the homeowner (I use this example because it's not actually part of the house), there's no tax due.Equipment and parts are called 'tangible personal property' when bought for the purposes of demonstrating or re-selling and tax is charged to the end-user/customer when they're sold.
"I cut this piece four times and it's still too short."
David,
No. I reread my post and it was poorly worded. I should have said that I passed the cost of the sales tax, collected by the vendor, along to my client.
I didn't pay sales tax to the vendor and then turn around and add 5% onto that (already taxed) material invoice.
"I didn't pay sales tax to the vendor and then turn around and add 5% onto that (already taxed) material invoice."Why not?? Our fascist government here in MD does that double taxing thing all the time!
I had a situation like this when the price of copper spiked last year. My electrician called me and set up a meeeting to discuss the price of copper. At that meeting he showed how the increase was affecting his costs on a $12,000 contract he had with us and asked me, hat in hand, to meet him half way. I said yes and covered the entire amount out of my contingency on the job.
Had he simply mailed me a letter asking for additional compensation the answer would have been no.
I'd say this is a "teachable moment" for your subcontractor. I'd tell him no, but let him know that a more humble and personal approach might have been more successful.
vintage,
Make sure he owes the tax first. What does your sub do?
I'm in DSM and was audited 2 years ago by the state revenuers. Supposedly someone turned me in. They went thru my books and found that I hadn't done anything that was taxable. But they did make me get a tax license and I have to do quarterly paperwork although I have yet to owe. From what the lady told me repair work is taxable, unless it was part of a bigger job. IIRC they let that slide
Here it is:
A service that is usually taxable may be exempt if it is performed closely with a construction activity.
Here's examples of what is taxable:
* Repair of broken or defective glass
* Replacement of individual or damaged roof shingles
* Replacement of a defective garage door or garage door opener
* Replacement – of defective kitchen cabinets
* Replacement – defective tub, shower or faucets
* Replacement – defective or broken water heater, furnace or central air conditioning compressor
* Restoration of original wiring in a house or building
* Rewiring or upgrading electrical service
Here's the website:
http://www.state.ia.us/tax/educate/78527.html
BTDT
His bust. He pays it.
We finally got rid of our sales tax on remodeling for the most part here, amen. While we had it, subs never charged sales tax, that was the GC's responsibility for the whole job. I think I just saw the rationale for that.
At any rate, he messed up, not you. He needs to understand that its not your problem and he needs to be a big boy and deal with it. This is simply behavior I wouldn't take from him, even if we were best of chums. He not only biffed but now he's shinin his a$$ by telling you about it. That wouldnt bestow much confidence in me.
Real trucks dont have sparkplugs
I have another question for the OP, did YOU charge sales tax?
On what portion of the job, all or part or just your markup % of the Subs bills?
How do you know how much to tax?
Joe H
A GC pays tax to a sub? Really? You might want to check into that, unless your state is different from WI.
It's his responsibility to make sure his bid is complete and coming to you almost a year later is BS.
It's state sales tax- the IRS has nothing to do with this and if his accountant tells him now that he needs to come up with an additional 5% for last year's billing, he needs a new accountant.
It's not your problem- he screwed up and wants someone else to cover for it.
Most places I have worked at collect taxes if the job is the remanufacturing of a product and they did not pay taxes when they bought the materials claiming it was for resale.
HARDLINE APPROACH: No. As a sub, he should be previously educated, and know the tax laws.
If he is NOT worth losing, I'd would lean toward giving him an eduction and pointing out that this is irregular and unprofessional. I may offer to help with a percentage.
Otherwise, NO! His bid should have been inclusive according to the laws. Again, he should be previously educated, and know the tax laws.
Years ago I had a license to build in Tennesssee. We had 6 hours of testing, including business law, had to be interviewed by 6 a state board made up of homebuilders and had to designate our license in a dollar amount. The dollar amount designation had to be accompanied by proof of 10% cash reserve. For example, my license was for $300,000.00 per project and required proof of $30,000.00 in business cash reserve.
The testing and cash requirements eliminated the kind of problem you are having, and kept lots of riff-raff out of the business.
You would not bill the customer, as you know it would not be a professional practise. He is brave. As your position is stated regarding the the client, if I were the sub I would not ask the GC.