Ohio sales and use tax (sales tax), as it relates to the construction of real property, can be complex. If the construction project is for an exempt organization, the issue of sales tax becomes much simpler.
A contractor must pay Ohio sales tax on its purchases of materials incorporated into real property unless an exemption exists. A construction contractor may purchase tax free those materials that will be incorporated into the following:
- A house of public worship or religious education, a building used exclusively for charitable purposes by a nonprofit organization operated exclusively for charitable purposes, or a building used exclusively for exempt purposes by an organization exempt from federal taxation.
- A hospital facility entitled to exemption under Sec. 140.08.
- Real property, pursuant to a construction contract with the U.S. government or its agencies, the state, or any political subdivisions of the state.
- Real property that is owned, or will be accepted for ownership at the time of completion, by the U.S. government or its agencies, the state, or any political subdivisions of the state.
- The original construction of a sports facility pursuant to Sec. 307.696.
- Real property in another state, provided the state offers an exemption to contractors purchasing materials and services for incorporation into real property within the state.
- The construction of a horticulture or livestock structure for a person engaged in the business of horticulture or producing livestock.
In Ohio, the contractor is considered to be the consumer of tangible personal property installed into real property. As the consumer, the contractor is subject to sales tax on purchases unless, as noted previously, an exemption exists. However, even for projects that qualify for one of the exemptions listed above, items used or consumed by the contractor are not exempt. Examples of items used or consumed include contractor’s tools, equipment, and rental of personal property, to name a few.
The question then becomes, if purchases of materials incorporated into real property are considered to be exempt from sales tax when the contract is with an exempt organization, then what’s the result if the materials are not deemed to be real property upon installation?
When tangible personal property is installed into real property yet retains its status as tangible personal property after installation, the contractor is deemed to be the vendor and should collect sales tax on the installed price of the property including any mark-up and labor charged to install the property. An example is computer cabling, even when embedded within building walls. If the contract is with an organization that meets one of Ohio’s exemptions, the acquisition and installation of the personal property is not subject to sales tax.
In summary, if the organization constructing or improving real property meets one of the exemptions, the project may be exempt from sales tax. The facts and circumstances of each situation should be closely evaluated before a contract is finalized.
Stay tuned…Each month we’ll focus on a different state within our geographic footprint. Next month we’ll focus our discussion on Illinois sales and use tax.