In Lowe’s Home Centers, LLC v. Indiana Department of State Revenue, the Indiana Tax Court addressed the sales tax treatment of construction materials that were incorporated into a customer’s real property by a retailer that also was a contractor. The court held that the contractor was obligated to pay tax only on the wholesale cost of the materials.
The petitioner, Lowe’s Home Centers LLC (Lowe’s), a home improvement retail chain, offers real property improvement services as a general contractor for the installation of products such as flooring and roofing. Lowe’s performs these services pursuant to installation contracts. In the case in question, the installation contract provided that Lowe’s would furnish both the construction material and the labor to complete the specified project. Lowe’s self-assessed and remitted use tax to the department on the wholesale, not retail, cost of the construction materials furnished under the installation contract.
Under Indiana regulations, the sales tax treatment of a construction contract depends on whether the contract is a lump-sum contract or a time-and-materials contract. Under a lump-sum contract, the contractor agrees to complete the project for a fixed price. The Indiana sales tax regulations indicate the contractor pays use tax on the purchase price of the materials in a lump-sum contract. In a time-and-materials contract, the contractor separately states the amount billed for materials and labor on the customer invoice. The regulations indicate that in a time-and-materials contract the contractor should charge sales tax to the customer on the amount billed for materials, which might be different from the contractor’s purchase price.
Lowe’s argued that its contract should be treated as a lump-sum contract, and Indiana argued that the contract was a time-and-materials contract. Because of the difference between the cost of the materials for Lowe’s and the retail sales price of the materials, treating the arrangement as a time-and-materials contract would have increased the sales tax obligation Lowe’s owed to the state.
In its opinion, the court held that the state’s sales tax statutes did not support the Department of Revenue’s distinction between lump-sum and time-and-materials contracts and held that all construction contracts generally should be treated as lump-sum contracts with the contractor responsible for use tax on its cost of materials.
In light of the court’s decision, contractors should evaluate current pricing and billing practices related to contracts for the installation of tangible personal property into real property to ensure that sales tax is not being charged and collected from customers. Additionally, contractors who paid use tax on the retail rather than wholesale value of the materials should file refund claims.
It remains to be seen if the Department of Revenue will appeal this decision.