Remodeling your own kitchen is undoubtedly one of the most expensive things on a fixer-upper owner’s budget. The Tax Trotter knows firsthand – she and Mr. Tax Trotter bought the worst house on the best block 8 years ago and are still renovating it. Several cost-saving strategies were used, including buying inexpensive mahogany furniture that was sold to order and adding a custom-made granite top to a series of classic-style cream cabinets sourced from IKEA on the advice of an expert friend. There were some excesses because the Tax Trotter insisted on using a specific European brand of paint – for the Tax Trotter, the brand’s color palette didn’t appear as “fluorescent” as paints made by brands sold in large stores.
Those fond memories of kitchen remodeling adventures were brought back recently through a discussion at a meeting of Sullivan’s state tax practice. The Tax Trotter was made aware that there appears to be widespread confusion in the Massachusetts-based countertop company community as to whether to treat them as sellers of property, plant and equipment or as contractors for sales / use tax purposes. In cases that the Tax Trotter was made aware of by their colleagues, the DOR auditors did not attempt to correct and enlighten the countertop companies and the problem with the contractor / seller had to be resolved as part of the appeal process.
We learned that several countertop companies have reported contract sales as if they were seller sales of tangible personal property and applied sales tax on customer invoices. Some of these companies had relied in part on the practices of other similar countertop companies in Massachusetts. The Tax Trotter notes that most of these businesses are small businesses with no tax departments.
For VAT purposes, contractors who build or improve real estate are distinguished from providers who sell tangible personal property. Only the latter are subject to sales tax. A seller of tangible property who can be sold over the counter or who requires nothing more than simple “installation, assembly, application or combination of services” is considered a seller of tangible property and not a contractor.[ii] Examples of standard equipment or fixtures installed that would be taxed by the seller / installer and payable by their customers (unless otherwise specified) are awnings, blinds, electrical devices, or wireless alarm systems.[iii] Once installed and attached to real estate, such items can be removed with little or no damage to the light fixture or property and possibly reused in another location. In contrast, it is seldom possible to remove a custom worktop without damaging it and reuse it “as is”. So a countertop job is not a taxable seller sale as the countertop itself becomes part of the property.
After months of searching for inexpensive options to get both kitchen cabinets and a countertop, the Tax Trotter assures you that the more likely you are to come across a standard set of cabinets (IKEA!) Than a standard countertop. In the countertop shops the Tax Trotter visited, slabs of available stone were displayed and composite countertops were tried. The Tax Trotter was able to review examples of complete kitchen countertop projects, none of which could be replicated or adapted to the Tax Trotter’s space. After the countertop manufacturer’s team had spent a few hours looking at the countertop using the tax trotter’s kitchen plans and layout, the tax trotter spent two hours with the sales rep tracing the countertop exactly like the tax trotter using a virtual reality tool to design specifications. After the Tax Trotter signed the design, her countertop was made to measure from two granite slabs, delivered to her house and permanently attached to the cabinet floor on the day of delivery.
DOR officials had informed my SALT colleague that they were actively working on the publication of sales and tax guidelines for certain industries. The DOR website already has extremely useful guides for electricians and installers. See Electrician VAT Guide | Mass.gov and Sales Tax Guide for Plumbers | Mass.gov.
Until such guidance is available to countertop manufacturers, it is the Tax Trotter’s sincere hope that the DOR Auditing Department seeks to educate taxpayers, particularly on matters affecting small businesses, and to proactively correct incorrect industry practices as part of the auditing process . If the facts are presented clearly enough and in a timely manner, both the DOR and taxpayers benefit from not having to deal with the time and expense involved in the formal complaint process.
The Tax Trotter thanks her state tax colleague Mssrs. Richard Jones (sullivanlaw.com), Joseph Donovan (sullivanlaw.com), and David Nagle (sullivanlaw.com) for their valuable insights and contributions to this article. Mr. Donovan wrote letter Ruling 79-46 during his tenure in the Treasury Department, and Mr. Nagle worked with the late, great Mr. William Halmkin, also of Sullivan, on the Classic Kitchens, Inc. case. Mr. Jones assisted countertop companies with recent audit complaints.
It is the humble opinion of the tax trustee that Dr. Jones, Donovan, and Nagle are the dream team for all of your government tax advisory and controversy needs.
[i] As the Tax Trotter explained by her colleagues, real estate contracts under Massachusetts law are not contracts for the sale of goods such as bricks, window frames, or custom cabinets or countertops. See White v Peabody Construction Co., Inc., 386 Mass. 121: 132-133 (1982); DOR guideline 14-2. As a result, contractors are not retailers of the materials they use in connection with their construction projects and therefore cannot be liable for VAT on their sales to customers. Classic Kitchens, Inc. v Commissioner of Revenue, ATB Dkt. No. C262393 (2004) cited White v Peabody Construction Co., Inc., 386 Mass. 121: 132-133 (1982); Ace Heating Service, Inc. v State Tax Commission, 371 Mass. 254: 256 (1976). Instead, Massachusetts treats building contractors as consumers of the building materials they use to build or improve real estate. The contractor is treated as a consumer, even if he charges a separate fee for materials in his contract or on a customer invoice. Letter decision 79-46.
[ii] See Classic Kitchens, Inc. v Commissioner of Revenue, ATB Dkt. No. C262393 (2004), specifying the Emergency Ordinance No. 12 under (4)
[iii] See e.g. B. Letter Ruling 85-25.