Tax Court invalidates contract distinction in administrative regulations

In ruling for a national home improvement chain on whether it had to collect sales tax from customers who used its contractor services, the Indiana Tax Court invalidated a distinction contained in Department of Revenue administrative regulations regarding the type of contract a contractor uses.

The state Department of Revenue claimed that Lowe’s Home Centers LLC should have collected sales tax from its customers for the tax years 2007, 2008 and 2009 on construction material it incorporated into customers’ real property during those years. Lowe’s provides contractor services such as installing roof and self-assessed and remitted use sales tax on that construction material.

Since Lowe’s did not collect sales tax, the DOR issued proposed sales tax assessments against the company, including penalties and interest for those tax years. Lowe’s appealed to the Tax Court in December 2012, which heard arguments last year in the case.

In Lowe's Home Centers, LLC v. Indiana Dept. of State Revenue, 49T10-1201-TA-6, Judge Martha Wentworth pointed out that I.C. 6-2.5-3-2, and 45 I.A.C. 2.2-3-8(b) and 2.2-4-21(b) unambiguously required Lowe’s to remit use tax on the construction material. But the DOR argued that Lowe’s is not just a contractor, it is also a retail merchant. But in order for the DOR to require Lowe’s to collect sales tax from its customers, it must have both acquired the tangible personal property for the purpose of resale and then transferred that property to another person for consideration. But Lowe’s customers in this case aren’t directly purchasing the wood or shingles, but are paying for a completed floor or new roof on their home, Wentworth wrote. Thus, they are converted into real property and are not subject to sales tax.

The DOR also claimed that Lowe’s installation contracts were time and material contracts and not lump sum contracts, citing 45 I.A.C. 2.2-3-9 and 2.2-4-22. These regulations require the self-assessment and remit use tax when a lump sum contract is used and that the customer is liable for sales tax in time and material contracts.

Wentworth found Lowe’s contracts are lump sum contracts. She also found that those two regulations create an artificial distinction between time and material contracts and lump sum contracts in its regulations to convert a contractor’s use tax liability under I.C. 6-2.5-3-2(c) into a sales tax liability on the materials’ higher retail price. Because Indiana Code does not impose use tax liability contingent upon the type of contract used, that distinction in the administrative rules is invalid.