Sometimes it seems as if we live in a world where everyone is just trying to skate by instead of striving for the best. Excellent service is rare and “okay” service is the norm. Using fillers like “um” and “you know” takes the place of concise speech. Ambiguity is valued, while being precise isn’t. While that may be okay when you are ordering a chalupa, it isn’t okay when you are dealing with sales tax.Sales fall into two categories: sales of tangible personal property and sales of services. Your invoices need to make it clear what is going on. If you are selling cakes, put that on the invoice. If you are charging a fee for delivery, have it on the invoice. The taxability treatment may depend on whether or not you separately state charges, but you still need to have invoices that state what you are selling, who you are selling it to, if sales tax is charged and where items are being shipped.
The same thing applies to taxable services. If you are performing construction services, make it clear what type of service you are performing. You can’t address the sales tax consequences effectively if it is not clear what service is being performed. Plus, for those jurisdictions where new construction is treated differently from repair or remodeling, it is always best that the contract spells out what type of project you are working on. How can your accounting department know the correct sales and use tax treatment for a specific job if they don’t know what type of project it is?
If the project is a new construction project, let your accounting department know. In Texas, they also need to know what type of contract you have with the owner to determine if sales or use tax should be paid or accrued on incorporated materials. If the project is for a tax exempt entity, the accounting department needs to know. Not only does that affect their invoicing, it affects the sales or use tax the contractor pays, as well as what documentation needs to be on file.
Don’t think that standard industry contracts address your sales tax issues. There are standard industry contracts that some contractors consistently use , but those contracts do not specifically address sales tax. You need to know what your responsibilities are.
A contract stating that contractor is responsible for the correct treatment of a project may work if you and the contractor have a legal dispute. It will not work, however, if you get audited. Even if you have a provision like I just described, if your company is audited and the contractor failed to charge the appropriate sales tax, the auditor will assess it on your audit. Keep that in mind when you are signing those contracts. A catch all contract will not always work.
The point is the last thing you want is for an auditor to have questions. Your contracts, invoices, workpapers, etc. should tell the story for you. In order for you to understand your sales and use tax responsibilities, you must be clear about what services you are providing, what items you are selling and what documentation you need to have on file for tax free sales. Ambiguity is not your friend. Your documentation must make it clear exactly what you are selling. That is why you must call a thing a thing.