CONTRACTORS’ EXCISE

TAX

The information in this presentation does not cover every aspect of tax, nor does it alter or supersede any state statute or administrative regulation.

The information in this presentation does not carry regulatory or statutory authority.

All users of this presentation are responsible for keeping informed about changes in tax laws and regulations by reading the Department of Revenue newsletters, press releases, Tax Facts, and other documents published by the Department.

WHO NEEDS A CONTRACTORS’ EXCISE TAX LICENSE?

ANYONE: Entering into a contract for construction services listed in

Division C of the Standard Industrial Classification Manual of 1987

Engaging in services including construction, building, installation, or repair of a fixture to real property

Engaging in repair or remodeling of existing real property or the construction of a new project

You must be licensed before starting work. You do not need a license for

each construction site.

SDCL 5-18B-17 No purchasing agency may award a contract for the construction of any public improvement unless the contractor has a South Dakota contractors’ excise tax license (CET)

WHAT IS EXCISE TAX?

2% tax on gross receipts of all prime contractors engaged in construction services or realty improvement projects

2% tax on gross receipts of all prime and subcontractors engaged in construction services or realty improvement for qualified utility projects

No prime contractor is exempt from contractors’ excise tax.

HOW TO DETERMINE IF CONTRACT IS SUBJECT TO CONTRACTORS’ EXCISE TAX:

Is the service listed in the SIC Manual Division C? If not in Division C of the SIC Manual, do the services

entail the construction, building, installation, or repair of a fixture to realty?

A fixture is: Annexed or attached to real property • hardwired or wired direct • bolted or affixed to the real property • plumbed in (connected direct to water or sewer) Adapted to real property Intended to be permanent

PRIME CONTRACTOR: anyone entering into a contract for construction services or realty improvements

Any person contracting to provide construction services or make realty

improvement who has not been issued a prime contractors’ exemption certificate

is a prime contractor.

SUBCONTRACTOR: contracts to perform part, or all, of the construction services or realty improvement for a prime contractor, and receives a prime contractors’ exemption certificate

PRIME Needs CET license

Contracts with owner

Reports gross receipts, including owner-furnished material

Owes sales or use tax on materials if not previously paid

Gives prime contractors’ exemption certificate

Pays contractors’ excise tax

SUBCONTRACTOR

Needs CET license

Contracts with prime or another subcontractor

Reports gross receipts, does not include owner-furnished materials

Owes sales or use tax on materials the sub supplies

Receives prime contractors’ exemption certificate

Doesn’t pay CET if has exemption certificate (unless qualified utility project)

Subcontractors: Report all receipts as gross receipts on Line 1 of the

Contractors’ Excise Return Deduct as Subcontractor’s Receipts on Line 3 of

Contractors’ Excise Return on projects for which they have a Prime Contractors’ Exemption Certificate

Cannot deduct receipts for qualified utility projects

Owe sales/use tax on materials they supply

PRIME CONTRACTORS’ EXEMPTION CERTIFICATE

Prime contractor’s responsibility to issue

If subcontractor hires another subcontractor, prime must issue Prime Contractors’ Exemption Certificate

Are not issued to materials suppliers or sales taxable service providers

Cannot be issued on qualified utility projects

Must show: • prime contractors’ excise tax license number • project location • project description

Blanket certificates cannot be issued – must list specific project

Certificates may not be issued by: • US Government • State of SD • Any state, public, or municipal corporation • Owner of a project – unless owner is a prime contractor building or remodeling with the intention of selling the property or building property to lease

Only Prime Contractors can issue Exemption Certificates

When Is Excise Tax Due?

Cash: when payment/draw received Accrual: when the sale is recorded, whether or not payment has been received Use Tax: due at the time the items or services are purchased and when the owner-furnished material is received

BID FACTOR: 2.041%

Online bid calculator can be found at http://www.state.sd.us/drr2/businesstax/cet/cet.htm

Or http://state.sd.us/businesstax/ and click on the Contractor’s Excise Tax tab

Only use this factor to prepare a bid. A straight 2% is used when calculating tax due on the excise

tax return

Invoice Example: Material $10,000.00 (Includes 6% sales tax paid at time of purchase)

Labor $ 5,000.00 Miscellaneous $ 1,500.00 (Includes permits, inspections, etc.)

Subtotal $16,000.00 Excise Tax x 2.041 __________ $ 336.77 Total Invoice $16,836.77

Excise Tax Due: Gross Receipts $16,836.77 x 2% ___________ Excise Tax Due $ 336.74

Subtotal $16,500 Excise Tax X 2% _________ $ 330.00

Return Example:

If bid were figured without using the bid factor:

Gross Receipts Include: Labor Sales or Use tax on materials

Excise tax Sweat equity

Indirect payments Penalties, Liquidated damages

Awards or Bonuses Barter transactions

Retainage Building permits, Fees

Owner-furnished materials

Draws on loans

No deductions for: Subcontractors Cost of services or labor purchased

Taxes

Expenses or losses

OWNER-FURNISHED MATERIALS (OFM)

Supplied by owner

Prime owes CET on value, except for qualified utility projects (fair market value includes sales or use tax on the material)

State and municipal tax due on cost of material if no documentation showing sales or use tax was paid

Value is include in excise tax calculation

Report on Line 2 of tax return during reporting period material is furnished for contractor’s use

Contractors are considered users/consumers of construction supplies.

EXCISE TAX ON OFM

Owner supplies $500 of materials to contractor (tax-paid) Labor $ 500 OFM $ 500 Total Taxable $1,000 Excise Tax Rate x 2.041% Excise Tax Due $ 20.41 Total Invoice $520.41

EXCISE TAX CALCULATIONS GROSS TAXABLE RATE TAX DUE

1.Gross Receipts $ 520.41

2.Owner-Furnished Materials $ 500.00

3.Deductions (Subcontractors Receipts Out-of-state)

4.Special Jurisdiction Receipts (Detail in city Section)

5.Net State Excise Taxable (Line 1 plus Line 2, minus Line 3, minus Line 4 $1,020.41 2% $20.41

6.Net Sales and/or Use Taxable

7.Total State Tax Due (Line 5 plus Line 6) $20.41

SALES AND USE TAX

Contractors are responsible for paying sales or use tax on all purchases of products or services, regardless of who owns the materials. This includes: Materials installed in construction projects All equipment, tools, and supplies used by the

contractor

64:09:01:16 General contractors are liable for use tax on all items of tangible personal property used, stored or consumed in

the performance of their contract, including those portions of the contract performed by subcontractors.

State sales and use tax applies if supplier does not charge applicable sales tax, based on where the contractor receives the product Use tax is reported on the excise tax return when

the contractor receives the product • Picks up at store, state and city tax applies at store’s location • Has delivered, state and city tax applies where delivered Use tax applies to cost of material, including delivery

and handling charges

If the contractor later uses the material in a city that imposes a higher tax rate, the contractor must pay the

additional city use tax in the reporting period the contractor uses the material.

Invoice Calculations Labor $ 5,000.00 OFM $10,000.00 Use Tax $ 600.00 ($10,000 x 6%) Subtotal $15,600.00 Excise Tax x 2.041% $ 318.40 Total $15,918.40

Use Tax collected is part of the gross receipts.

Include on Invoice $5,000.00 $ 600.00 $ 318.40 $5,918.40

EXCISE TAX GROSS TAXABLE RATE TAX DUE

1.Gross Receipts $5,918.40

2.Owner-Furnished Materials $10,000.00

3.Deductions (Subcontractors Receipts Out-of-state

4.Special Jurisdiction Receipts (Detail in City Section)

5.Net State Excise Taxable (Line1 plus Line 2, minus Line 3, minus Line 4 $15,918.40 2% $318.37

6.Net Sales and/or Use Taxable $10,000.00 4% $400.00

7.Total State Tax Due (Line 5 plus Line 6) $718.37

8.City & Special Jurisdiction Tax Calculation Detail:

9. City/Special Jurisdiction Name

Code

Taxable

Rate

Tax Due

10.Sioux Falls 330-2 $10,000.00 2.00 $200.00

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.Total City/Special Jurisdiction Tax (Add Lines 10 through 21) $200.00

23.Total Tax Due (Line 7 plus Line 22) $918.37

24.Penalty/Interest

25.Adjustment (Previous Credit/Balance Due)

26.Total Due (Line 23 plus Line 24 plus Line 25) $918.37

27.Amount Remitted $918.37

OUT-OF-STATE PURCHASES

Material and equipment delivered into South Dakota are subject to SD sales or use tax, even if supplier charges another state’s sales tax.

Credit is allowed for tax properly paid to another state (reciprocity).

If less tax is charged in another state than applies in

SD, contractor owes difference in use tax to SD

Equipment: • New equipment purchased for use in SD subject to SD sales or use tax • Used equipment brought into state by contractor who originally purchased it for use in another state less than 7 years old, use tax on fair market value of equipment

MATERIALS REMOVED FROM INVENTORY

Use tax due when material is taken out of tax unpaid inventory to use on construction project – based on where material is taken out of inventory

Additional use tax is due if material is removed from inventory in one city and is used, stored, or consumed in another city that imposes a higher city tax

Use tax must be reported on Contractor’s Excise Tax return

FABRICATION

Contractors may fabricate materials such as vents or ductwork.

Fabrication costs excluded from fair market value of tangible personal property if fabrication done by contactor’s employees

Tax due on raw materials cost only

If third party hired by contractor to do fabrication, sale/use tax due on entire cost including fabrication labor

SERVICES

Sales and use tax applies to all services unless state law specifically exempts the service. Examples of sales and use taxable services: • Engineering • Accounting • Computer services • Business consulting • Surveying & staking • Architectural planning • Testing • Rock crushing • Carpet laying • Locksmiths • Inspecting • Snow removal • Construction management • Concrete pumping • Equipment rental

Services performed on tangible personal property: where property is delivered to customer (i.e., repairs, rag cleaning, fabrication, millwork finishing)

Services to real property: property location where service is

performed ( i.e. carpet installation, surveying or staking, pest control, lawn care, security services)

Other services subject to sales tax where customer receives

the service (i.e. consulting, architecture, engineering, legal, third party administrative, accounting)

The service provider is responsible for state and municipal tax on services

Use tax is based on where the product or service is used.

EQUIPMENT LEASE OR RENTAL

Without an operator: sales tax applies First payment taxed where possession is taken Subsequent payments taxed at primary location With an operator: tax depends on use • Excise taxable situations • Sales taxable situations

CONSTRUCTION MANAGERS

Sales Taxable Service: • Provides management/consulting services • Oversees or supervises construction project • Contract doesn’t include construction • Has no contracts with contractors – does not PAY contractors

Excise Taxable Service: • Contracts with owner to “build a building” or other construction – Becomes a primer contractor • Is user/consumer of services such as cleanup crew, port-a-potty, dumpster rental • Hires and Pays contractors working on the project • Issues prime contractors’ exemption certificates to subs

EXAMPLES OF REALTY IMPROVEMENTS

Heating/cooling

Plumbing Concrete

Remodeling

Electrical

Carpentry

Painting/wallpapering

HEATING/AIR CONDITIONING

Excise Taxable: • Installation of heating, central air, ventilation units • Repair work

Sales Taxable: • Cleaning • Calibration • Changing filters • Duct cleaning • Smoke/gas testing • Maintenance agreements • Adding freon or recharging AC units • Sale, installation or repair to window air conditioning units

REPAIR VS MAINTENANCE

CET • Includes replacement parts • Fixes parts

If installation is subject to CET, any repair is subject to CET.

SALES TAX • Does not include replacement of parts • Does not fix parts • Maintenance work, even if installation of equipment was subject to CET

WARRANTIES: • Tax according to what the warranty or maintenance contract covers • Charges for warranties or contracts that include repair to real property are subject to CET

TYPES: • Manufacturer’s • Warranties sold by contractors • Service or maintenance contracts

MANUFACTURER’S WARRANTIES

Parts and services covered are NOT subject to sales or use tax.

If the manufacturer provides replacement materials covered by warranty with no charge to the contractor or customer, there is no sales or use tax on the parts. Parts are not included as OFM.

The contractor owes CET on the total gross receipts billed to the manufacturer.

WARRANTIES SOLD BY CONTRACTORS

Warranty charge subject to CET

No tax on labor for services covered under warranty if no charge made to customer

Use tax due on parts used

Charges made to customer for labor or parts subject to sales tax or CET according to work done

Parts covered by manufacturer’s warranty not subject to sales or use tax; all other parts are taxable

SERVICE OR MAINTENANCE CONTRACTS

Contracts to clean or calibrate that do not include installation or repair to real property are subject to sales tax.

Parts and labor used to complete the service contract work are not subject to sales tax.

Any charges to the customer for deductibles or items NOT covered under the contract are subject to tax.

LANDSCAPING – LAWNCARE

SALES TAX

• Landscape design • Spraying and fertilizing • Mowing • Ornamental shrub and tree planting and pruning • Trimming and removal • Utility line tree trimming • Seeding or laying sod • Putting down rock

CET • Laying bricks/retaining walls • Installation of underground sprinklers • Installation of fountains and ponds that contain heaters or flowing water • Stump removal in fields • Sidewalks • Shelterbelt clearing • Cedar tree removal from land

CARPET AND FLOOR LAYING

Most installation of floor covering is sales taxable. Examples: • Carpet laying or removal • Linoleum installation • Laying, scraping, finishing, • Vinyl floor tile/sheet and refinishing parquet and installation hardwood flooring • Asphalt tile installation • Duraceramic and durastone • Fireproof flooring • Resilient floor laying • Wood flooring

CET • Ceramic tile • Terrazzo • Marble • Epoxy flooring

GRAVEL

Sales Taxable: • Gravel sales • Gravel crushing • Stockpiling • Gravel spreading (no blading) • Dumping on the road

Excise Taxable: • Blading or grading of road after gravel has been spread • Road maintenance • Road building

The contractor will owe sales or use tax on purchases of rock or crushing services.

SNOW REMOVAL

Gross receipts from snow removal are subject to sales tax.

When snow removal is for a political subdivision, such as a city or county, the receipts are not taxable.

HIGHWAY CONTRACTORS

Licenses required for all prime and subcontractors who perform highway construction work on public road (including snow removal and blading): Contractor’s Excise Tax Highway Contractor’s (receive from the Division of Motor

Vehicles at www.dor.sd.gov.

Licenses must be obtained before beginning work in South Dakota.

Excise Taxable: • Landscaping • Seeding, sodding • Mulching • Erosion control • Traffic control, flagging • Signing • Striping • Pilot car operation

Sales Taxable: • Gravel crushing • Gravel sales and hauling • Architect • Engineering • Surveying • Snow removal

QUALIFYING UTILITIES (ALTERNATE CONTRACTORS’ EXCISE TAX)

Electric, heating, water and gas companies Railroads Rural electric companies Telephone companies, including rural telephone Rural water supply companies Rural water systems Municipal telephone

Payment must be received directly from the utility to be considered a qualified utility project.

Qualified Utility Project (tax applies under 10-46B)

PRIME Owes 2% excise tax on gross receipts

Do not include value of OFM in gross receipts

Owes 4% state and applicable municipal use tax on OFM

Owes 4% state and applicable municipal use tax on material

Cannot give Prime Contractor Exemption Certificates

Cannot deduct amounts paid to others from gross receipts

SUBCONTRACTOR Owe 2% excise tax on gross

receipts

Owe 4% state and applicable municipal sales or use tax on material

Cannot accept Prime Contractor Exemption Certificate

PORTABLE BUILDINGS

Lawn sheds and portable buildings: subject to sales tax

Shed sold to utility companies: subject to sales tax unless sold with installation on a foundation

Fully wired sheds, such as telephone switching stations: Subject to sales tax unless sold with installation on a foundation

SCHOOL-BUILT HOMES

If built on blocks in school yard by students is subject to sales tax on the selling price when sold

Materials and labor can be purchased exempt from tax because the school is an exempt entity

If built on owner’s site, total contract price subject to contractors’ excise tax

TRIBAL EXCISE TAX

Contractors’ excise tax collected when working on a reservation with an agreement Same rate as state excise tax – 2% Instead of, not in addition to, state excise tax Applied same as state excise tax – subject to

same laws Reported on state excise tax return Reported in Special Jurisdiction section on state

tax return using the code assigned to that Special Jurisdiction

FILING AND PAYING RETURNS

Electronic filing is the preferred method (EPath)

To access EPath: http://sd.gov/epath

SD Quest Users: after July 23, 2013 must create EPath account to continue to file and pay electronically

Questions or assistance: 1-800-829-9188 (Option 1) or email to Epath@state.sd.us

Benefits: • Available 24/7 • One EPath account may be used for all same owner licenses (with same FEIN) • Allows for additional user access to all or specific accounts • Multiple payment options (ACH Debit, ACH Credit, pay at later time or submit check) • Automatically save for later access and editing before submitting • System does all calculations • Amend returns online • Review file and pay history • Change password, security questions, and email addresses at any time • View pending payments and make changes to a payment up to date payment is scheduled • Use a bank account for one-time payment or save account information for future payments

For additional information on sales and use tax or questions concerning taxes: Call toll-free: 1-800-829-9188 E-Mail: bustax@state.sd.us Visit our website: http://state.sd.us/businesstax Visit or call your local Department of Revenue office

DEPARTMENT OF REVENUE FIELD OFFICES

Aberdeen: 419 Moccasin Dr., Aberdeen, SD 57401, 605.626.2218

Mitchell: 417 N. Main, Suite 112, P.O. Box 1103, Mitchell,

SD 57301, 605.995.8080 Rapid City: 4447 S. Canyon Road, Suite 6, Rapid City, SD

57702, 605.394.2332 Sioux Falls: 300 S. Sycamore Ave., Suite 102, Sioux

Falls, SD 57110, 605.367.5800

Watertown: 715 South Maple, Watertown, SD 57201, 605.882.5188

Yankton: 1900 Summit St., Yankton, SD 57078, 605.668.2939

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http://dor.sd.gov/