Tips for use tax deposits and reconciliation
A number of Colorado towns, cities and counties require a use tax deposit to be paid with a building permit. Fifty percent of the project value is commonly considered as the taxable amount for materials.
Once the permit is issued and the project work starts, however, it’s easy to forget about the use tax deposit paid. So how are contractors most likely to be impacted by permit reconciliations?
The deposit is only an estimate of the use tax obligation due on the materials used on the project. Job change orders can impact the amount of additional use tax remaining due. Additionally, jobs that are more labor intensive are less likely to hit the estimated taxable amount, so a refund may be due.
A subsequent sales and use tax audit of the contractor, the subcontractor or the customer can lead to further assessments of tax, plus interest and penalties. Interest commonly ranges from 1% to 1.5% per month or 12% to 18% per year! With a 36-month audit period and the delays in getting to the assessment, the interest is often significant.
The Colorado Department of Revenue audits for sales tax on behalf of state-collected cities and counties but not for their use tax. Home-rule cities are also left to their own enforcement, typically through audit.
Tips and recommendations from the city of Aurora, as an example:
- Make sure the permit has been issued before starting work and purchasing of materials and ensure the permit is used correctly by both general contractors and subs.
- Issue a copy to all subs so they purchase materials exempt from the city and/ or county with tax covered under the permit.
- Do not expect credit for sales tax paid when a permit was to have exempted it.
- Realize the permit deposit is just that, a deposit.
- Make sure to reconcile within the specified days of completion/C.O.
- An intentionally undervalued permit (not okay) combined with change orders (very common) can lead to an unforeseen liability, so make sure to account for those.
- Be aware of the different requirements for different jurisdictions.
- Address sale of complete goods, such as appliances, that might/should not be included in the deposit.
- Aurora’s contractor brochure is available on their website as an example: Contractor’s Brochure.pdf (civiclive.com)