Sales and use tax mistakes come with costly pitfalls. What are the risks of incorrectly assessing, collecting or remitting sales and use taxes?
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Audits of unlicensed vendors can — and do — go back multiple years, and even to day one of the business.
Contractors’ “construction services” may extend into retail sales of goods. Thus, there may be unmet obligations to register, collect and remit sales tax to the state and to any of the 72 home-rule jurisdictions like Denver.
Use tax is due on untaxed purchases for the contractor’s own business, including expense items and fixed assets, as well as untaxed materials for construction jobs that aren’t exempt or covered under a use tax deposit paid with a permit.
Contractors often do not get licensed to collect sales tax, but later find that home-rule city or state auditors treat some of their work as a taxable retail sale with installation or taxable fabrication. If the items are lump summed, and thus a “mixed transaction,” the entire amount may be deemed as taxable.
Subsequent audits of the project, or the contractor and any subs, may result in an assessment for the unpaid tax, interest and penalties. Interest is commonly 1% to 1.5% per month cumulative. On a Denver audit, for example, in a typical 36-month audit, the interest for the assessment from the first month is 36%.
Our recommendation? “Know before you go” when considering doing construction work in the various local jurisdictions in Colorado. Start with an address verification to find out which taxing jurisdictions the jobsite is in.
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Then ask questions like:
- Is a permit required?
- Is a use tax deposit paid with the permit?
- If so, does it cover the city or the county only, or both?
- Did you pay sales tax, or self-assess and remit use tax, to the proper jurisdictions?
- Did the GC provide a copy of the permit showing use tax was paid to the subs?
- Do you have applicable proof of exemptions for verification in an audit?
Properly understanding the state’s requirements, plus county- and city-specific requirements, prior to choosing a development site or bidding on a project will bode well for all parties involved.
Alan Smith is director of Sales Tax Colorado, LLC. He can be reached at [email protected].