The purpose of this Directive is to explain the deposit and bonding requirements for nonresident contractors contained in the Massachusetts sales and use tax statutes. These provisions were enacted to ensure payment of the Massachusetts sales and use tax from nonresident contractors for consumption or use of tangible personal property during the performance of a contract in Massachusetts.
II. Discussion of Law:
General Laws chapter 64H, § 30A and G.L. c. 64I, § 31A provide a mechanism to secure payment of sales and use taxes due on account of the use of tangible personal property in Massachusetts by a nonresident contractor. These statutes provide:
(a) Where a nonresident contractor enters into a contract with a person pursuant to which or in the carrying out of which tangible personal property will be consumed or used within the commonwealth, the nonresident contractor shall deposit with the commissioner a sum equivalent to five per cent of the total amount to be paid under the contract, or shall furnish the commissioner with a guarantee bond satisfactory to the commissioner in a sum equivalent to five per cent of such total amount, to secure payment of the tax payable relative to tangible personal property consumed or used pursuant to or in the carrying out of the contract and shall obtain a certificate in duplicate from the commissioner that the requirements of this subsection have been met.
(b) Any person dealing with a nonresident contractor without first obtaining the duplicate copy of the certificate from the commissioner as required in subsection (a) shall deduct five per cent of all amounts payable to the nonresident contractor and pay it over to the commissioner on behalf of or as agent for the nonresident contractor, or shall furnish the commissioner with a guarantee bond satisfactory to the commissioner in a sum equivalent to five per cent of such total amount, to secure payment of the tax payable relative to tangible personal property consumed or used pursuant to or in the carrying out of the contract.
(c) Where a person dealing with a nonresident contractor fails to comply with subsection (b), he is personally liable for payment of the tax imposed by this chapter relative to tangible personal property consumed or used pursuant to or in the carrying out of the contract.
As used in this section "contractor'' shall mean any person engaged in the construction, reconstruction, alteration, remodeling or repair of real property.
Id. These sections provide that upon undertaking a construction contract in Massachusetts, a nonresident contractor is required to provide the Commissioner with a deposit in an amount equal to five per cent of the total amount to be paid under the contract or a surety bond equivalent to five per cent of such total amount. The deposit or bond is required to secure payment of any sales/use tax payable for any tangible personal property consumed or used in carrying out the contract. When the required deposit or bond is received from the nonresident contractor, the Commissioner provides the nonresident contractor with a certificate stating that he has complied with this requirement. The nonresident contractor must provide the person who hired him with a copy of the certificate.
Detailed information for nonresident contractors, including how to register with DOR, obtain a bond and file the bond with the Department, is contained on the Department's website.
In some instances, instead of providing a bond for each contract, a nonresident contractor may be given the option of providing a single bond based on the aggregate amount of the contractor's Massachusetts contracts for the prior year and/or sales and use taxes paid by the contractor in the prior tax year. Nonresident contractors interested in this option should contact the Department's Audit Division.
Written inquiries may be directed to the Massachusetts Department of Revenue, Audit Division, Out of State Contractors Unit, 200 Arlington Street, Room 4300, Chelsea, Massachusetts 02150.
Please note that voluntary registration as a Massachusetts vendor, by itself, does not meet the statutory requirements. The nonresident contractor must complete and file a nonresident contractor registration form, available from the website above, and meet the bond or deposit requirements of G.L. c. 64H, § 30A and G.L. c. 64I, § 31A.
If the nonresident contractor does not furnish the copy of the DOR certificate to the person who hired him, the statute requires that person to deduct an amount equal to five per cent of the total amount payable to the nonresident contractor and remit this amount to the Commissioner or to furnish a surety bond for the equivalent amount.
A person, including but not limited to, a property owner, a lessee, or a general contractor, who does not receive a certificate from the nonresident contractor and does not deduct and pay over to the Commissioner or post a bond as required by the statute is personally liable for the tax due with respect tangible personal property consumed or used by a nonresident contractor in the carrying out the contract.
Issue 1: What is the definition of "nonresident contractor"?
Directive 1: For purposes of G.L. c. 64H, § 30A and G.L. c. 64I, § 31A, a contractor is considered a nonresident contractor if the contractor does not maintain a regular place of business in Massachusetts.
Discussion 1: The statutory provisions define contractor as "any person engaged in the construction, reconstruction, alteration, remodeling or repair of real property." However, the term "nonresident contractor" is not defined in the statute. The Department has adopted the following definition of nonresident contractor:
Nonresident contractor, a construction contractor or subcontractor who does not own or lease real property located in Massachusetts that is continuously used by the construction contractor as an office, warehouse, store, factory, or other regular place of business. A temporary office at the site of a construction contract is not real property continuously used as an office, warehouse, store, factory, or other regular place of business.
Issue 2: In determining whether an entity such as a general partnership, limited liability partnership ("LLP"), limited liability company ("LLC"), or joint venture is a non-resident contractor, is it the location of the entity or the location of the members of the entity that is taken into consideration?
Directive 2: If an entity such as a general partnership, LLP, LLC, or joint venture is the contractor obligated to perform under a construction contract, the Department will look to whether that entity has a regular place of business in Massachusetts. If the entity does not have a regular place of business in Massachusetts, then the entity will be considered a nonresident contractor for purposes of G.L. c. 64H, § 30A and G.L. c. 64I, § 31A.
Discussion 2: A contractor is any person engaged in the construction, reconstruction, alteration, remodeling or repair of real property. G.L. c. 64H, § 30A; G.L. c. 64I, § 31A. For purposes of chapters 64H and 64I "person" means "an individual, partnership, trust or association, with or without transferable shares, joint stock company, corporation, society, club, organization, institution . . . and any combination of individuals acting as a unit." Thus, an entity such as an LLP or LLC may be a contractor. Except in the case of an individual contractor, the focus of the Department's inquiry in determining whether the entity is a nonresident contractor will be on whether the entity as such has a regular place of business in Massachusetts.
Issue 3: When DOR determines that a person, including but not limited to a property owner, a lessee, or a general contractor, has hired a nonresident contractor that did not provide a deposit or post a bond, how will DOR calculate the person's liability?
Directive 3: The liability of a person that hired a nonresident contractor and failed to comply with the provisions of G.L. c. 64H, § 30A and G.L. c. 64I, § 31A is based on the sales and use tax due on the tangible personal property used in Massachusetts. When the exact amount of a nonresident contractor's liability cannot be determined, the person's liability will be determined based on the best information available.
Discussion 3: General Laws chapter 64H, § 30A and G.L. c. 64I, § 31A provide in part:
(c) [w]here a person dealing with a nonresident contractor fails to comply with subsection (b), he is personally liable for payment of the tax imposed by this chapter relative to tangible personal property consumed or used pursuant to or in the carrying out of the contract.
Id. Pursuant to the provisions, the liability of the person dealing with the nonresident contractor is based on the sales and use tax due on the tangible personal property used in Massachusetts. The person's liability is generally less than five per cent of the contract amount, which amount generally includes the cost of labor as well as tangible personal property. When the exact amount of a taxpayer's liability cannot be determined, the liability should be determined based on best information available.
Issue 4: When a nonresident general contractor hires a nonresident subcontractor that provides a deposit or surety bond for 5 per cent of the amount the subcontractor will receive under its contract, may the deposit or surety bond amount required from a nonresident general contractor be reduced by the amount of the deposit or surety bond provided by the nonresident subcontractor?
Directive 4: The nonresident general contractor may reduce its required deposit or surety bond by the amount of a deposit or surety bond posted by its nonresident subcontractor.
Discussion 4: If the nonresident general contractor pays a nonresident subcontractor out of the total paid to the nonresident general contractor under the contract, then having a bond from the nonresident general contractor and a bond from nonresident subcontractor for the full amounts to be paid to them would potentially result in the Commissioner receiving a deposit or bond for more than five per cent of the total amount that the nonresident general contractor will receive under the contract. To avoid this result, the deposit or surety bond amount required from a nonresident general contractor may be reduced by the amount of the deposit or surety bond provided by or on behalf of the nonresident subcontractor hired by the nonresident general contractor.
Issue 5: Is there a minimum contract size below which a deposit or surety is not required?
Directive 5: For a construction project where the contract between a person and the project's general contractor is $20,000 or less, a non-resident contractor will not be required to make a deposit or post a bond with the Commissioner. This exception to the deposit or bond requirement does not exempt the nonresident contractors from paying the tax on the items the contractor purchased for use on Massachusetts jobs. If a nonresident contractor is not required to provide deposit or bond because of the $20,000 limitation, the person dealing with the nonresident contractor will not be personally liable for payment of sales or use tax due from the nonresident contractor for tangible personal property used or consumed in carrying out the construction contract. In determining whether a general contractor has exceeded the $20,000 limitation in Directive 5, the Department will aggregate the amounts paid under all contracts between a general contractor and same person in Massachusetts in any one hundred and twenty day (120) period. Directive 5 will be applied prospectively from the date this Directive takes effect.
Discussion 5: Although the provisions of G.L. c. 64H, § 30A and G.L. c. 64I, § 31A do not set forth exceptions from the deposit or bond requirement, under the authority of G.L. c. 62C, § 3, the Commissioner may prescribe rules to effectively and efficiently administer the Massachusetts tax provisions. To ease the administrative burden on DOR and nonresident contractors, the Commissioner will except nonresident contractors from the deposit or bonding requirements on general contractors' construction contracts of $20,000 and less.
Issue 6: Other than the exception provided in Directive 5, are there other situations where a nonresident contractor is excepted from the deposit or bond requirements?
Directive 6: Generally, a nonresident contractor will not be required to make a deposit or submit a bond if the owner of the real estate being constructed, reconstructed, altered, remodeled or repaired is a tax-exempt organization under IRC § 501(c)(3) exempt under G.L. c. 64H, § 6(e) or if the owner is a government agency exempt under G.L. c. 64H, § 6(d), and the contractor is an agent of the exempt entity. This rule also applies to the purchase of building materials and supplies that fall within the exemption in G.L. c. 64H, § 6(f). A bond or deposit is also not required if the contract is for labor only and the nonresident contractor supplies no materials. The nonresident contractor is required to register with the Department to obtain a determination that the project qualifies for this treatment.
Discussion 6: The purpose of the nonresident contractor deposit and bond requirements is to ensure payment of sales/use tax on construction materials used in Massachusetts unless they are otherwise exempt. Where the owner of the real estate or the party entering into the construction contract is an exempt entity, the contractor's purchase of building materials and supplies and payment of rental charges for construction vehicles, equipment and machinery may be exempt. See DD 02-16 for limitations. Also see TIR 99-6 in situations where the contractor is an agent of the exempt entity. The nonresident contractor is required to register with the Department when contracting with an exempt entity in Massachusetts. The Department will determine if the project qualifies for the exception in Directive 6. If so, the Department will issue Form ST-5C to the nonresident contractor, Contractor's Sales Tax Exempt Purchase Certificate.
/ s/Alan LeBovidge
Commissioner of Revenue
August 16, 2005