Request for Comment

As part of the Commissioner’s DOR 360 initiative, the Department is seeking public input on the sales tax “contractor” rules in Massachusetts, in particular with respect to whether they are currently working effectively for taxpayers or whether they can be improved upon.

The general Massachusetts sales tax rule pertaining to contractors is that a contractor is considered the consumer of materials used in connection with a construction or similar contract (such as lumber, nails, or paint). The contractor pays tax on those items unless another exemption applies (see DD 07-6), but it does not collect tax on the amount charged to its customer.  The transaction between a contractor and its customer is not generally considered a retail sale subject to sales tax.

There is an exception to the above-stated rules when the contractor is selling “a complete unit of standard equipment, requiring no further fabrication but simply installation, assembling, applying or connecting services.” In those cases, the contractor is acting as a vendor of tangible personal property and must collect tax from its customer and remit that tax to the Commonwealth.  (Examples of complete units are HVAC equipment and hot water heaters.)  The contractor gives a resale certificate to its supplier in this scenario.

The sales tax contractor rules were originally published in Emergency Regulation 12 in 1966.  Although that regulation was never permanently promulgated, those underlying rules still have effect through case law, e.g., Ace Heating Service, Inc. v. State Tax Commission, 371 Mass. 254 (1976) and numerous public written statements of the Department.  Nevertheless, there have occasionally been issues as to what constitutes a “complete unit of standard equipment.”  For example, see discussion regarding kitchen cabinets in Classic Kitchens, Inc. v. Commissioner of Revenue, ATB Docket No. C262393 (2004).

If you wish to comment, please respond to the following:

  • Are you a practitioner or a business – and, if a business, briefly describe the business.
  • Do the current contractor rules work effectively in your experience?  Please explain why or why not.
  • Should some change be made?  If so, what do you suggest? If not, do you believe that the Massachusetts rules are sufficiently established that no change is preferable?
  • Should a taxpayer be allowed to elect to be treated as a contractor or a vendor, and, if so, should an election apply across-the-board or apply to each transaction separately?
  • Do you believe there is currently sufficient guidance on this subject?
  • Are there other states where you do business that have an approach to contractor sales tax rules that we should consider?

Please submit comments to rulesandregs@dor.state.ma.us by November 1, 2012.  Thank you.