A general contractor or a subcontractor is responsible for complying with the pertinent sections of M.G.L. Withholding Tax, Chapter 62B, as well as M.G.L. Sales and Use Tax, Chapters 64H Sections 30A and 64I Section 31A. These two sections contain the procedures which out-of-state contractors and subcontractors must follow when performing their services in Massachusetts.
A Deposit or Bond, in the amount of 6.25% of the total contract price, is required to secure payment of any sales or use tax payable in respect to tangible personal property consumed or used in carrying out the contract. When the required deposit is received from the contractor, the Commissioner provides him with a certificate stating that he has complied with this requirement.
Out of State Contractors must complete a Registration Form and submit it with surety deposit or bond prior to the start of the job. If submitting a bond, a Guarantee Bond Form must be completed and properly executed. The guaranteed Bond must be accompanied by a Power of Attorney designating the bonding company as an agent for all matters pertaining to the job in Massachusetts.
Sales and Use Tax Notice to Out-of-State Contractors
Section 30A of Chapter 64H, and Section 31A of Chapter 64I of the General Laws, the laws for the Massachusetts Sales and Use Taxes, are effective November 27, 1973. These sections set forth obligations, guidelines and directions for out-of-state contractors, sub-contractors and principals who enter into contracts with them regarding the construction, reconstruction, alterations, remodeling or repair of real property.
Some of the more important requirements are:
- Upon undertaking a construction contract in Massachusetts, non-resident contractors are required under the Sales and Use Tax Laws to deposit with the Commissioner of Revenue a sum equivalent to 6.25% of the total amount of the contract or to provide the Commissioner with a Guarantee Bond, payable to the Commonwealth of Massachusetts, Department of Revenue, equivalent to 6.25% of such total amount.
- If the out-of-state contractor or sub-contractor does not furnish the copy of the certificate to his principal, the statute requires the principal in Massachusetts who let the contract to deduct an amount equal to 6.25% of the total amount payable to the out-of-state contractor and remit this amount to the commissioner or to furnish a Guarantee Bond or an equivalent amount.
- Subsection (c) of Sections 30A and 31A, provides that if the person who let the contract fails to comply with the procedure given above, he is personally liable for the tax due in respect to tangible personal property consumed or used in the carrying out of the contract.
Form ST-5R Instructions
This certificate may only be used by a Massachusetts contractor or subcontractor to purchase building materials and supplies to be used in the construction, reconstruction, alteration, remodeling, or repair of any building or structure without payment of sales tax to the vendor if the materials and supplies are to be used pursuant to a qualified contract entered into (1) before August 1, 2009, or (2) before October 1, 2009, if the contract is entered into in accordance with a bid that had to be submitted before August 1, 2009. Form ST-5R may not be used after December 31, 2010. See TIR 09-11 for additional limitations.
Note: This is not a blanket certificate, and must be completed with each purchase order.
Bonds and Surety Checks
The amount of the bond or surety required is 6.25% of the total amount the nonresident contractor will receive to complete the contract. In cases where a subcontractor will in turn receive part of the nonresident contractor's payment, this may result in two or more bonds to cover payment of the same tax.
Guarantee Bonds received from nonresident contractors are retained on file.
After the contractor has completed work and filed the applicable returns with full payment, the bond will be released. If returns are not filed or if returns are filed without payment a claim is made against the bond.
Exceptions to the Bonding Requirement
Certain nonresident contractors working in Massachusetts may not be subject to the bonding requirement. A contractor may not be required to submit a bond or deposit if:
- the principal (the owner of the real estate being constructed, reconstructed, altered, remodeled or repaired) is a tax-exempt organization under IRC §501(c)(3) (these include certain religious, charitable and similar organizations);
- the principal is an exempt government agency (but must file registration indicating this status);
- the contract is for labor only where the contractor supplies no materials (the contractor must still file registration);
- the contractor maintains a permanent office (other than a site office) within Massachusetts.
When a contractor qualifies for exemption because the principal is a governmental agency or a tax exempt organization per IRC §501(c)(3), DOR will issue Form ST-5C to the principal or general contractor. Taxpayers are required to provide a copy of Form ST-5C in response to inquiries from the auditor about their claim of exempt status.
Contractors maintaining permanent offices in Massachusetts remain liable for tax on tangible personal property. Nonresident contractors doing business in Massachusetts are expected to know and voluntarily comply with the bonding provision and secure a certificate if required to do so by c.64H §30A or c.64I §31A.