Business tax tip #18

Real Property Contractors and Maryland Taxes

General information

Real property contractors are responsible for several different state taxes and licenses. The information below answers some of the most commonly asked questions about them.

If you engage in construction activities, you must obtain a construction license annually. The license is valid from May 1st through April 30th and is available from your local Clerk of the Circuit Court.

If you already have a Maryland Home Improvement License, you do not need a construction license.

Do I have any other registration requirements?

Yes. You need to establish various tax accounts for your business. You can fill out the interactive Combined Registration Application online, and set up sales and use tax, income tax withholding, motor fuel tax and unemployment insurance tax accounts.

You can also obtain a Combined Registration Application from one of the Comptroller's taxpayer service offices located throughout Maryland. The addresses and phone numbers of the offices are listed in your local phone directories. Read further to see if you will be responsible for one of these taxes. You may also want to check out Tax Tip 30 - A Brief Look at Maryland Taxes for other possible obligations. You can also obtain Tax Tip 30 from any of the taxpayer service offices

Who is a real property contractor?

• General contractor;
• Special contractor;
• Sub-contractor; or
• Builder

What types of work are done by construction and building contractors?

• Constructing or demolishing buildings;
• Road construction;
• Landscaping; and
• Construction for government agencies, schools, churches or hospitals.

What kinds of records do I need to keep?

You should keep the general business records that are appropriate for your type of business. These general business records include a general ledger, subsidiary ledgers, journal entries, bank statements, check stubs, federal and state income tax returns, purchase invoices, sales invoices, contracts, and job files.

Sales and Use Tax

When contractors buy building materials for use in a real property project, they are responsible for paying the tax at the time of purchase. However, they may also purchase materials tax free with a valid resale certificate, if they intend to resell the materials as personal property.

Do I have to pay sales and use tax?

Yes. Real property contractors must pay the 6 percent sales tax on building materials and supplies. Items purchased out-of-state, either directly, by mail, Internet or telephone, are also taxable if they are delivered to the purchaser in Maryland. Construction materials, tools, and equipment are examples of taxable out-of-state purchases that may be made by real property contractors.

What purchases can I make without paying sales and use tax?

If you are also a retailer of supplies and materials, you may purchase materials for resale tax free by issuing your supplier a resale certificate. You must subsequently collect the sales and use tax from your customers.

What is a resale certificate?

A resale certificate states that materials and supplies or taxable services you purchase tax free will be resold or incorporated into tangible personal property or a taxable service that will be sold. For more information about resale certificates, request Business Tax Tip #4, If You Make Purchases For Resale.

I've heard about exemption certificates. Can a contractor use an exemption certificate to buy materials?

Yes. A real property contractor may use an exemption certificate of a private, nonprofit charitable, educational, and religious organization; volunteer fire company and rescue squad; and nonprofit cemetery to purchase materials tax free that will be used to construct, improve, alter, or repair the real property of the exempt entity.
The materials must be incorporated into the real property to qualify for exemption. For more information on exemption certificates, request Business Tax Tip #6, Retail Sales Involving Exemption Certificates.

Are government contracts taxable?

Materials you incorporate into real property owned by governments, diplomatic embassies and credit unions are taxable when purchased. You may not use an exemption certificate held by one of these entities to purchase materials which will be incorporated into real property tax free. Personal property you sell directly to the federal government, the state of Maryland, or to any political subdivision of the state are not subject to sales and use tax when purchased.

Are a contractor's labor charges taxable?

Labor charges (whether separately stated or lump-sum billed) to install, erect, assemble, or repair real property are not taxable. Separately stated labor charges for installing personal property aren't taxed either. But when the installation and material costs are not separately stated, the entire charge, including installation, is taxable. Labor charges for fabricating tangible personal property are taxable whether charged separately or on a lump-sum basis. For more information, request Business Tax Tip #12, Fabrication Labor is Subject to Tax.

What is the difference between personal and real property?

If the intention of the person making the annexation is for the object being installed to be temporary, the material used remains personal property and the contractor can purchase the materials tax free by issuing a resale certificate to the supplier. The contractor must charge the customer the tax on the total charge for the item sold. Examples include counters used in a business and modular office furniture. If the intent is to have the material permanently and substantially improve the land, buildings, or other real property on which it is installed, it's considered real property. The purchase of the materials is taxable to the contractor and no tax is charged to the customer. Examples include built-in residential dishwashers and garbage disposals, kitchen cabinets, fencing, landscaping, windows, and doors.

Is there any tax on transportation charges?

No. Sales and use tax does not apply to separately stated transportation and delivery charges for building materials delivered directly from a supplier to the purchaser.

I entered into a sales contract before January 3, 2008, when the sales and use tax increased from 5 percent to 6 percent. What tax rate should I use?

Sales contracts that were entered into prior to January 3, 2008 are taxable at the 5 percent rate. The sales tax applies and must be collected and remitted at the time a sale is made, regardless of the time of payment of the price or time of delivery.

If the sale is made by a vendor located outside of the state of Maryland who is not required to collect the Maryland tax, the use tax is due at the 6 percent rate when possession is taken in Maryland after January 2, 2008. Proper records must be maintained regarding the date and terms of a sale in order to justify collecting at the 5 percent rate where delivery or payment is made after January 2, 2008.

Is there any tax on leasing tools, vehicles, equipment, and supplies?

Leased tools, vehicles, equipment, and supplies are subject to sales and use tax. Payments for lease periods due after January 3, 2008 are subject to tax at the 6 percent rate. Rental of a vehicle or equipment with an operator is also taxable if the customer controls how the equipment is used. However, if the equipment is for the performance of a specific job, and the equipment is under the control of the contractor, no tax is due.

Do I have to pay taxes on equipment I bring into Maryland?

No - if you paid at least a 6 percent tax to another state when you bought the equipment.

If you did not pay at least 6 percent sales tax on the purchase in another state, you owe Maryland sales and use tax on the purchase. You may reduce the sales price by a 10 percent depreciation allowance for each full year that you used the property outside Maryland.

Does the tax apply to goods purchased out-of-state that I bring into Maryland for installing or repairing real property?

No - if you paid a sales tax of 6 percent or more to another jurisdiction on the cost of the materials or on the cost of fabricating them.

If you paid no tax or a tax of less than 6 percent sales tax on the goods you bring in from another state, then the Maryland sales and use tax would apply. The value of your own labor added to the materials is not taxed.

Is there any tax on modular homes and trailers?

The sales tax is applied to 60 percent of the price of the first retail sale of modular homes and trailers. Resales are not taxed.

What are my Maryland sales and use tax liabilities when I'm involved in an out-of-state construction contract?

The sales and use tax does not apply to personal property that is bought outside Maryland if it is intended exclusively for use in another state. If you buy materials in Maryland for a real property contract in another state, you must pay the Maryland sales tax on the materials. You may apply for a refund of the taxes paid if the purchase of materials would not have been subject to sales and use tax in the state where you used it.

Motor Fuel Tax

Fuel used in off-road construction equipment is subject to the 6 percent sales tax if no Maryland motor fuel tax has been paid on it. If the motor fuel tax has been paid, no additional tax is owed.

Are there specific provisions for fuel taxes on power take-off vehicles?

Yes. A refund claim can be filed for a percentage of the tax paid on motor fuel used in any of the following vehicles that have pumping or other equipment mechanically or hydraulically driven by the engine that propels the vehicle:

• Concrete mixing motor vehicle - 35 percent
• Motor fuel delivery vehicle - 10 percent
• Solid waste compacting vehicle - 15 percent
• Well-drilling vehicle - 80 percent

What about special fuels?

If you have bulk storage, and use special fuel in a motor vehicle which is registered to operate on a public highway, you may apply to become a licensed special fuel user. This would allow you to buy special fuel tax free and pay the tax on a monthly basis as the fuel is used.

Do I need special registrations for the vehicles I use?

Yes. Decal registration is required for motor vehicles with three axles or more, regardless of weight, or any vehicle exceeding the weight of 26,000 pounds, alone or in combination. Examples are three-axle trucks, tractor-trailer rigs, dump trucks, delivery trucks and other heavy-weight vehicles. For qualifying vehicles that travel interstate, registration under the International Fuel Tax Agreement (IFTA) is required. You can register IFTA accounts online by visiting the Comptroller's Motor-fuel, Alcohol and Tobacco Tax Division's Web site. For information about decal requirements and IFTA registration, visit the Motor-fuel, Alcohol and Tobacco Tax Division Web site or call 410-260-7215 in Central Maryland, or 1-888-784-0142 from elsewhere in Maryland, Monday - Friday, 8:00 a.m. - 5:00 p.m.

Income Tax

What do I need to know about income taxes?

If you hire people to work for you, you need to withhold income taxes from their wages. You can set up income tax withholding and other tax accounts by filling out a Combined Registration Application online. The application is also available from our taxpayer service offices.

What about my own tax obligations?

They depend on what type of company you have:

• Sole proprietors who are Maryland residents must file Maryland personal income tax Form 502. You will also need to make quarterly estimated tax payments on any income that's not subject to withholding.
• Nonresident sole proprietors must file Maryland Form 505. They must also make quarterly estimated payments.
• C corporations must file Maryland Form 500 and attach a copy of federal Form 1120. A corporate group and publicly traded corporation are also subject to special reporting requirements.
• S corporations must file Maryland Form 510.
• Partnerships must file Maryland Form 510.
• Limited liability companies must file Maryland Form 510 unless they are disregarded as separate entities under federal law.
• S corporations, partnerships and limited liability companies are pass-through entities. This means that income earned by the entity passes through to the personal income tax returns of the shareholders, partners or members. If any of the shareholders, partners or members are not Maryland residents, the entity or business itself must make estimated tax payments on behalf of those nonresidents. Maryland residents are responsible for making their own estimated tax payments.

For more information on your income tax responsibilities, call Taxpayer Service at 410-260-7980 from Central Maryland, or toll-free 1-800-MD TAXES (1-800-638-2937) from elsewhere.

Should I file my reports if I have no tax due?

You must file your employer withholding, motor fuel tax, IFTA and sales and use tax returns even when no tax is due. But the good news is that you can file sales and use tax and withholding returns by phone if no tax is due, by calling 410-260-7225. More than one return can be filed with a single call.