People and organizations hire contractors to work on their real property. The definition of real property is very broad and includes land, buildings, fixtures, mineral rights and other items that would decrease the value of the property if removed. Sometimes, the work that contractors perform is subject to sales tax.
Definition of a Contractor
A contractor is an individual or an organization that homeowners and businesses hire to build, maintain or improve their properties. Organizations that manufacture and sell products that will later become a part of real property are also considered contractors. Plumbers, electricians, carpenters and landscape professionals are examples of contractors.
Types of Improvements to Real Property
According to the New Jersey Division of Taxation, there are several types of home improvements: repair, maintenance or capital improvement. A repair is a type of service that restores the property, but does not add value to the property. Repairs to leaky roofs, replacements of broken screens and plumbing services are considered repairs. Maintenance involves the work that preserves the condition of the real property. Painting the interior of the building, mowing the lawn or removing snow are all maintenance services. Capital improvement is a type of project that adds value to the property. For example, an installation of a new water heater, an addition to the building or construction of a garage are capital improvements.
Capital Improvement Sales Tax
Contractors pay sales tax to their suppliers when they purchase materials, regardless of whether they intend to these materials for personal use or for performing projects for others. When contractors perform repair or maintenance services, they must collect sales tax from their customers. However, most capital improvements are tax-exempt. For example, homeowners don’t have to pay taxes on new construction, installation of new kitchen cabinets, installation of heating or cooling equipment and other projects that add value to the properties. You will have to pay tax on such capital improvements as wired alarm system installation, carpet installations services and labor-intensive landscaping projects.
Different states have different rules pertaining to sales taxes on home improvement services. To receive tax exemption, you may need to fill out certain forms detailing what types of capital improvements you are making and present them to your contractor. The forms will allow the contractor to perform the service for you without collecting sales tax.