A homebuilder is a contractor who improves residential real estate and incorporates tangible personal property into the property being improved. The tax responsibilities of a homebuilder depend on the type of contract used in the project. Contracts may be categorized as lump-sum or separated contracts, each with different tax implications.

Lump-Sum Contracts

A lump-sum contract is where the total price is billed as a single amount, without separately stating charges for materials and labor. Under this type of contract:

• The homebuilder is considered the ultimate consumer.
• The lump-sum charge to the customer is not taxed.
• The homebuilder owes sales tax on equipment, incorporated materials, consumable materials, and taxable services.
• No tax is owed on purchases of real property services.

Separated Contracts

A separated contract divides costs into at least two amounts: one for labor and another for incorporated materials. Under this type of contract:

• The homebuilder is considered a retailer of the incorporated materials.
• Sales tax must be collected from the customer on the materials portion of the contract.
• A resale certificate may be furnished when purchasing materials.
• The homebuilder owes tax on equipment, most consumable materials, and taxable services.

If consumable materials are separately stated and transferred to the customer, the homebuilder must collect sales tax on these materials at a price not less than the amount paid.

Taxation of Real Property Services

Real property services are typically taxable, but they are exempt when purchased by a homebuilder as part of a contract for a new residential structure or adjacent improvements used for residential occupancy.

What Qualifies as a Residential Structure?

Residential structures include:

• Houses
• Apartments
• Condominiums
• Nursing homes
• Retirement homes

Non-qualifying structures include hotels, motels, hospitals, rehabilitation centers, prisons, and RV parks.

New Improvements Eligible for Tax Exemption

Eligible improvements adjacent to a new residential structure include:

• Sidewalks
• Swimming pools
• Garages
• Fences
• Decks
• Driveways

Repairs, renovations, and interior remodeling do not qualify.

Examples of Real Property Services

There are six types of real property services:

1. Landscaping
2. Lawn and yard maintenance
3. Waste removal
4. Janitorial or custodial services
5. Structural pest control
6. Property surveying

If a homebuilder constructs a new residential structure under a lump-sum contract, they do not owe tax on real property services. Under a separated contract, they also do not owe tax but must include these costs in the labor portion.

Certification for Tax Exemptions

The homebuilder is responsible for determining whether the work qualifies as part of a new residential structure. To ensure clarity, they should provide the service provider with certification that the work is tax-exempt. This can be in the form of an exemption certificate.

A certification remains valid until the residential structure is sold and occupied. After this point, services such as landscaping become taxable.

Materials Used in Non-Taxable Services

Once a service provider receives certification, their services are no longer taxable. However, they still owe tax on supplies and equipment used.

Special Case: Landscapers

Landscapers, as subcontractors, handle tax responsibilities based on their contract type:

• Separated Contract: Landscapers purchase materials tax-free for resale and must collect tax from the homebuilder.
• Lump-Sum Contract: Landscapers owe tax on all materials and do not collect tax from the homebuilder.

Local Tax Responsibilities

For custom home projects, local tax responsibilities vary by contract type:

• Lump-Sum Contract: The homebuilder pays local tax based on the supplier’s location.
• Separated Contract: The homebuilder must collect and remit local sales tax based on the job site location.

By understanding these tax rules, homebuilders can ensure compliance while managing costs effectively.