On Dec. 19, 2014, the Indiana Tax Court issued a decision in Lowes Home Centers, LLC v. Indiana Department of State Revenue that may radically change the sales tax landscape for Indiana real property contractors. The Indiana Department of Revenue has had a long-standing policy of applying different tax treatment depending on the underlying real property construction contract. The historic treatment has been as follows:
- Contractors operating under a lump sum contract: Treated as the end user of materials, and thus taxed on the cost of materials they purchase
- Contractors operating under a time and materials (T&M) contract: Treated as sellers of materials, and thus have a responsibility to collect sales tax on materials transferred to customers
The Tax Court held that this distinction between T&M and lump sum contractors does not exist in the Indiana Code and the Department has inappropriately created an artificial distinction via regulations it has adopted. As a result, it was determined that Lowes should owe use tax on its costs of materials incorporated into realty via a T&M contract (i.e. be treated as lump sum contractor would historically have been treated).
The effect of this decision could mean that there is now one Indiana standard for all real property construction contractors regardless of the type of contract entered into with its customer. Having a uniform standard, in which the contractor would owe use tax on its purchases of all materials incorporated into realty in Indiana, could significantly decrease the recordkeeping/compliance burden of contractors utilizing multiple types of contracts.
While much may have changed, the Lowes decision does not impact the tax treatment for contractors operating under lump sum contracts for real property or any contract for the sale or repair of personal property, even if performed by a real property construction contractor.
We expect the Department of Revenue to file an appeal; however, it will be up to the Indiana Supreme Court whether or not it takes the case if/when the Department attempts to appeal the decision. Until the appeals process plays out, there will be some uncertainty for real property contractors operating under a T&M contract. Department regulations and other guidance (such as Information Bulletin ST 60) may need to be re-written as a result of this decision.
In the meantime, we wanted to make you aware of this exciting development. If you have any questions, please do not hesitate to contact us.