006.05.06 Ark. Code R. 005-GR-21.1

Current through Register Vol. 49, No. 9, September, 2024

Rule 006.05.06-005-GR-21.1 - RATES PROPERTY PURCHASED FOR USE IN THE PERFORMANCE OF A CONSTRUCTION CONTRACT - INCREASE IN SALES AND USE TAX RATES

A. Materials purchased for use in construction contracts that become recognizable components of the completed project are subject to state and local sales and use tax. A contractor that purchases these materials is entitled to a rebate on certain increases in state and local sales or use taxes if the following conditions are satisfied:

1. The materials must be used in a construction contract entered into before the effective date of the tax increase;

2. The materials must be purchased within five (5) years from the effective date of the tax increase; and

3. The contractor paid the additional sales or use tax to the seller.

Example 1: Pulaski County local sales and use tax is increased by 1% effective October 1, 2008. Purchases of materials used in completing construction contracts entered into prior to October 1, 2008 (but after January 1, 2008), will be eligible for a rebate of the additional 1% tax until September 30, 2013.

Example 2: On November 1, 2008, a construction contractor purchases a hammer and 50 pounds of nails for use in framing an apartment building. The construction contract was signed prior to the October 1, 2008 (but after January 1, 2008), tax increase. The additional tax increase is due on the sale of the hammer because the hammer will not become a recognizable part of the building. The nails are subject to the rebate because the nails, although they cannot be seen, are a recognizable part of the building.

4. This rule is not applicable to cost-plus contracts that allow the contractor to pass any additional tax on to the principal as a part of the contractor's cost.

5. For the purposes of the rebate, "construction contract" means a contract to construct, manage, or supervise the construction, erection, or substantial modification of a building or other improvement or structure affixed to real property. Construction contract does not mean a contract to produce tangible personal property.

B. CLAIMS FOR CREDIT OR REBATE.

1. Self Rebate. A contractor that holds an active Arkansas sales and use tax permit and files excise tax reports with the Department may offset the amount of credit or rebate claimed against any municipal and county sales or use tax due to be remitted with the return.

a. The contractor must list each local code and the amount of additional tax paid to the seller on the return.

b. If the total amount of the credit or rebate is being requested is larger than the local tax due for that month, then the contractor will deduct the remaining credit or rebate from the state tax due on the return and remit the difference.

c. The contractor must maintain documentation, such as photocopies of the invoices or receipts provided by the seller, for which the credit or rebate is being requested.

2. File a Claim. A contractor that qualifies for a rebate, but is not required to file a sales or use tax return as provided in GR-21.1(B)(1), may file a claim for a credit or rebate by completing the Claim for Refund Form 2004-6.

C. BURDEN OF PROOF. The burden of proving entitlement to the rebate is on the contractor. The contractor is required to keep adequate records to identify the purchases that are eligible for the rebate and follow the process outlined in this rule. Failure to do so will result in the rebate being disallowed.

D. CONTRACTS EXECUTED PRIOR TO JANUARY 1, 2008.

1. Materials purchased for use in construction contracts that become recognizable components of the completed project are exempt from certain increases in state or local sales and use taxes if the following conditions are satisfied:

a. The construction contract was executed prior to January 1, 2008;

b. The materials must be used in a construction contract entered into before the effective date of the tax increase; and

c. The materials must be purchased within five (5) years from the effective date of the tax increase.

2. The construction contractor shall furnish a completed exemption certificate or "Certificate of Proof for Contractor's Entitlement to Exemption from Sales and Use Tax Increase" to each seller of exempt property for each contract and shall retain a copy of the certificate with his purchase records.

3. The contractor must keep adequate records to identify all exempt materials sold. The seller's invoices or other sales documents must contain a statement that the seller has received the certificate which is retained in his records.

4. The exemption is not applicable to cost-plus contracts that allow the contractor to pass any additional tax on to the principal as a part of the contractor's cost.

5. Consumer use tax reports. Some construction contractors report the use tax due on materials purchased from out-of-state sellers directly to the Department. When such a construction contractor claims the exemption, the construction contractor must keep all records required by this rule including maintaining copies of purchase invoices and the contracts for which the exemption is claimed.

6. The burden of proving entitlement to an exemption is on the contractor. In the case of an audit of a seller's business, the burden is on the seller to keep adequate records pursuant to GR-79. In the case of an audit of a construction contractor's business, the burden is on the construction contractor to keep records adequate to prove the validity of the claimed exemptions. Failure to do so will result in the exemptions being disallowed and applicable tax, penalty, and interest being assessed.

006.05.06 Ark. Code R. 005-GR-21.1

Ark. Code Ann. § 26-52-427