CONTRACTOR’S TAX

OVERVIEW

Department of Revenue
Todd Stoner

Fall 2013
 What is Contractor’s Tax?
 Contractor’s tax is generally a 3.5% tax levied by
MCA § 27-65-21 to the contractor on the gross
proceeds of all commercial, non-residential
construction projects for the construction,
renovation, or repair of real property that exceed
$10,000 dollars, including constructive receipts.

 Consider: (1) Type of job on real property, and if

(2) Residential or commercial, and if
(3) Total compensation > $10,000
Contractor’s Tax Overview v Fall 2013 2
 Real Property vs
Tangible Personal Property

*** MOST IMPORTANT***

 To be qualifiable for contractor’s tax,

the job must involve real property.
 If tangible personal property is involved, then as a result of
the construction activity, it must be permanently attached to
real property and lose its identity as tangible personal
property to be subject to contractor’s tax.

Contractor’s Tax Overview v Fall 2013 3

 Who Pays Contractor’s
Tax?
 The contractor is responsible to pay this tax
to DOR.
 The project (job) owner cannot pay the
contractor’s tax.
 Direct pay permit holders cannot accrue and pay
contractor’s tax for the contractor.
Exceptions:
 Casinos/floating structures (CCPC – Casino
Construction Permit Certificate)
 Refineries (RPC – Refinery Permit Certificate)
Contractor’s Tax Overview v Fall 2013 4
 How Does a Contractor Pay Its
Contractor’s Tax?
 All general or prime contractors and subcontractors improving
real property subject to contractor’s tax in the state of
Mississippi are required to obtain a sales and use tax certificate
of registration for the remittance of any sales and use taxes that
may be due, regardless of the number of jobs they are
performing.
 Registration must be made even if the contractor’s tax due on
the job is being prepaid with the MPC application submitted.
 Payment of contractor’s tax is either prepaid with payment
submitted with the MPC application or paid on a long version
sales tax return either by paper or on TAP – regardless of
whether the taxpayer receives a contractor’s or retailer’ sales
tax permit.
Contractor’s Tax Overview v Fall 2013 5
 REGISTRATION APPLICATION
The registration application is available on the DOR website
under the “I want to” section of the home page. Or the taxpayer
can simply click on TAP on the DOR main webpage and register.

6
Contractor’s Tax Overview v Fall 2013
Contractor’s Sales Tax Permit
- General Construction
 Contractors who are issued a contractor’s sales
tax permit must have an MPC number in order
to purchase component materials and services
exempt.

 Examples of contractors with contractor’s sales tax

permits:
 Contractors of building construction
 Contractors of construction other than buildings
 Drillers of oil and gas wells

Contractor’s Tax Overview v Fall 2013 7

 Retail Sales Tax Number
– Construction and Retail Sales
 Examples of contractors with retail (resale) tax permits:

 Electrical contractors
 Elevator or escalator contractors
 Excavating, grading & landscaping contractors
 Insulation contractors
 Mechanical contractors – plumbing and heating & air
 Water well drilling contractors

 Contractors performing taxable services or in the business

of installations of materials, or selling materials in addition
to construction activities, are provided a resale sales tax
permit.
Contractor’s Tax Overview v Fall 2013 8
 Contracts and Contractors
 Prime contractor is the one who directly receives the payment or
benefit from the owner and generally is responsible for performance
of the job. The prime contractor is the one responsible for the
contractor’s tax.
 A prime contractor can have one or more sub-contractors
performing all or part of the work. The prime pays the sub-
contractor. The prime contractor remains primarily responsible for
the contractor’s tax due on the job and for obtaining the MPC on
each qualifiable job.
 Any sub-contractor can use the prime contractor’s MPC number in order to
purchase component materials exempt from tax for the related MPC job.
 If the prime contractor did not obtain an MPC on a qualifiable job, the sub-
contractor can be held secondarily liable for the contractor’s tax due on the
payments or benefits received for its portion of the job.
 Any sub-contractor who receives payment or benefits directly from the job
owner becomes the prime contractor for that portion of the payment or
benefit.
Contractor’s Tax Overview v Fall 2013 9
Contracts and Contractors
 A contract can be in written form or be by verbal
agreement.
 A prime contract is based on a contract between a
contractor (prime or sub) and the job owner (owner of
the project).
 A subcontract is based on a contract between a contractor
(prime or sub) and another contractor (not the owner of
the project).
 An owner of the job is the one who “owns” the property
and is the one who pays to have the work done.
 An entity cannot contract with itself and have the job
qualifiable – must be separate entities (arm’s length
transaction).
Contractor’s Tax Overview v Fall 2013 10
Contracts and Contractors
 A management contract is a contract whereby a
liaison is employed on a fee basis to oversee the job
but the liaison does not handle paying any of the
contractors for work accomplished.
 Continuous contracts embrace construction activities
for a definite time period, a definite amount, and are
generally in the same adjacent area.
 The individual job receipts can be of varied amounts, even
amounts less than $10,000, but still subject to contractor’s
tax when the total compensation exceeds $10,000 for a
commercial, non-residential job on real property.

Contractor’s Tax Overview v Fall 2013 11

Contracts and Contractors
 Contracts subject to contractor’s tax, except those for oil or
gas well drillers, must be qualified prior to beginning work
or be subject to a late filing fee of 10%.
 Oil or gas well drillers qualify jobs using Form 72-410, Mississippi
Oil and Gas Well Driller’s Qualification of Well or on TAP; DR-
number must be issued in order to remit contractor taxes due.
 All other jobs are qualified using Form 72-405, Contractor’s
Application for Material Purchase Certificate and/or Contract
Qualification.
 All contracts subject to contractor’s tax are qualified under
the sales tax section of the law.
 Contractor’s tax and any use tax due must be paid prior to
beginning work on qualified jobs exceeding $75,000
(>$10,000 if an out-of-state contractor) unless a surety bond
is filed with DOR.
Contractor’s Tax Overview v Fall 2013 12
How Does a Contractor Qualify a Job?

OUT-OF-STATE
IN-STATE CONTRACTOR
CONTRACTOR
 MPC Application (Form  MPC Application (Form
72-405) 72-405)
 Bond or Prepayment for  Bond or Prepayment for
Jobs greater than $75,000 ALL Jobs
 Job Bond (Form 72-441)  Job Bond (Form 72-441)
 Blanket Bond (Form 72-442)  Blanket Bond (Form 72-
 Tax Rider (Form 72-440) 442)
 Tax Rider (Form 72-440)
Taxpayers, either in-state or out-of-state, can apply for an MPC through
TAP. The MPC requested will be issued by the Sales & Use Tax bureau
after all required documentation has been approved by the bureau.

Contractor’s Tax Overview v Fall 2013 13

Contractor’s Tax Overview v Fall 2013 14
 Discussion of the MPC
Application
 Estimated start date
 Estimated completion date (change order, rain delays, etc can affect
this date)
 Cannot be prior to the contract date
 Description of work (should provide sufficient detail to
determine if the described job is subject to this tax)
 Owner name (must be a different entity than that of the prime
contractor)
 Contract amount
 Prepaid sales or use tax (taxes paid with the MPC application)
is applied to the sales tax account with an MPC payment type.
 Subcontractors are expected to be listed by the prime contractor
on the MPC application.

Contractor’s Tax Overview v Fall 2013 15

 Bond Requirements
 Mississippi contractors are generally authorized
to file and pay contractor’s tax as receipts are
realized for qualified jobs equal to or less than
$75,000.
 A surety bond is required on any job exceeding $75,000
unless the job is prepaid.
 All out-of-state contractors either prepay the tax
due on the job or bond the job for any contract in
excess of ten thousand dollars ($10,000) which is
subject to contractor’s tax.
 The bond must be a job bond or a blanket bond.
Contractor’s Tax Overview v Fall 2013 16
 Bond Requirements
 Bonding of the job must cover any liabilities
resulting from sales, use, income, withholding,
and motor fuel taxes due.
 A bonding company (or surety of the tax bond)
can be held secondarily liable for all taxes due
on the contract covered by the bond. This
includes the contractor’s tax and other taxes
such as withholding, use, income, and motor
fuel taxes when the taxpayer does not pay the
tax due the state.

Contractor’s Tax Overview v Fall 2013 17

Job Bond
(Form 72-441)
 The job bond form names
the job but does not describe
a dollar amount on the
bond.

 The bond “guarantees”

payment of any amount of
the taxes, damages, interest
and penalties for the named
job – in the event the
taxpayer does not pay the
taxes due.

Contractor’s Tax Overview v Fall 2013 18

Blanket Bond
(Form 72-442)
 The blanket bond form
specifies a dollar amount –
required to cover at least (a
minimum of) 4% of the
stated contract amounts of
the jobs covered under this
bond.

 As the contractor pays

the tax due on one job, the
bond coverage is freed up
to allow the contractor to
include another job up to
the contract amount
reduced with proper
authorization.

Contractor’s Tax Overview v Fall 2013 19

Bond (Tax)
Rider
(Form 72-440)

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Contractor’s Tax Overview v Fall 2013
Job Qualification: Issuance of MPC
MPC – Material Purchase Certificate
 An MPC is issued by the Department of Revenue

after a contractor has qualified a project (upon

meeting requirements).
 The certificate allows the prime or general

contractor and its sub-contractors to purchase

component building materials and component
services exempt from sales or use tax.
 Component - becomes an integral part of the structure
being erected.
 Component does not include equipment, tools, or
consumables.
 The MPC is job specific.
Contractor’s Tax Overview v Fall 2013 21
 MPC Number
 This number will be shown on the MPC. It will be
shown on the list of MPCs issued to the taxpayer in
MARS, on the approved MPC application, and if the
image is available, it will be on the scanned copy of the
MPC application in MDA.

 Currently, these certificates are issued with these

designations:
 MP – Material Purchase Certificate
 DR – Oil/Well Driller’s Permit

 The MPC number should be indicated by vendors on

applicable purchase invoices in the taxpayer’s records.
Contractor’s Tax Overview v Fall 2013 22
 MPC Number
 The MPC number is valid until the job is completed.
 The estimated completion date indicated on the MPC
application could be extended for a variety of reasons
including, but not limited to, rain delays, change orders, etc.
 The MPC number can be used for warranty issues up to a
year after the completion of the job. Allows contractor &
subs to purchase component items exempt, NOT tools,
equipment, supplies or consumables.

 The MPC allows the contractor and the subcontractors to

purchase component items exempt from retail tax, but
does not allow exemption for tools, equipment, supplies,
or consumables used by the contractor.

Contractor’s Tax Overview v Fall 2013 23

MPC – Pre-R3 Example

Contractor’s Tax Overview v Fall 2013 24

MPC Tax Calculation - Formula
Contractors can calculate their bid to account for the contractor’s
tax with the following formula.

 To calculate the contract bid the contractor should submit to the

job owner which will account for (include) the contractor’s tax in
the bid amount, the contractor should utilize the following
formula:

 Contract amount (without the contractor’s tax expense) x

1.0362694 = total contract bid

 Example:
$100,000 x 1.0362694 = $103,626.94 total contract bid
Contractor’s Tax Overview v Fall 2013 25
MPC Tax Calculation - Formula
 Then the contractor would compute the tax to report to
DOR by the following calculation:

 Total contract x .035 = contractor’s tax

where total contract = total compensation

 Example: $103,626.94 x .035 = $3,626.94 contractor’s tax

 The $103,626.94 will be the amount of the job receipt

from the owner, and the contractor will tax it at 3.5%
and report $3,626.94 to the DOR.

Contractor’s Tax Overview v Fall 2013 26

 Sales Tax Return (Form 72-010)

 Vendor’s Discount is not applicable on contractor’s tax

due.
 MPC jobs are reported using either tax code 60 or 61, as
applicable
 Taxpayers reporting and accounting for all compensation
received in the business can also report non-taxable
receipts.
 Prepaid receipts for which no tax is due (contract did not have
change orders increasing the contract amount) would be reflected
as deductions in the general sales tax location section under tax
code 74 (7% tax code) as sales to MPC holders.

Contractor’s Tax Overview v Fall 2013 27

 Contractor’s Tax Calculation
– Factors to Consider
 Tangible personal property included in the
contract should be deducted from the
contractor’s tax calculation and taxed at retail
(i.e., 7%) as a separate calculation.
 This deduction includes items such as, but not
limited to, the following:
 Church pews
 Storage racking systems
 Other tangible personal property that is either only
bolted in or is free-standing

Contractor’s Tax Overview v Fall 2013 28

 Contractor’s Tax Calculation
– Factors to Consider
 Component tangible personal property that is
considered to become real property and taxed
as part of the contract subject to contractor’s tax
includes, but is not limited to, the following:
 Commodes
 Sinks
 Other property which is built into a wall, flush-
mounted, or hooked up to the plumbing
 Does not include appliances which are simply hooked
up to an electrical or gas lines, such as a commercial
type stove – these remain tangible personal property.

Contractor’s Tax Overview v Fall 2013 29

 Commercial Includes Jobs on Real Property
Which Exceed $10,000, such as the following:

 Agricultural jobs, such as, but not limited to,

barn construction, pond construction, and
terracing
 Apartments and condominiums
 Churches
 Dormitories, fraternity and sorority houses
 Government agencies (any government jobs;
i.e., federal, state, county, city agencies)

Contractor’s Tax Overview v Fall 2013 30

Commercial Includes Jobs on Real Property
Which Exceed $10,000, continued

 Hospitals, hotels, motels, military barracks

 Installation sales of tangible personal property which
qualify under MCA § 27-65-21 (real property
transactions) and according to MCA § 27-65-3(k)
(installation sales), such as but not limited to, roofing,
siding, tile setting, floor covering, and fence
installation
 Nursing or retirement homes, tourist cottages, and
other commercial establishments
 Quad-plexes with common use areas with a common
ownership rented to tenants

Contractor’s Tax Overview v Fall 2013 31

Commercial Includes Jobs on Real Property
Which Exceed $10,000, continued

 Constructing, building, erecting, repairing,

grading, excavating, drilling, exploring, testing,
or adding to or improving any real property
structures with the exception of those activities
which are classified as residential
 This includes those activities that fall under MCA §
27-65-23 (miscellaneous services), such as, but not
limited to, air conditioning work, electrical or
plumbing work, elevator work, grading or other dirt
work, insulation work, tin and sheet metal work, and
welding.

Contractor’s Tax Overview v Fall 2013 32

 Residential Includes, But is Not
Limited to, the Following
Applications:
 Fishing and hunting camp buildings
 Homes, including:
 Church parsonages
 College or University President’s home
 Mobile homes
 Summer cottages and similar buildings

Contractor’s Tax Overview v Fall 2013 33

 Non-Taxable Jobs or Activities
 Construction jobs equal to or less than $10,000 and not
part of a continuous contract which exceeds $10,000 in
the aggregate (however, these may be subject to retail tax
if listed in MCA § 27-65-23 unless noted for exemption)
 Design and engineering fees if the total contract price
exceeds $100 million
 Land clearing, grass cutting, and tree trimming when
these activities are the main job and not incidental
activities
 Liquidating damages withheld by the owner of the
project
 Snow or debris removal
Contractor’s Tax Overview v Fall 2013 34
Non-Taxable Jobs or Activities
 Receipts for sub-contract work when an MPC
number for the job to be performed was
provided by the prime contractor
 NOTE: The subcontractor can be held liable for the
contractor’s tax due on receipts received from the
prime contractor where the prime contractor failed
to pay the contractor’s tax due.
 Residential construction
 NOTE: Purchases of component parts and services
listed in MCA § 27-65-23 by the residential contractor
are taxable at retail and tax is paid to vendor

Contractor’s Tax Overview v Fall 2013 35

 Casino (Floating Structure)
Construction & CCPC
 Forms are generally the same as general construction where the
casino did not provide a direct pay permit.

 All qualified Floating Structure owners are required to obtain

both a Direct Pay Permit (DPP) and Casino Construction Permit
Certificate (CCPC) where part of the property is water based.
 Law change after Hurricane Katrina in 2005 now allows coastal
casinos to build 800 feet inland. MCA § 87-1-5 & § 97-33-1

 The job must be determined to be either water-based, land-based,

or a combination of water- and land-based construction where
the water-based portion is not clearly identifiable in order to
ascertain the correct tax rate application.

Contractor’s Tax Overview v Fall 2013 36

 Casino (Floating Structure)
Construction & CCPC
 Water-Based Construction:
 The contractor is not required to qualify water-based real property
construction activities exceeding $10,000 because the floating
structure owner reports 3.5% casino tax on all construction activities
on its use tax return.
 Water-Based and Land-Based Construction:
 The contractor may qualify the total job when the land-based portion
and the water-based portion are not clearly identifiable AND the
land-based portion of the contract exceeds $10,000.
 Land-Based Construction:
 The contractor is subject to contractor’s tax on the land-based real
property.
 Examples include, but are not limited to, construction of parking
lots, waiting areas, or any other land-based construction. Some
casinos are located entirely on land.
Contractor’s Tax Overview v Fall 2013 37
 Refineries (RPC)
 Qualified refineries obtain an RPC (Refinery
Permit Certificate) which allow them to pay taxes on
construction activities directly to the state.

 Upon receipt of the refinery’s RPC, the contractor is

relieved of the duty to collect sales taxes due on sales
and services related to manufacturing machinery and
of the responsibility to report contractor’s taxes on
construction activities performed for the refinery.

Contractor’s Tax Overview v Fall 2013 38

 Other Tax Implications for
Contractors
 Use Tax – The contractor must report use tax on any
equipment brought into Mississippi for use on the job (tax
is due one time) on TAP.
 Tax is due on the taxable value of the property at time of service
in Mississippi (value cannot be less than 20% of the original cost
after a straight-line depreciation has been allowed, similar to a
residual value amount).
 Tax credit is allowed on the taxable value at time of service in MS
up to the amount due MS (Schedule of Equipment for use in
Mississippi – Form 72-335 – TAP ONLY)
 A working paper showing the determination of taxable value
along with the related tax credits allowed for taxes paid other
states should be included in the working papers (utilizing other
applicable states’ rates applied to the taxable value).

Contractor’s Tax Overview v Fall 2013 39

 Other Tax Implications for Contractors,
continued

 Withholding Tax
 Income earned in Mississippi is subject to
withholding (income) tax
 Job cost detail for jobs performed in Mississippi can
indicate specific employees and income received for
Mississippi work
 Other payroll documentation should be reviewed
 Income Tax
 Income is required to be reported on a direct
accounting basis.

Contractor’s Tax Overview v Fall 2013 40

 Other Tax Implications for Contractors,
continued
 Petroleum Tax
 Highway rate of tax applies on diesel (special fuel) fuel gallons
purchased for motorized equipment (dozers, backhoes, etc.) which is
used on state (or city or county) jobs in Mississippi (generally, non-
highway rate is for off-road use)
 Highway rate due per gallon less the non-highway rate paid per gallon when
purchased multiplied by the number of gallons of diesel used on the state job
equals the additional tax due.

$0.18 - $0.0575 = $0.1225 difference x # of gallons = additional

tax due for special fuel (diesel)
 Generally, if the diesel was purchased at a fuel pump (i.e., at a gasoline
station), the highway rate was already included in the purchase and no
additional tax would be due for special fuel tax.
 See district management for additional assistance in these circumstances.

Contractor’s Tax Overview v Fall 2013 41

Questions
or
Comments
Contractor’s Tax Overview v Fall 2013 42