Monday, May 15, 2017

CT Pay-When-Paid Tax Reporting Requirements - Connecticut Department of Revenue Services

Pay-When-Paid Method for Materialmen

Over the course of the last 15 to 20 years, the Connecticut Department of Revenue Services ("DRS", i.e. the Taxman) has grappled with how to deal with when and how use and sales taxes are to be reported when a subcontractor or supplier has a "pay-when-paid" clause in their contract. The issue seems simple - taxes should only be paid when the subcontractor or supplier is paid - but from the DRS's point of view, the materials were provided, they have a value, and taxes should be paid. The question is whether the taxes are paid at the time of shipment, transfer, or when money exchanges hands.  In the end, the DRS agrees that money needs to exchange hands before sales or use tax is assessed, with some reporting and record keeping requirements.

Essentially, the DRS's new guidelines, issued and effective as of April of 2017, permit as follows:

1. The pay-when-paid provision allows sellers of building materials and services an exception to the rule that tax is payable when the transaction takes place
2. It applies to materialmen on a construction project, which includes suppliers and subcontractors, among others. (To be considered a "materialman", you must be entitled to file a Connecticut Mechanics Lien on a construction project).
3. The person or entity claiming the exemption must file an application with DRS by July 1 of every year showing that they or their company was, in fact, a qualified materialman for the last 2 of 4 years.
4. If the materialman then receives permission in writing from DRS, they will be permitted to collect and remit tax on sales of building materials and taxable services related to the materials to contractors "at the time and to the extent that the materialman receives payment."
5. For tax purposes, any payments received on account from a contractor must be applied in the regular accounting method used by the materialman, so that the tax is paid when the accounting method is fulfilled. For an example, refer to the DRS Pay When Paid Guidelines, IP 2017(21).
6. Record keeping requirements under this guideline include keeping most of the receipts and other records relating to the transaction for six years.
Note that if the receivable on a pay-when-paid transaction is factored (i.e. if the receivable is sold), the sales tax on 100% of the original sales price must be paid in the year the factoring is performed.

These new guidelines provide some clarity on how the pay-when-paid provisions work with the Connecticut tax code, and how subcontractors and suppliers should deal with non-payment issues when they are filing their tax returns.

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