Can a plumber who uses both lump-sum and time-and-material contracts just pay sales tax on materials at purchase for every job, even when billing time-and-material, if it never marks up the materials?

Plain-English summary

A plumbing contractor works on both lump-sum and time-and-material contracts. To keep things simple, it wants to just pay sales tax when it buys the materials for every job (at the supply shop that charges tax) rather than charging customers sales tax — and it points out that it does not mark up the parts. Because it has no sales tax license, it can't buy materials at wholesale. The question: can a plumber pay tax on all materials at purchase regardless of the contract type?

The Department's answer is no, and it turns on Colorado's special contractor rules. Contractors are people who incorporate tangible personal property into real property — a plumber installing or repairing water lines is a contractor. How the contractor bills determines who pays the tax:

• Lump-sum contract: the contractor does not collect tax from the customer; instead the contractor pays sales tax when it buys the materials. (Because this plumber has no sales tax license, it must bill all contracts lump-sum.)
• Time-and-material contract: the contractor must collect sales tax from the customer on the materials charged. And you can't bill time-and-material without a sales tax license, because you'd have no way to collect and remit the tax. To bill any customer on a time-and-material basis, the plumber must get a sales tax license, then buy the materials exempt as wholesale-for-resale and charge the customer tax on those materials.

The plumber's "I don't mark up, so let me just pay it" argument fails. The Department acknowledged that making this plumber collect tax from the customer may not produce any additional tax — but the rule exists to handle markup situations and does not distinguish between contractors who mark up and those who don't. All contractors must follow the rule. (The Department did note the contractor regulation is under review and it might later accommodate this situation by regulation.)

What this means for you

Plumbers and other trade contractors

Your billing method dictates your tax method. If you have no sales tax license, you must bill lump-sum and pay tax on materials at purchase — you can't do time-and-material. If you want to bill time-and-material, get a sales tax license, buy materials exempt for resale, and collect tax from the customer on the materials. Don't try to "pay it yourself" on time-and-material jobs just because you don't mark up — the Department doesn't allow that, regardless of markup.

Contractors structuring contracts

Decide up front which billing model you'll use and license accordingly. A licensed contractor can use both models, but each carries its own tax mechanics: lump-sum (you're the consumer, pay at purchase) vs. time-and-material (you're effectively reselling materials, collect from the customer).

Accountants and tax professionals

This is the classic Colorado lump-sum-vs-time-and-material contractor split (see SR-10 generally). The notable holding is that no-markup doesn't excuse a time-and-material contractor from the collect-from-customer rule, and that time-and-material billing is unavailable without a sales tax license. Watch for any future regulatory accommodation the Department flagged. Compare the time-and-material/lump-sum backdrop in [[gil-15-011-audio-visual-equipment]].

Common questions

Q: Can a plumber just pay sales tax on materials at purchase for every job?
A: Only for lump-sum jobs. On time-and-material jobs, the contractor must collect tax from the customer on the materials, which requires a sales tax license.

Q: I don't mark up my materials — can't I just pay the tax myself on time-and-material work?
A: No. The rule doesn't distinguish between contractors who mark up and those who don't; all contractors must follow it, even if collecting from the customer yields no additional tax.

Q: What do I need to bill time-and-material?
A: A sales tax license. With it, you buy materials exempt as wholesale-for-resale and charge the customer sales tax on those materials.

Q: What if I don't have a sales tax license?
A: Then you must bill all contracts on a lump-sum basis and pay the sales tax when you purchase the materials.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance and is not binding on the Department; it makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes. (The Department also noted the contractor regulation was under review.)

Citations and references

Rules:
- Department Rule 24-35-103.5 (GIL / PLR procedure)
- (Colorado contractor lump-sum vs. time-and-material framework; see 1 CCR 201-5, Special Regulation 10)

Related rulings in this library:
- [[gil-15-011-audio-visual-equipment]] (lump-sum vs. time-and-material; retailer-reselling-to-owner mechanics)
- [[gil-15-002-contractor-exemption-certificates]] (contractor exemption certificates)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-15-015.pdf

Original ruling text

Office of Tax Policy, P.O. Box 17087, Denver, CO 80217-0087 ([email protected])

GIL-15-015 — June 8, 2015

Re: Contractor Pay Tax when Billing on a Time-and-Material Contract

You submitted on behalf of your client (the "Company") a request for guidance to determine whether a plumber who bills both lump-sum and time-and-material may pay tax on the materials purchased for each job, even when billing on a time-and-material contract. […] The Department treats this request as one for a general information letter.

Issue

May a plumber who uses both lump-sum and time-and-material contracts pay sales tax on all tangible personal property used in each contract regardless of the type of contract used?

Background

Company is a plumbing contractor who contracts on both a lump-sum and time-and-material basis. Company would like to pay sales tax when purchasing materials and parts for each job rather than charging customers sales tax. Company purchases materials and parts for contracts at a supply shop that charges sales tax. Company does not mark up such parts or materials when he bills customers. At times, Company does bill on a time-and-material basis because the customer wants to know exactly what Company is charging for each item or because Company does not give a firm bid or estimate … Because Company does not have a sales tax license, Company cannot purchase the materials at wholesale. In such cases, Company purchases materials and pays the state, county and city sales tax and passes the total cost on to the customer.

Discussion

Colorado has adopted special rules regarding the application of sales and use tax for contractors. Contractors are persons who incorporate tangible personal property into real property. Plumbers are considered contractors if they incorporate tangible personal property into real property. … The type of contract the plumber uses determines whether the plumber charges customers sales tax on the tangible personal property or the plumber pays sales tax when the plumber purchases the materials.

Contractors who charge clients lump-sum do not collect sales tax from their customers. Rather, a contractor pays the sales tax on the tangible personal property acquired to complete a contract. Because Company does not have a sales tax license, it must bill all contracts on a lump-sum basis.

In contrast, a contractor who charges clients on a time-and-material basis must collect the sales tax on the amount charged to the customers for the materials. A contractor cannot bill on a time-and-material basis without a sales tax license because the contractor has no means to collect and remit the sale tax to the Department. If Company wishes to charge some customers on a time-and-material basis, Company must obtain from the Department a sales tax license so that it can acquire the materials exempt from tax as wholesale sales and charge the customer for such materials.

Company suggests that because it does not mark up the price of the materials, it is permitted to pay sales tax on the materials it acquires and uses for each contract regardless of the type of contract used. We recognize that requiring Company to collect tax from the customer on the materials may not result in additional tax. However, Company is not permitted to pay sales tax on the materials it acquires to complete a contract when billing on a time-and-material basis. The purpose of the rule is to deal with situations where there is a mark up of the materials. The rule does not make a distinction between contractors that mark up and those that do not. Thus, all contractors are required to follow this rule. However, the contractor regulation is currently under review by the Department and we may consider whether to accommodate this situation by regulation.

Miscellaneous

This letter represents the good faith opinion of Department personnel who are knowledgeable on state taxes issues. However, the Department does not make a specific determination here on any of the issues raised and the Department is not bound by this general information letter. The Department administers state and state-administered local sales and use taxes; this letter does not address sales and use taxes administered by home-rule cities and home-rule counties.

(Condensed from the official PDF; see the linked source for the complete text and footnotes.)