By Vinay Navani, CPA, MBA, MST and Len Nitti, CPA, MST
Sales and use tax is an area often overlooked by Common Interest Realty Associations (CIRAs). It can be a confusing topic and is ever changing. This article will provide a general overview of the New Jersey rules in this area as they relate to CIRAs.
Sales Tax Overview
Sales tax is required to be collected and remitted to the state by the seller of tangible personal property in New Jersey, unless a specific exception exists (for example, food and clothing).
Services, on the other hand, are only subject to sales tax if the service is specifically taxed. Common services of interest to CIRAs which are subject to sales tax include:
- Repairs and maintenance
- Cleaning services
- Landscaping services (mowing, mulching)
- Snow clearing
- Security services
- Health and sports facility membership fees
- Parking charges
Sales tax is currently imposed at a rate of 6.625%. It is the vendor’s obligation to collect and remit sales tax to the State of New Jersey.
Use Tax Overview
Use tax is the mirror image of sales tax. The underlying property or services subject to tax are the same. However, whereas sales tax is imposed on the seller, use tax is imposed on the purchaser. A taxable item or service is only subject to tax once under either system.
For example, if a New Jersey business purchases office supplies from an out-of-state supplier and that supplier does not charge New Jersey sales tax, the purchaser must pay New Jersey use tax. Another example would be a contractor who fails to charge sales tax on a taxable repair service. The failure of the contractor to charge sales tax does not relieve the purchaser of paying use tax for that service.
Specific Transactions of Interest to CIRAs
Listed below are a number of typical transactions that require CIRAs to pay or remit sales or use tax:
- Out of State Purchases: Often CIRAs will purchase tangible items such as office supplies, club house furniture, etc. from out of state vendors who are not registered with the New Jersey Division of Taxation to collect sales tax. As a practical guideline, if sales tax would have been charged had those same items been purchased at a New Jersey retail store, then use tax is due and must be paid by the purchaser.
- Repair and Maintenance Services: When a CIRA hires an outside contractor to provide repair or maintenance services, the contract amount is generally subject to sales tax. However, to the extent that the contractor uses parts in the performance of the project and separately itemizes the cost of those parts, sale tax is not due with respect to the parts.In other words, sales tax is only due on the labor portion of the invoice. If the contractor does not separately itemize the cost of materials on the invoice, sales tax is due on the entire amount. We find frequent noncompliance in this area by contractors. To the extent that the contractor does not collect and remit New Jersey sales tax, the burden falls on the CIRA to pay use tax on this amount.
- Capital Improvements:Unlike repair and maintenance services, no sales tax is due from the purchaser on either parts or labor on a project which constitutes a capital improvement when a third party contractor is hired for the project and provides the materials. If the parts and materials are purchased directly by the CIRA from someone other than the contractor, then sales tax is due on the parts and materials only. New Jersey’s defines capital improvement as “an installation of tangible personal property which increases the capital value or useful life of the real property (land or buildings). The item(s) installed must be permanently attached to the real property.” Obviously, the above criteria is subjective. Whether or not an item constitutes a capital improvement is frequently contested between taxpayers and the Division of Taxation. For example, a driveway paving project could be considered a repair if it consists of temporary patch-ins or filling of potholes. On the other hand, it could be considered a capital improvement if it is a larger resurfacing project. To the extent the size of a project warrants, CIRAs would be well served to consult with their tax advisors prior to the project to assess the likelihood of capital improvement status. When the conclusion is unclear, sometimes it is possible to get written guidance from the Division of Taxation. In some cases, to the extent the facts suggest capital improvement treatment, the CIRA may choose to take the position that the transaction is not subject to use tax, but “earmark” or reserve the sales tax amounts and associated interest and penalties in case of a later examination by the state and determination that the item does not constitute a capital improvement. An important exception to this general rule relates to the purchase of flooring, such as carpeting, landscaping and the installation of hard wired security systems. Even though these items may meet the above definition of a capital improvement, they are considered to be taxable and subject to the same rules discussed above with respect to parts and labor associated with a taxable repair.
- Health and Sports Facility Membership Fees: Membership fees separately charged by a CIRA to allow members to access golf, swimming, fitness or other facilities are considered a membership fee subject to sales tax. However, to the extent that the monthly maintenance fee for the CIRA enables any unit owner to use the facility, no sales tax is usually due. Additionally, fees for participation sports such as greens fees or daily pool passes are not subject to sales tax.
- Parking: While charges for parking paid by a member of a CIRA to the CIRA are exempt from sales tax, to the extent that guests pay for parking charges directly or if parking valet services are offered to members, sales tax may be due.
- Storage Units: Many CIRAs have storage units which are rented to residents pursuant to a lease agreement and not included in the monthly maintenance fee. Whether this transaction is subject to use tax is currently a subject of debate in NJ. Effective October 1, 2006 NJ enacted legislation which subjected subjected to sales tax receipts from the furnishing of storage space by a person “engaged in the business of furnishing space for such storage.” Most CIRAs have taken the position that renting storage units is not their primary business and accordingly these rental charges are not subject to sales tax.
- Filings: To the extent that a CIRA is required to collect and remit sales tax, the CIRA must file a sales tax return at least quarterly. More frequent filing could be required based on the amount of sales tax collected. Any use tax to which the CIRA is subject is reported on the same form. Note that once any taxpayer is required to file sales tax returns, it must continue to file at least quarterly returns, even if there is no tax due. Failure to file quarterly returns can result in significant penalties.
For CIRAs which are not subject to sales tax and have owed less than $2,000 annually in use tax (on average, over the last three years), an annual use tax filing can be made on Form ST-18B, Annual Business Use Tax Return.
We recommend that all CIRAs, whether they believe they have a use tax liability or not, file Form ST-18B. The filing of this return, even if it is unnecessary, starts the statute of limitations on tax assessments which restricts the time period during which the state can retroactively audit and assess the taxpayer for tax obligations, as well as interest and penalites. The form is due on May 1 and can be found here. The instructions for this form outline the limitations associated with this simplified filing method.
The above is a general overview of New Jersey sales and use tax. The rules are complex and this article should not be considered to be a complete analysis of this topic. Furthermore, most other states have sales and use tax systems which may be relevant for CIRAs located outside of New Jersey.