NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Tangible Personal Property Converted into Real Property

Authority: IC 6-2.5-1-5; IC 6-2.5-1-11.5; IC 6-2.5-1-14.7; IC 6-2.5-1-14.9; IC 6-2.5-1-27; IC 6-2.5-1-27.7; IC 6-2.5-2-1; IC 6-2.5-2-2; IC 6-2.5-3-2; IC 6-2.5-4-1; IC 6-2.5-4-9; 45 IAC 2.2-4-1; 45 IAC 2.2-4-2; Sales Tax Information Bulletin #60 (November 2017).

A taxpayer ("Company") seeks a ruling regarding the following issues pertaining to its business:

Company is an out-of-state corporation that is in the business of designing, making, installing, and servicing custom signs. Company provides the following information regarding its business:

Company operates under time and material contracts. Company's charges include: a charge for the sign itself; a charge for installation; a charge for freight; a charge for a survey, if one is needed; an "engineering stamp fee," which is a professional, pass-through fee that may be required from the local government to secure a permit; and a fee for a permit that the local government may require to erect a sign. The customer is billed by Company. The customer does not make a separate payment to the subcontractor installer.

Company also repairs and performs other services to signs. This may include: repairs to broken or damaged parts; replacement of burned-out bulbs; neon repair; ballasts or transformer replacements; cleaning/washing; and painting. Company provides the labor and parts necessary to repair the sign and bills the customer accordingly.

Company makes, installs, and services many different types of signs using various installation methods. Company provides that the most common types of signs and methods of installation are as follows:

Based on the foregoing facts, Company requests a ruling as to whether it is installing items that become incorporated into real property, and what the sales tax treatment would be regarding these transactions.

Pursuant to IC 6-2.5-2-1(a) and IC 6-2.5-2-2(a), sales tax is imposed on retail transactions made in Indiana. A retail transaction is defined in IC 6-2.5-4-1(b) as the transfer, in the ordinary course of business, of tangible personal property for consideration. IC 6-2.5-4-1(c) goes on to provide in pertinent part:

"Tangible personal property" is defined in IC 6-2.5-1-27 as:

A contractors' sales and use tax responsibilities with respect to the purchase, use, and sale of construction material are found in subsection (c) of IC 6-2.5-3-2, which provides the following:

"Construction material" is defined in IC 6-2.5-1-14.7 as "any tangible personal property to be converted into real property." IC 6-2.5-1-14.9 defines "Contractor" as "any person engaged in converting construction material into real property on behalf of another person. The term includes, but is not limited to, general or prime contractors, subcontractors, and specialty contractors." Finally, "time and material contract" is defined by statute at IC 6-2.5-1-27.7 to mean "a contract in which the cost of construction material and the cost of labor or other charges are stated separately."

There is a difference in the tax collection and remittance requirements for construction material purchased by a contractor, which depends on whether the contractor is operating under a time and material contract or non-time and material contract (i.e., a lump sum contract). The Department's guidance on the topic is found in Sales Tax Information Bulletin #60 (November 2017). In interpreting IC 6-2.5-3-2(c), the Bulletin provides that when operating under a lump sum contract, contractors "purchase construction material for their own use or consumption in the fulfillment of contractual obligations to provide real property improvement services." Therefore, when a contractor operates this way, they "purchase construction material for their own use or consumption in the fulfillment of contractual obligations to provide real property improvement services." Id. A lump sum contractor's tax obligations would be the following:

On the other hand, in interpreting the IC 6-2.5-4-9(b), Sales Tax Information Bulletin #60 provides that "contractors are retail merchants selling construction material when they (1) dispose of, or (2) convert construction material into real property under a time and material contract." Id. Due to sales of tangible personal property being subject to sales tax, which includes construction materials, "contractors converting construction material into real property under a time and material contract must collect and remit sales tax on the material portion of their contracts." Id.

"Installation charges" are specifically excluded from the definition from "gross retail income" per IC 6-2.5-1-5(b)(6) if they are "separately stated on the invoice, bill of sale, or similar document given to the purchaser." IC 6-2.5-4-1(e) provides additional guidance on charges for installation versus similar charges:

Additionally, "the cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the seller" and "charges by the seller for any services necessary to complete the sale, other than delivery and installation charges" are included within the definition of gross retail income which would be subject to sales tax in a retail sale. IC 6-2.5-1-5(a)(2) & (3). Further, "delivery charges" would also be considered part of gross retail income. IC 6-2.5-1-5(a)(4). "Delivery charges" are defined in IC 6-2.5-1-5(a) as follows:

Turning to the first issue regarding the treatment of the signage as tangible personal property or not, Sales Tax Information Bulletin #60 provides additional guidance as to how the Department determines whether or not items remain tangible personal property:

Signage that is embedded in the ground would constitute construction material that has been converted into "real property" because one would reasonably believe the sign has been permanently affixed to the real property. Further, signs that are bolted or screwed to a foundation or building would be considered permanently affixed as well. Even if the bolts or screws could be removed without damaging the real estate or the sign, similar construction material such as water softeners and air conditioning units, which are often affixed in the same manner, are still considered by the Department to be part of the real property. Therefore, the signs that are bolted or screwed to a foundation or building would be considered incorporated into real property as well, as one would reasonably believe these signs have been permanently affixed to real property. Of the installation methods mentioned by Company above, only if the sign is affixed with tape would the signs remain tangible personal property.

In answer to the second and third questions, the consequences of the sale of signage that qualifies as either tangible personal property or real estate, it must first be clarified that in Company's situation, the signs (except for those affixed with tape) would be considered construction material when they are sold. The signs are construction material because they are not yet incorporated into real property when they are delivered to their customers in Indiana. The signs are only converted into real property after the subcontractors install them. IC 6-2.5-13-1(d)(2) provides that when a product sold to a customer "is not received by the purchaser at a business location of the seller," then "the sale is sourced to the location where receipt by the purchaser . . . occurs, including the location indicated by instructions for delivery to the purchaser (or donee), known to the seller." The sale would therefore be sourced to Indiana and be subject to Indiana sales tax.

Because Company operates using time and material contracts, Company is a retail merchant and must collect sales tax on the materials portion of the contracts. IC 6-2.5-4-9(b). Company's installation charges are separately stated on their invoices, so these charges would not be subject to sales tax per IC 6-2.5-1-5(b)(6), which provides that these type of charges are not included within gross retail income when separately stated. On the other hand, the freight charge would be subject to sales tax as a delivery charge because it constitutes a charge for transportation. IC 6-2.5-1-5(a). The charge for a survey, a permit, and the charge for an engineering stamp would all be taxable as gross retail income as well, as service costs or expenses of the seller. IC 6-2.5-1-5(a)(2). Further, even though the signs that are installed using adhesive tape are not considered construction material because they are not converted into real property, the signs are still tangible personal property and would be subject to sales tax as a retail transaction pursuant to IC 6-2.5-4-1.

As for any repair work, repair charges are typically exempt as a charge for a service. However, if the property being repaired is real property, then the tax treatment would depend on whether the repairs are performed pursuant to a lump sum contract or a time and materials contract. Separately stated repair parts in a time and materials contract would be subject to sales tax. If the repair parts are not separately stated and the true object of the transaction was the service, the cost of the parts would have to be ten percent or less of the cost of the service for the unitary charge to be exempt from sales tax, and Company would be required to pay sales or use tax on the parts. If the cost of the parts is more than ten percent, or the true object of the transaction was not a service, then the whole unitary charge is subject to sales tax. (See IC 6-2.5-1-11.5; 45 IAC 2.2-4-1 and -2). Regarding charges for the services of cleaning, washing, or painting, this same "ten percent test" would apply if the charges for service and materials are not separately stated.

Company's signs are (with one exception) construction material that are converted into real property. Company is a retail merchant and must collect sales tax on the portion of the materials converted into real property and other charges that constitute gross retail income. Company must collect sales tax on the sign that is not converted into real property as well.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.