Sales Tax State Activity Update - September 2005

Third Party Construction Work in Tennessee Taxable

The Tennessee Department of Revenue ruled that taxpayers selling custom countertops that are fabricated and installed by a third-party are in fact a construction contract.

The taxpayer is liable for paying sales tax on the materials used to fabricate and install the custom countertops and does not charge sales tax to customers for the sale of the countertops. Tennessee sales and use tax law provides that a contractor or subcontractor shall pay sales or use tax on the purchase of tangible personal property used in fulfilling a contract. A regulation states no sales or use tax is due on the charges made for the installation of tangible personal property which becomes a fixture.

The countertops in question are made to customer specifications, not free-standing or easily removed and once installed remain permanently in place. Once the third-party completes the work, the seller bills the customer a lump sum fee for the completed work. The fact that the seller hires a third-party to fabricate and install the countertops does not change the tax obligations. Therefore, the taxpayer is liable for paying sales tax on the materials used to fabricate and install the custom countertops and does not charge sales tax to customers.

View the full text here.

(Tennessee Department of Revenue Letter Ruling No. 05-11, 6/8/05)

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