Michigan Court Rules that Retailer is Also a Contractor for Sales and Use Tax Purposes
The installation of counter tops, fixtures and sinks made them no longer tangible personal property – and thus subject to use tax for the installing company.
By Tina Chunn, SALT senior manager
It is often challenging to determine the treatment of a retailer vs. a contractor for sales and use tax purposes in each state. This is particularly true where a retailer also offers installation involving the attachment of tangible property to real estate. Many times this attachment to realty will cause the retailer/installer to be treated as a contractor and, thus, subject to a different set of sales tax rules.  This issue was recently addressed in an opinion issued by the Michigan Court of Appeals.  In that case, the taxpayer disputes the Tax Tribunal findings that it is a contractor and not a retailer, thereby subject to sales/use taxes on items purchased.
The taxpayer is a supplier and installer of fixed institutional furniture including casework, counter tops, fixtures and sinks, as well as laboratory fume hoods and test chambers. The taxpayer does not manufacture the furniture, but instead sells pre-manufactured furniture to its customers (usually schools or universities), delivers and unloads it, and may install it on the premises according to the customer’s specifications. The taxpayer had not originally paid use tax on those items since it was instead applying sales tax to its customers. However, since many of the customers had provided exemption certificates, the taxpayer did not collect or remit any sales tax on these sales.
The state disagreed with the taxpayer’s assertion that it is a retailer subject to the collection of sales tax from its customers, and ruled that the taxpayer is a contractor subject to use tax on the goods that it installs on its customers’ real property.  Per Michigan statute, contractors are considered consumers of the materials used by them. All purchases of tangible personal property made by a contractor that are affixed and made a structural part of real estate are taxable to the contractor, except when made for a qualified exempt non-profit hospital or non-profit housing entity. 
The court reasoned that for the installation sales, the taxpayer is using the materials to improve realty and does not sell the items as tangible personal property. As such, the taxpayer is treated as a contractor for these sales.
To make this determination, the Michigan courts considered whether the taxpayer installs a fixture sufficiently attached to real property so that it becomes part of the realty and is no longer an item of tangible personal property after installation. Factors considered by the court included (i) whether the property was actually or constructively annexed to the real estate, (ii) whether the property was adapted or applied to the use or purpose of that part of the realty, to which it was affixed and, (iii) whether the property owner intended to make the property a permanent addition to the realty. Taxpayer testimony that these items were permanently attached to walls and countertops supported the findings that these materials became part of realty. Therefore, with regard to these items, the Court ruled that the taxpayer was a contractor for sales/use tax purposes.
Situations such as these are often complex, and each state’s rules will differ. Commonly, states have considered these items to be part of realty if removal of the item would alter either the real estate that remains and whether the item removed continues to be usable. However, some states are changing their rules based on determinations of whether the construction is an improvement or repair.
Although not an issue in this case, one question often raised by contractors is what happens when they are performing a contract for an exempt entity (i.e., an entity that does not pay sales tax to vendors on items that it purchases). Does the contractor, which is not exempt, still have to pay tax on purchases it makes to perform the contract? States take varying positions on this issue, and it may be based on the particular type of contract. This is an important issue for contractors, who must know before pricing the contract whether or not they will be paying tax on items purchased or whether they can claim their customer’s exemption.
The SALT team at Aprio is experienced with evaluating these transactions and their treatment in the various states, and can help contractors assess their obligations so they don’t find themselves losing profit margin on an unexpected sales tax exposure. We continually strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant tax developments, and we will include any updates in future issues of the Aprio SALT Newsletter.
This article was featured in the January 2018 SALT Newsletter.
 In most states, a contractor pays sales/use tax on goods purchased and used in performing the contract, but does not charge tax to the customer. A retailer can issue a resale certificate on goods purchased and resold to its customer and then collect sales tax from the customer based on the sales price.
 Farnell Contracting, Inc, Petitioner-Appellant, v. Department of Treasury, Respondent-Apellee, No. 334667 (Mich. Ct. of App., Dec. 19, 2017).
 Some of the goods sold by the taxpayer, such as tables and cabinets on wheels, are not installed. The Tax Tribunal ruled previously that the taxpayer is a retailer for those sales, and thus the sales tax exemptions were upheld. Those sales are not the subject of the taxpayer’s appeal in this case.
 Mich. Admin. Code, R 205.71.
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