2.14.23 – Butler Snow
Nothing in life is certain except death and taxes. And if you fail to understand Mississippi’s unique contractor’s tax framework before a project begins, it is almost certain to create problems down the road.
A. What is contractor’s tax?
The term “contractor’s tax” is the common vernacular used to refer to Mississippi’s special sales tax applicable to construction projects. Mississippi sales tax law imposes a 3.5% contractor’s tax on all non-residential construction activities when the total contract price or compensation exceeds $10,000. The tax is levied on the entire contract price even though most construction contracts will consist of both goods and services. Moreover, the Mississippi Department of Revenue’s (MDOR) position is that all non-residential construction contracts are subject to contractor’s tax, including contracts with state and federal governmental entities, as well as exempt and non-profit entities, such as hospitals and churches.
B. How does Mississippi’s contractor’s tax scheme work?
Prior to beginning work, the prime contractor is required to apply for a Material Purchase Certificate (MPC) with the MDOR. If the contract amount exceeds $75,000 for in-state contractors ($10,000 for out-of-state contractors), then the contractor’s tax must either be prepaid or a bond posted. Upon receipt of the requisite prepayment or bond, the MDOR will issue a MPC for the project. The MPC can then be presented by the prime contractor and lower tiered subcontractors when purchasing materials for the project to avoid paying Mississippi’s otherwise applicable 7% sales tax.
C. Planning tips to avoid common pitfalls
Not having a plan to address Mississippi contractor’s tax can, at best, cause headaches or, at worst, significantly cut into a party’s bottom line. The following is a list of items to consider before undertaking a construction project in Mississippi in order to avoid common pitfalls.
1. Factor contractor’s tax into your bid
All non-residential construction projects over $10,000 in Mississippi are subject to contractor’s tax and the prime contractor is responsible for paying it. Thus, it should be factored into a contractor’s bid. This could be done as a separate line item or a statement that the bid does not include contractor’s tax. It is imperative to not overlook this step. There have been cases where an out-of-state contractor did not pay contractor’s tax and was audited by the MDOR after the project was complete. The MDOR issued an assessment for the outstanding contractor’s tax, plus penalties and interest. This resulted in the contractor having a net loss on what it thought was a successfully-completed, profitable project.
2. Address how to get reimbursed for contractor’s tax
Because contractor’s tax can be fairly substantial (depending on the size of the project) and often must be prepaid, the parties should also have a clear understanding of when it will be paid. For instance, the tax could be built into the overall contract price and the contractor could receive incremental reimbursement with each progress payment. Or, the contractor’s tax could be listed as a specific line item in the general conditions and the parties agree that the contractor is entitled to submit a payment application as soon as the tax is paid. Or, the owner could prepay the contractor for the contractor’s tax. Whatever the method used, it is beneficial to have these discussions on the front end.
3. Plan to utilize the MPC
Once the contractor’s tax is paid, the MDOR will issue a MPC. The MPC can be used to purchase materials on the project without paying Mississippi’s 7% sales tax. Everyone involved with purchasing should be aware of the MPC and how to use it. It is also important to keep in mind that the MPC applies only to Mississippi sales tax, so out-of-state purchases will be subject to that particular state’s tax laws and should be planned for accordingly (see point 1 above about factoring tax into bid).
Subcontractors should also utilize the prime contractor’s MPC to avoid paying additional taxes and thereby increase the overall cost of the contract. Care should be taken by subcontractors to verify there will be a MPC on a particular project and not simply assume there will be one. A subcontractor may mistakenly believe there will be a MPC on a project and, therefore, may not include sales tax in its bid. In that case, the subcontractor may unexpectedly pay 7% sales tax on its entire scope of work, a significant portion of which could be taxable materials.
4. Don’t forget to true-up
The amount of contractor’s tax owed at the outset of the project is based on the contract value at that time. Frequently, however, the final contract amount changes, such as through change orders, equitable adjustments, or other reasons. The MDOR’s position is that a prime contractor must make a true-up payment based on the overage and has sought penalties and interest (in addition to the extra contractor’s tax) for failure to do so. Thus, this step should not be overlooked during project closeout. Likewise, if the contractor’s compensation was lower than originally anticipated, the contractor can seek a refund for the overpayment of contractor’s tax.
The aforementioned considerations, of course, are not an exhaustive list of all Mississippi tax considerations. The applicable tax structure and rates can vary depending on the unique characteristics of each project. Thus, professional consultation with each project is always advisable. But a general awareness of these unique tax issues will help avoid common pitfalls.