South Carolina Rules That Home Depot is a Retailer on its Install Contracts

For a taxpayer that acts as both a retailer and a contractor, distinguishing between the two can be difficult, and choosing the wrong characterization can create significant sales tax exposure, as this South Carolina case demonstrates

State sales tax rules typically distinguish between retailers and contractors.  Generally, retailers sell tangible personal property (or services) to end-users and must collect sales tax absent an applicable exemption.  In addition, retailers may purchase the goods that they sell tax-free by providing their vendor a resale certificate.

On the other hand, contractors are viewed as making repairs or addition to real property.  The materials used by contractors my start out as tangible personal property, but, through the contractor’s labor, end up being incorporated into real property.  In almost all states, contractors do not collect sales tax from their customers but must pay sales tax on their material purchases since they are viewed as the end-user (i.e., contractors may not issue resale certificates).

In some cases, the same business may have transactions in which it acts as a retailer and other transactions in which it acts as a contractor, adding further complexity since that business must determine which way a given transaction will be treated and apply the appropriate sales tax rules.  Making the wrong determination can cause significant sales tax exposure as illustrated in a recent South Carolina Administrative Law Court decision involving Home Depot.1

Home Depot, in addition to its large home improvement retail business, also provides customers a “do-it-for-you” option.  The “do-it-for-you” service has three different contract options, but the one at issue in this case is the install contract. Under the install contract, Home Depot helps a customer select home improvement materials to purchase (these must be purchased from Home Depot), and the customer agrees to have Home Depot install those materials.  Home Depot contracts with a third party to install those materials. Home Depot sends an individual to the customer’s home to take measurements, confirm how much material is needed, etc. Based on those measurements, the third-party installer then prepares a quote for labor to install the materials. Home Depot uses that quote along with the cost of materials to create a total quote for the customer, which separately states labor and materials. The customer brings the signed contract to the Home Depot cash register and pays the full contract balance. If, during the actual installation, changes need to be made to the materials needed, etc., the customer must sign a change order created by Home Depot and pay for those additional materials before work is completed.  Customers may also return materials for a refund.  Home Depot treated itself as a contractor for install contracts and did not charge sales tax on the price of the materials.  Instead, since Home Depot provides resale certificates for its material purchases, it self-assessed use tax on its cost of the materials used in fulfilling the install contract.

Upon audit, South Carolina assessed Home Depot for sales tax and interest based on the state’s determination that Home Depot was a retailer under the install contracts and must collect sales tax on the price charged to customers for the materials instead of remitting tax based on its cost.  Upon appeal by Home Depot, the Court recognized that Home Depot acts as both a retailer and contractor.  Thus, the issue to be addressed was in what capacity Home Depot was acting during the execution of its install contracts.

The Court concluded that Home Depot acted as a retailer on the sale of materials under install contracts, and it provided several reasons.  First, Home Depot does not provide installation services to customers who have already purchased materials from somewhere else. The true purpose in offering installation services is to facilitate a sale to its retail customers. Thus, the purchase of the materials is a retail sale upon which the install contract is contingent.

Second, the sale of materials under the install contract meets the definition of a traditional retail sale. Customers pay for materials under install contracts no differently than customers who buy materials without install contracts.  The only difference is that in the install contracts, labor is listed separately on the invoice, but that does not change the fact that the customer is making a retail purchase of the material.

Third, the customer takes title and possession of the materials (even though they may not walk out of the store with them) under the install contract once payment is made as is typical in a traditional retail sale transaction.  Conversely, in a true contracting situation, customers generally do not take title/possession of the materials but instead take ownership of the real property project once complete.

Finally, the Court noted that Home Depot provides a resale certificate for all of its material purchases, including those sold under install contracts.  Since resale certificates are provided by retailers, this was contrary to Home Depot’s treatment of itself as a contractor under install contracts.

This ruling demonstrates that classification as a retailer or contractor can have major sales tax consequences, and taxpayers that choose the wrong classification can be stuck with significant sales tax exposure.  Aprio’s SALT team has experience advising retailers/contractors on the proper sales tax treatment so that these businesses remain in compliance and avoid unexpected liability.  We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the May 2018 SALT Newsletter.

1 The Home Depot v. South Carolina Department of Revenue, Docket No. 15-ALJ-17-0253-CC (March 12, 2018).

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