Sales tax on invoices in Indiana

In Indiana, the contract decides the tax. Under a time and material contract, the contractor is a retail merchant and collects sales tax on the materials; under a lump sum or any other contract, it pays tax on the materials itself and charges its customer no sales tax.

Registered Retail Merchant Certificate

A business that sells goods or tangible personal property in Indiana registers to collect sales tax through INBiz and receives a Registered Retail Merchant Certificate (RRMC), with one certificate on display at each business location. The Department of Revenue’s Sales Tax Information Bulletin #60 adds that contractors using time and material contracts are retail merchants, so they must register and hold an RRMC.

Time and material or lump sum: the contract type decides

Bulletin #60 defines a contractor as anyone converting construction material into real property for someone else, including general or prime contractors, subcontractors and specialty contractors. That conversion can include improvements to and repairs of existing structures.

• Time and material contract: a contract that states the cost of construction material and the cost of labor or other charges separately. Under one, you’re a retail merchant selling the material, and you collect Indiana sales tax on the material portion of the contract.
• Lump sum or any other contract: you aren’t a retail merchant. Pay sales tax on the material when you buy it, or self-assess use tax when you convert tax-free material into real property, and don’t charge your customer sales tax.

Indiana’s contractor rules in 45 IAC 2.2-3, which date from 1982, take the same line: a contractor who quotes the material and labor of a real estate improvement as one price owes sales tax on the material. Giving the customer a breakdown of labor and material charges after a flat bid doesn’t turn them into separate transactions.

Tax line under a time and material contract

On a time and material contract, the tax line covers the material, plus any charges for preparing, fabricating, altering, finishing, delivering or otherwise servicing it before it reaches your customer. Installation charges separately stated on the invoice aren’t taxed. In Bulletin #60’s cabinet example, fabrication labor is taxable and separately stated installation isn’t, and wrapping the fabrication into a general labor charge with the installation makes the whole labor charge taxable.

On a lump sum job, leave the tax line off. The same job can be taxed either way depending on the contract, and on a job with subcontractors, each contractor’s contract type decides the tax on its own sales, starting with the subcontractors. Bulletin #60 walks through an electrical subcontractor on a custom home: if the subcontractor works under a lump sum contract, it pays tax on its electrical components, and if the prime contractor isn’t a time and material contractor, it doesn’t charge the homeowner sales tax.

No advertised tax-included prices

Indiana’s regulation 45 IAC 2.2-9-5, also from 1982, makes it unlawful, except as IC 6-2.5-7 provides, to display an advertised, marked or publicly stated price that includes the state gross retail or use tax, or to offer to assume or absorb part of a customer’s tax. Doing so is a Class B infraction.

Services, repairs and service calls

Indiana’s 1982 rule 45 IAC 2.2-4-2 says professional services, personal services and services on property the provider doesn’t own aren’t retail sales and aren’t subject to the gross retail tax. People doing repairs are servicemen for their services and retail merchants for the repair or replacement parts they sell.

• Repairs to tangible personal property: Bulletin #60 says repair charges are generally exempt as a service when stated separately from the materials. If they aren’t separated, the whole transaction could be taxable when the materials are more than 10% of the overall charge, which makes it a taxable bundled transaction.
• Repairs to property affixed to real property: these are repairs of real property and follow the contractor rules. Unless the contract is a time and material contract, the repairperson pays sales tax on the parts and charges no sales tax on any part of the contract.
• Bulletin #60’s furnace example: a heating and cooling company repairs a furnace that is a fixture to real property. The repair charge isn’t taxable as long as the company paid sales tax on the part, because it’s a repair of real property outside a time and material contract, and its $65 service call charge is exempt because it goes with a nontaxable transaction.
• Evaluation visits: in the bulletin’s water conditioner example, a repairperson sent to evaluate the problem without knowing what’s needed to fix it makes a visit that relates to the service, so its delivery or transportation charge isn’t taxable, even if the repair then uses taxable parts.

The bulletin lists furnaces, central air conditioning units and water heaters as construction material that may become real property, while window air conditioning units typically remain tangible personal property. It names plumbing, heating and cooling, electrical work, roofing, landscaping, and installing underground sprinkler or drainage systems among contractor activities, so those trades follow the contract-type rule above.

Bulletin #92 covers goods you sell and then install: separately stated installation that happens after delivery and transfer isn’t taxable, and installation charges not separately stated are. Delivery charges on taxable property sold by or for the seller are taxable, stated separately or not.

Exempt customers and direct payment permits

A contractor may buy construction material exempt when its customer could have bought it exempt, such as a nonprofit organization or a federal or Indiana government entity. The exemption covers only material incorporated into real property, not other property used or consumed on the job, and contractors may not reissue their customer’s exemption certificates to suppliers. Leftover exempt material used later on a non-exempt project owes use tax.

A contractor that isn’t working under a time and material contract isn’t relieved of its use tax by accepting a customer’s direct payment permit. It must get an exemption certificate from an exempt customer instead.

No local sales tax in Indiana

Indiana’s sales tax is the same across the whole state. Counties levy a local income tax, and some counties and municipalities levy innkeeper’s or food and beverage taxes, but none of these is a local sales tax to add to your invoice.