California Disallows Resale Exemption for Contractor Who Used Purchased Materials

A construction contractor was subject to California use tax on materials that it purchased with resale certificates since the contractor failed to establish that it was engaged in the business of selling materials. In California, construction contractors are generally the consumers of materials that they furnish and install in the performance of construction contracts, and therefore they owe use tax on their use of the materials. Construction contractors may not purchase materials for resale unless they are also in the business of selling materials. Anyone who furnishes a resale certificate for property that that they know at the time of purchase will not be resold is liable for the amount of tax that would be due if he or she had not given such resale certificate. During the audit period in question, the contractor consumed in installation projects 99.9% of steel materials and resold 0.1% of steel materials at retail. This establishes that the contractor was not engaged in the business of reselling the materials. The contractor argued that its original intent was always the resale of inventory, which is part of its business model. The contractor further argued that it made significant resales of steel materials in other periods, and that it had intent to resell steel materials at the time of purchase during the audit period. However, the contractor did not provide any evidence of the total amount of materials it purchased or the amount of those it consumed during other periods, so there is no way to determine whether the gross sales were comparatively significant. As such, the contractor did not meet its burden in proving that it was engaged in the business of selling material, and all of its purchases of materials were subject to tax at the time of purchase. This is a valuable reminder for contractors (and others) to not make exempt purchases for resale unless they will actually resell the items. Otherwise, they are putting themselves at significant audit risk. (Martinez Steel Corporation, California Office of Tax Appeals, No. 18073411, November 1, 2019, released July 2020)

Posted on September 29, 2020