$100 Million Construction Tax Increase Analyzed

SB 6173, sponsored by Sen. Margarita Prentice, would change the resale certificate to a sellers permit. This measure will increase up-front costs by nearly 10% to contractors, an industry that is under substantial pressure due to the economy.

The state will incur additional administrative costs at a time when it is cutting programs. Penalties will increase under this measure to 100% of the tax value and sends a contrary message to the efforts of the Senate earlier this session to reduce paperwork violations for small employers.

The business, design and contracting groups believe the changes in this bill are unnecessary and efforts to raise revenues should be placed on job creation and business expansion instead of increasing penalties and the establishment of new programs.

The fiscal note indicates that the bill will increase construction costs by over $100 million in the next two years. Over 6 years, the bill will increase constructions costs by over $450 million. That is just for the state portion of the sales tax. The local government fiscal note has not been completed. We can expect that the local portion will be a huge hit as well.

SB 6173 purports to improve sales tax compliance but really targets construction contractors by eliminating the resale certificates and not allowing the state to issue the new seller’s permit to construction contractors. This may not be an official “tax increase,” but it is an added cost to construction contractors because the sales tax must be paid upfront for purchases of goods which then will be resold to the project owner and taxed.

Contractors will be forced to “float” revenue to the state, and will undoubtedly lose money due to the lag time experience on the credit exchanges. Tremendous cost increases and administrative difficulties will also result when trying to track and account for various transactions during the process of a project. All contractors will be penalized in the attempt to get at a few who are breaking the rules. There are better alternatives.

The construction industry is one of the few industries that will continue to play a significant role in the state’s economic recovery. It purchases goods, sells goods, employs skilled and unskilled workers, and is one of the largest contributors to the state’s tax coffers in the way of business taxes and payroll taxes.

This upfront tax payment will also add upfront costs to public project owners and the State. Many small contractors are working on a very slim profit margin, and the added upfront cost required in SB 6173 will be a real hardship, and it could result in more contractors laying off more workers and/or closing their doors, putting everyone in the firm out of work. In most cases, the sales tax for purchases during construction will be significant.

In a fragile economy, this is not the time to cripple the construction industry more by adding a cost that is unfairly targeted to only the construction industry.