Homeowner Quiz

[SemiSalt]

You have hired a contractor to do work in your home. Part of the agreement is that, for materials that purchases, he will bill you for cost plus a 20% management fee. Assume that the state income tax rate is 6%. Which of these scenarios do you anticipate?

For a $100 purchase:

1. Contractor will buy wholesale for $100, add the $20 management fee and 6% x $120 = $7.20 sales tax, and bill the homeowner for $127.20.

2. Contractor will buy retail for $100 plus $6 sales tax, add $20 management fee and bill the homeowner for $126.00

3. Contractor will buy retail for $100 plus $6 sales tax, add 20% x $106.00 = $21.20 management fee and bill the homeowner for $127.20.

Bonus question: Who gets to deduct the sales tax?

Note: Answer may vary from state to state depending on sales tax law and local custom.

[TheOffice]

Option 1. Management fee should not be based on sales tax.

[Chris Chesley]

Yup. Option 1

It's good to be clear on this before the job starts. Afterwards, once you find out just how the details are being applied, it gets hard to renegotiate and results in sour feelings on the part of one or both. Colors the whole project.... If it's options 2 or 3, you get to ask for a shift to #1 but it won't be worth a fight

[SemiSalt]

I think the option to buy wholesale is controlled by state tax law. If the contractor's bill does not need to include sales tax, then he has to buy retail, i.e. pay the sales tax. Options 2 and 3 differ in whether the mgmt fee is applied to the tax.

[BeauV]

I think the option to buy wholesale is controlled by state tax law. If the contractor's bill does not need to include sales tax, then he has to buy retail, i.e. pay the sales tax. Options 2 and 3 differ in whether the mgmt fee is applied to the tax.

I've had exactly this discussion with a number of our contractors. Settling it upfront is key. I don't pay management fees on taxes.