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Builders and Remodelers:

Does that Insurance Certificate your Subcontractor Gave You Really Protect You?

By Steve Snyder, Attorney at Law

That Certificate of Liability Insurance your Subcontractor’s Insurance Company provided you may not cover your Company and the Insurance Company knows it (and they are hoping you don’t!)

I represent a lot of builders and remodelers and they all know that when they are hiring a subcontractor, they need the subcontractor to provide them with a “Certificate of Liability Insurance.” What they often do not know, and the insurance company does, is that the insurance certificate you were provided probably will not protect your company in the event you need to make a claim. Insurance companies do it all the time, and they do it on purpose. And if you don’t know what to look for, you could have a serious problem in the event you need to make a claim…with your subcontractor’s insurance company and with yours as well!

A client of mine in the roofing business had it happen to him and it has cost him tens of thousands in attorney fees and potential liability of close to $200,000.00 to pay for a mishap on the job site that should have been covered by his subcontractor’s insurance company.

The roofing company, we will call them ABC Roofing, signed a contract to put a new roof on a commercial building. ABC then contracted with a subcontractor to do the roof. ABC required the subcontractor to provide a Certificate of Liability Insurance, which they did, with ABC Roofing printed right on the bottom of the certificate under the heading “Certificate Holder.”

Both contractors were not aware that the roof on the building had leaked for years and the substructure was in bad shape. On the first day of work a section of the roof collapsed. Luckily, no one was injured or killed.

The owner of the building made a claim to his insurance company for nearly $200,000 to put a new roof on the building and remodel the inside of the building, claiming the work was necessary because of the damage caused by the roof collapse. Two years later, the Owner’s insurance company filed a suit against ABC to recover the money they paid to the Owner. Its what the insurance industry calls “subrogation.” They also named the Subcontractor in the suit but he was no longer in business.

ABC figured this would not be a problem because he had obtained a Certificate of Liability Insurance from the Subcontractor. However the Subcontractor’s insurance company declined the claim. The reason for their denial? The Certificate of Liability Insurance provided by the Subcontractor’s insurance company named ABC Roofing as a “CERTIFICATE HOLDER.”  What the Certificate did not do was name ABC Roofing as an “additional insured.” Insurance companies do this all the time, hoping the contractor is unaware of the difference between a “certificate holder” and an “additional insured.” And often the contractor is not aware of the difference.

So, after being denied coverage by the subcontractor’s insurer,  ABC went to his own insurance company, who he had been paying insurance premiums to for years. And guess what his insurance company told him? That’s right! They denied the claim because ABC was supposed to be covered by the Subcontractor’s insurance company.

If you want to know how the story ends, give me a call. But more importantly, if you have not talked to a lawyer who specializes in construction law, give me a call. I will be pleased to review all of your contracts and make sure you are protected. You can reach me at (717) 975-7799 or check out my web site at www.steveonyourside.com

Modular Housing Sales and Use Taxes for Modular Manufacturers

Modular Housing Sales and Use Taxes for Modular Manufacturers

By Steve Snyder

Attorney at Law

 

When was the last time your company underwent a state sales tax audit?  For most modular companies that have gone through a state sale and use tax audit, they will tell you that they would rather have had a root canal performed. There are a number of reasons why, companies in the modular industry dread sales and use tax audits so much.

Whether your company is involved in the modular industry as a residential or commercial modular manufacturer, a residential modular builder, or a commercial modular wholesaler, there are steps you can take to insure that the outcome is not vastly burdensome or financially devastating. These actions are best taken as a preventative measure before you get audited. Since auditors from the state tax department will want to review the contracts and related documents for each sale made in that state, the way you structure your sales transactions will dictate their decision on your tax liability.  Unfortunately, they will do everything they can to find liability.

 

Ideally, it is best to structure your business transactions and prepare the contracts from the very beginning when your company is still a start-up. However, for companies that have been doing business for many years, it is not too late to review the contracts you are using and restructure your sales and use tax methodology to ensure your company does not receive an exorbitant bill when you are audited. If your company decides to begin doing business in a state where you have not previously done business, then you must review that state’s sale and use tax law.  The sales and use tax law is different in every state in the US.

 

Problem 1:  Most state sale and use tax laws were written before there was a modular industry or with no understanding of how the modular industry operates. Now tax auditors and their respective tax policy officials are faced with trying to compare the existing tax law with the modular construction industry, and it is a daunting task to determine how existing state tax law relates to the modular industry.

 

Problem 2: Most state sales and use tax auditors do not know how their own tax law pertains to the modular industry, so the initial determination you receive from the tax department is often sizable and inaccurate.

 

In most cases, those working in the modular industry are left with the burden to make a case for an appeal. If you decide to appeal, many states require the company to pay the tax in dispute or post a bond in order to appeal a tax dispute. 

 

If you are successful on appeal, you will get the money back; but it could take several years. In fact, many companies attempt to negotiate as low a figure as possible and pay it, rather than to litigate, even though the entire assessment is wrong. 

 

Modular manufacturers purchase building materials from wholesalers or building supply manufacturers in large quantities that are tax exempt under a manufacturer’s exemption.  When a modular manufacturer purchases material, the manufacturer does not know in which state those materials will be utilized by the modular builder.

 

When the modular building is shipped to the job site and placed on a permanent foundation, the building should be considered by tax officials as a capital improvement to real property. If the building is not permanently installed, the building is considered tangible personal property. This distinction will have a big impact on the amount of sales or use tax due in most states.

 

As the modular industry grew in the late 1990s, state tax officials took the position that all modular buildings were tangible personal property and as such, the manufacturer should remit sales tax on 100% of the selling price of the modular building to the state where the home was shipped.   As a result, while conventional building contractors were paying tax on only the materials used in the construction of the building, a modular manufacturer was required to pay tax on the entire selling price of the building, including labor, overhead, shipping costs, and profit.  Modular manufacturers were being forced to pay in excess of twice the amount of tax on a modular building as the same building would generate if built on site.

 

A review of the tax laws provided an argument for the modular industry. If the modular building was permanently installed on a foundation, it should be taxed at the same rate as conventional construction, i.e. as a capital improvement to real property, and the tax should be paid on only the materials used in the manufacture and installation of the building.  In some states, the modular industry has been successful in getting the tax department to agree to this argument. Many state departments agreed that if the set crew was paid by the manufacturer, the state would consider the modular building an improvement to real property, and the tax could be paid on materials only.

 

Essentially the manufacturer enters into a contract with the building contractor and enters into a separate contract with the set crew, usually identified by the contractor or dealer for the installation. If the manufacturer structures the transaction properly, and has the proper documents on file, the manufacturer can cut in half the amount of sales and use tax they are paying. 

 

However, not all states tax the modular industry in exactly the same manner. In fact, nearly every state has its own nuances that every modular manufacturer and building contractor must understand. Given the narrow margin in the residential and commercial modular industry and the pattern of the housing market over the last ten years, the ability to minimize sales and use taxes has been imperative in order for companies to survive. For a detailed review of your company’s sale and use tax procedures and contracts for each state you operate in, contact Steve Snyder at stevenrsnyderesq@gmail.com or call him at (717) 975-7799

 

This issue has not been as well managed in the commercial modular industry, due in part to a much different type of contractual relationship between the commercial modular manufacturers and the building contractors. In addition, many states tat have amended their law to address modular sales and use tax use a definition that includes only modular housing used as a residential dwelling. Further, many states will not recognize commercial re-locatable modular buildings as a capital improvement to real property.  However, there are states that do not require that the modular building be permanently installed, so there are great savings available to the prudent manufacturer who is willing to understand the tax law in each state and structure their sales transactions accordingly.

 

Steve Snyder has spent in excess of 31 years representing the modular construction industry both in a legislative and regulatory affairs capacity as a lobbyist for the industry, as well as in legal representation of modular manufacturers, modular building contractors, and commercial modular dealers. Steve has represented companies in the modular industry during sales and use tax audits, in appeals before state tax departments, and in litigation of sales and use tax disputes as well as legal representation on a multitude of other legal issues affecting modular companies.

 

While serving as the Executive Director and Legal Counsel of the Modular Building Systems Association, (MBSA), Steve drafted the language which has been passed in numerous states to amend the modular tax laws in those states where negotiations with tax regulators were unsuccessful.  In other states, Steve was successful in negotiating agreements on how modular construction would be treated under the states’ existing tax laws. Today, Steve is a member and serves as legal counsel to the Modular Home Builders Association, a trade association dedicated to representing companies involved in the residential modular Industry. If you are a modular manufacturer or builder or manufacturer and are not a member of this organization, you need to join and support their work.

 

Steve is available to consult with modular manufacturers, building contractors, and subcontractors. He is greatly experienced in reviewing current business and tax practices, as well as representation through tax audits, tax regulatory appeals, and tax litigation in any state where a company is involved in a dispute.  Steve is also available to provide legal representation involving any other business issue in which a company may be involved.  Contacts Steve at stevenrsnyderesq@gmail.com or call him at (717) 975-7799 and take a look at his web site at www.steveonyourside.com

 

Steven R. Snyder, Esquire

635 Glenbrook Drive

Harrisburg, PA 17110

(717) 975-7799

FAX (717) 526-2044

stevenrsyderesq@gmail.com

www.steveonyourside.com

Steven Snyder