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Deducting sales tax on a home purchase

George SaenzDear Tax Talk,
Hello, I am a CPA in Arizona and am having a heck of a time getting home builders to give me the sales tax amount that was included in the purchase of some of my clients' homes. One used Private Letter Ruling #8249010 as the resource backing up their claim that the sales tax included in the purchase price of a new home was not a deductible sales-tax expense. Now mind you, this PLR was written in 1982, but I'm wondering if it still applies to the current situation. Thank you so much for your time.
-- Jan

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Dear Jan,
The sales-tax deduction was eliminated almost 20 years ago. For 2004 and 2005, an individual can choose to claim the higher of their state and local income taxes or their general state sales tax. An individual can determine sales tax paid based on actual expenditures or can use a combination of IRS provided tables plus the tax on certain selected "large" ticket items. In order to determine what is general state sales tax, we need to look at the rules as they existed prior to repeal in 1987.

The term "general sales tax" is defined in section 164(b)(2)(A) of the Code as a tax imposed at one rate on the sale at retail of a broad range of classes of items.

Section 164(b)(5) of the Code provides that if the amount of any general sales tax is separately stated, then that amount will be treated as a tax imposed on and paid by the consumer as long as the consumer pays the stated amount to the seller.

The private letter ruling that you refer to deals with an Arizona builder and a gross receipts tax on a builder's income and, accordingly, the tax is not considered a general sales tax, but rather a tax on gross receipts.

Further, since most home builders buy the material and either rebill it to the client or include it in the total contract price, the homeowner does not pay the "stated amount to the seller" (that is, the building material supply house). Accordingly, even though there is sales tax paid for the materials, it is not deductible by your client as sales tax. Also see PLR's 8234130 and 8051042.

For the sales tax on the materials to be deductible by the homeowner, you have to look at Rev. Rul. 58-292 1958-1 C.B. 106. The revenue ruling points out two situations that would allow a homeowner to deduct sales tax on material purchases:

  1. If the homeowner were the contractor, or
  2. If the homeowner had the materials billed to him and he paid it directly to the seller.

To claim the deductions, you would have to modify your contract with your contractor and remember that sales tax is not deductible for the alternative minimum tax.

-- Posted: March 25, 2005




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