Borough tax exemption for builders a little-known fact

Posted: Sunday, August 08, 2004

Building projects are often costly affairs, whether they're as small as a deck or as big as a house. Most folks would welcome any approach that would save them money.

Yet many doing their own projects may not know about a borough program that would do just that shave thousands, perhaps, from a project's bottom line.

It's called an owner builder certificate, a piece of paper exempting the holder from borough and city sales taxes.

Brian Springer, who runs a small residential electrical supply business in Homer called Electric Outlet for its owner Steve Shank, said he tries to alert his customers to the borough's owner builder tax exemption program.

"I'm amazed at how many projects are done (by owners) with no contractor who don't know about it," he said. "I'm finding people with $5,000 or $10,000 projects who don't have a clue."

Once, while explaining the advantages of the owner builder certificate to one customer, he said he noticed a woman standing next in line listened intently. Springer said she apparently was at the tail end of a house construction project that had gone well beyond estimated costs. The realization that she might have saved thousands had she known about the program sent her from the store in tears.

"That's indicative of how important this is," he said. "I have a sense the borough doesn't want to advertise this. There's no promotion. It's totally up to the contractors or businesses, or people like myself to let the public know. I ask. They say they don't know."

Springer figures that in Homer, where the sales tax amounts to 5.5 percent, any job over $2,000 makes the certificate worth the $100 fee.

The tax on $2,000 worth of purchases could be as high as $110 in Homer if the sum was spent on several separate purchases. A single $2,000 purchase, however, would be subject to the $500 tax cap, and cost a buyer in Homer just $27.50 in sales tax.

Nevertheless, for projects costing several thousands of dollars, the tax exemption cards are well worth the $100 borough fee, said Troy Tankersley, accounting supervisor for the borough's sales tax division.

Though the program has been around since about 1994, the borough hasn't actively advertised the owner builder card, he acknowledged. But then, neither has it actively promoted the existence of other tax exemption vehicles, such as those for nonprofit organizations or resellers of goods and services, he added. But they are laws on the books.

The idea behind the tax exemption, which obviously loses the borough some sales tax revenue, is that projects such as additions to homes result in higher assessments and thus bring in added property tax revenues.

"We're trading sales tax for real property tax," Tankersley said. "That's the goal."

Not all projects are eligible. Add a deck or redo the siding and you're fine, he said. Building a doghouse or adding flowers to the lawn, however, won't get you a tax exemption.

The holder of an owner builder card doesn't necessarily have to draw the designs and pound the nails himself. A contractor can be hired to do the actual work, but the cardholder must purchase any goods and services for the project, Tankersley explained.

In 2003, the Kenai Peninsula Borough Assembly adopted a host of amendments to the borough's complex sales tax code. Among them was a reduction in the fee from $200 per card to $100 per card. Another change added services to the owner builder card's list of things eligible for tax exemptions. Prior to 2003, owner builder cards only made goods eligible for exemptions, Tankersley said. That was deemed to be unfair given that contractors essentially doing the same things were getting exemptions on both goods and services.

According to the borough code, building construction materials and services are exempt from the borough sales tax under certain conditions. What is required is that materials become part of the permanent structure; that materials or services be bought by the owner of a residential or other building for a specific building project; and that the building owner obtains an owner builder tax exemption certificate (card), which must be presented at the time of each sale.

Owner builders may apply for the tax exemption certificate on a form provided by the borough. Certificates are valid for one year from the date of purchase and are basically project specific, Tankersley said. That is, if you are adding an arctic entry to a home, say, and later decide to add a deck to the same property, one card would suffice. Two different projects on different properties, however, would require separate cards and the payment of separate fees, he said.

To be exempted from sales taxes, goods purchased for a project must become part of the project; for instance, lumber that becomes a wall. Tools, however, are not eligible, Tankersley said.

Misuse of the owner builder card can result in immediate cancellation and surrender of the certificate and retroactive denial of the tax exemption. Sales taxes formerly exempted would be collected.

Since the fee was lowered and services added to the owner builder card exemptions, the number of people applying has risen, Tankersley said. That's been especially true in Homer, where Spenard Builders Supply has been an avid promoter, informing its customers of the tax exemption possibilities, he said.

Response to the amended tax code was slow at first and resulted in few added applications last summer. But this year, applications are increasing. The borough has issued 152 of the cards so far, Tankersley said. So many applicants were showing up expecting cards to be printed out almost immediately that the administration had to adopt a policy whereby new owner builder cards are only printed and issued just once a week. Tankersley said issuing the cards requires bringing up and examining assessment and other records, which involves some time and effort. Nowadays, applications must be in by noon on Tuesdays and the cards are generally ready by Wednesday.

Application forms for the tax exemption owner builder cards can be found on the Kenai Peninsula Borough's Web site under Sales Tax. Look for a list of forms.

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