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IP 2001(13)

"Pay When Paid" Method for Materialmen

This publication has been superseded by IP 2003(12)

Purpose: This Special Notice describes how materialmen may remit sales and use taxes on certain purchases of building materials and services to real property as and when actually paid by the purchasers to whom the materialmen have extended credit, instead of remitting the full amount of tax at the time of the transaction.

Effective Date: Effective when issued.

Statutory Authority: Conn. Gen. Stat. §§12-408(2) and 12-426(3).

Background: Generally, sellers of tangible personal property and taxable services must remit tax on the entire amount of the gross receipts from a transaction on the return for the period in which the transaction takes place. The "pay when paid" provision allows certain sellers of building materials and services with respect to such materials an exception to this general rule.


A materialman, for purposes of the "pay when paid" provision, is a person who furnishes building materials or services to a contractor for the construction, raising, removal, or repair of a building or the improvement of real property. To be considered a materialman, a person must also be entitled under Chapter 847 of the Connecticut General Statutes to file a mechanic’s lien against the real property to ensure payment for the materials or services.

Building materials means materials that are incorporated as an improvement or repair to real property. The term also includes tools and other items that are used to improve real property.

The term contractor includes a general contractor, a subcontractor, a repairman, and a property owner acting as his or her own general contractor.

Qualifying for "Pay When Paid" Status: A person seeking Department of Revenue Services (DRS) permission to collect and remit sales tax on a qualifying transaction when actually paid by a contractor must file an application by July 1 of each year and demonstrate to the satisfaction of DRS that, in two out of the last four calendar quarters,

  • The seller was a "materialman" as the term is used in Chapter 847;
  • The materialman is authorized under Chapter 847 to put a mechanic’s lien on real property; and
  • At least 50% of the materialman’s sales of building materials (not services) were to contractors.

DRS has issued an application, Form REG-20, Application for a Materialman to Remit Sales Tax Under the "Pay When Paid" Method. A materialman must file this application by July 1 each year in order to obtain "pay when paid" status. DRS will respond to a properly completed application with a letter authorizing the materialman to use the "pay when paid" method on qualifying transactions.

Deadline to Submit Application: DRS only accepts applications filed on or before July 1 of each year. The applications will be considered timely filed if received, or if the date shown by the U.S. Post Office cancellation mark is, on or before this date.

"Pay When Paid": Under this method, a materialman who receives permission from DRS may collect and remit tax on sales of building materials and taxable services with respect to the materials to contractors at the time and to the extent that the materialman receives payment.

For purposes of Conn. Gen. Stat. §12-414, which governs when a return is to be filed and what is to be reported on it, tax is deemed imposed at the time the materialman receives payment. Payments received on account from a contractor should be applied in accordance with the accounting method regularly used by the materialman.

Example: A contractor buys $2,000 in building materials from a lumberyard that has materialman status under Conn. Gen. Stat. §12-408(2), paying $500 in cash and charging the remaining $1,500 on the contractor’s account with the lumberyard. The total tax to be paid on this transaction is $120. Over the following nine months, the contractor pays the remaining balance in three installments, paying $500 each time without breaking down the payment between sales price and tax. If the lumberyard imposes finance charges, which are not taxed, it will subtract them from the $500 payment. The lumberyard must allocate each payment by multiplying $500 (assuming there are no finance charges) by .943, resulting in a credit to the sale of $471.50 and tax of $28.50, which the lumberyard must remit on the return for the period in which each payment is made. The lumberyard must remit the remaining $6.00 of tax within one year of the original transaction whether or not it receives the remaining $114 of the sales price from the contractor.

Filing Returns and Remitting Tax: A materialman using the "pay when paid" method reports receipts from each payment as gross receipts on Form OS-114, Sales And Use Tax Return, for the period in which the payment is received.

Factored Receivables: Factoring is the sale of accounts receivable at a discounted price to a third party who assumes the risk of loss on the accounts. If a materialman factors a receivable that is from a qualifying sale, the materialman must remit all of the remaining sales tax on 100% of the sales price of the qualifying sale to DRS on its next return, with a credit for any tax already paid by the purchaser. The factor is not responsible for collecting and remitting tax on factored accounts. If the purchaser later pays tax on the same transaction to the materialman, the materialman should take a credit on the next return to ensure that tax is not paid twice to DRS.

"Pay When Paid" Up To One Year After Sale: If a materialman does not collect the full tax on a transaction qualifying for "pay when paid" treatment within a year from the date of the transaction, the materialman must remit any remaining tax due on the full gross receipts (whether or not full payment for the tangible personal property or services has been received) with the return for the period that includes the date that is the one year anniversary of the transaction.

Worthless Accounts Receivable: The provisions of Conn. Gen. Stat. §12-408(2) regarding worthless accounts receivable apply to transactions under the "pay when paid" method, with the three-year deadline based on the date the tax was payable by the materialman to DRS, as determined by the "pay when paid" method. The bad debt provisions of Conn. Gen. Stat. §12-408(2) apply only to sales and use taxes that have been remitted to DRS. Therefore, if an account receivable becomes worthless for federal income tax purposes within one year of the original transaction date, the materialman must remit any remaining tax due on the account by the one year deadline, and then claim the credit under Conn. Gen. Stat. §12-408(2) on its next sales and use tax return.

Record-Keeping: In addition to the usual record-keeping requirements for retailers under Conn. Gen. Stat. §12-426, a materialman using the "pay when paid" method must keep the following records for each sale made:

  1. The date of the sale;
  2. Proof that the sale meets the qualifications for the "pay when paid" method;
  3. The amount of credit, if any, extended by the materialman to the contractor for each sale;
  4. The terms for payment of the purchase price or repayment of any credit; and
  5. The date or dates on which the purchase price is paid or the credit is repaid, in whole or in part, and the amount of each payment or repayment.

The records, along with the approval letter from DRS for each year the materialman qualifies to use this method, must be kept for six years from the date the tax on each sale is paid over to DRS in full.

Statute of Limitations and Penalty: DRS may assess additional tax on a sale made under the "pay when paid" method up to three years from the date the tax must be paid over to DRS under Conn. Gen. Stat. §12-408(2).

If DRS determines that a materialman’s return was willfully false or fraudulent with intent to evade tax, or where the materialman fails to file a return, Conn. Gen. Stat. §12-428 will apply. The penalty under that section for failure to file a return or keep records required by law is, in addition to any other penalty provided by law, a fine of up to $1,000 or imprisonment up to one year, or both. The penalty for filing a willfully false or fraudulent return is, in addition to any other penalty provided by law, a fine of up to $5,000 or imprisonment up to five years, or both.

Effect on Other Documents: This Informational Publication modifies and supersedes Special Notice 2000(1), "Pay When Paid" Method for Materialmen.

Effect of This Document: An Informational Publication is a document that addresses frequently asked questions about a current DRS position, policy or practice, usually in a less technical question and answer format.

For Further Information: Please call DRS during business hours, Monday through Friday:

  • 1-800-382-9463 (toll-free within Connecticut), or
  • 860-297-5962 (from anywhere)

TTY, TDD, and Text Telephone users only may transmit inquiries 24 hours a day by calling 860-297-4911.

Forms and Publications: Forms and publications are available all day, seven days a week:

  • Internet: Preview and download forms and publications from the DRS Web site
  • Telephone: Call 860-297-4753 (from anywhere), or 1-800-382-9463 (toll-free within Connecticut) and select Option 2 from a touch-tone phone.

IP 2001(13)
Sales and Use Taxes
Construction Materials
Services to Real Property
Issued: 03/15/2001