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SN 99(13.1)

"Pay When Paid" Method for Materialmen

This publication has been superseded by SN 2000(1)

PURPOSE: The purpose of this Special Notice is to describe the new legislation permitting materialmen to 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. This revision corrects statutory citations in the previous Special Notice.

EFFECTIVE DATE: Effective for sales occurring on and after July 1, 1999.

STATUTORY AUTHORITY: Conn. Gen. Stat. §§12-408(2) and 12-426(3), as amended by 1999 Conn. Pub. Acts 173, §§14 and 28.

BACKGROUND: Generally, sellers of tangible personal property and taxable services are required to 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 new "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 this legislation, 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 such 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 to obtain DRS permission to pay sales tax on a qualifying transaction when actually paid 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, Annual 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: For this year only, DRS will accept applications filed on or before November 1, 1999. Such applications will be considered timely filed if received, or if the date shown by the US Post Office cancellation mark is, on or before this date. After 1999, DRS will only accept applications filed on or before July 1 of each year.

"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 such materials to contractors at the time and to the extent that the materialman receives payment.

For purposes of Conn. Gen. Stat. §12-414 provisions governing 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 $1500 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 will report receipts from each payment as gross receipts on the 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 such 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 is determined to be 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.

RECORDKEEPING: In addition to the usual recordkeeping requirements for retailers under Conn. Gen. Stat. §12-426, a materialman using the "pay when paid" method must retain the following records for each sale made under such method:

Such records, along with the approval letter from DRS for each year the materialman qualifies to use this method, must be kept for a period of 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 is required to 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 $1000 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 $5000 or imprisonment up to five years, or both.

EFFECT ON OTHER DOCUMENTS: This Special Notice modifies and supersedes SN 99(13), "Pay When Paid" Method for Materialmen, issued 9/28/99.

EFFECT OF THIS DOCUMENT: A Special Notice is a document that announces a new policy or practice in response to changes in State or federal laws or regulations or to judicial decisions. A Special Notice indicates the Department’s informal interpretation of Connecticut tax law and may be referred to for general guidance by taxpayers or tax practitioners.

FOR FURTHER INFORMATION: Please call the Department of Revenue Services during business hours, Monday through Friday:

    (toll-free from within Connecticut), or (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:

    preview and download forms and publications from the DRS web site: Call (toll-free from within Connecticut), and select from a touch-tone phone, or (anywhere)

SN 99(13.1)
Sales and Use Taxes
Construction Materials
Services to Real Property
Issued 10/27/99