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Home Improvement Retailers Face Scrutiny From State Governments

Home Improvement Stores Expand Installation Offerings

As people across the country have been spending more time at home this summer, many are working on home improvement projects. While retail as a whole has suffered significantly during the pandemic, the home improvement boom has been helpful for large chains like Home Depot (HD) and Lowe’s (LOW).

Even before the pandemic, these companies were expanding their offerings to include installing appliances, cabinets, and other products—not just selling them. However, they are now facing scrutiny from state governments who claim these stores have not paid their fair share of taxes on these operations.

Retailers or Contractors?

Several lawsuits are currently examining whether big box home improvement stores should be taxed as retailers or contractors. Often, stores assert that they are contractors when they install products for customers, but states claim that they are still retailers. This distinction is important because the tax rate for materials used by contractors is lower than sales taxes on the products retailers sell.

Lawmakers in South Carolina and Illinois are currently leading the charge in investigating this tax question. However, many other states could follow their lead and update tax codes to designate stores as retailers, even when their employees install products.

Lawsuits in South Carolina and Illinois

South Carolina’s Department of Revenue is in the process of trying to collect $2.8 million in back taxes, penalties, and interest from Lowe’s. The state recently won a $2 million judgement against Home Depot. Similarly, Illinois has gone after Best Buy (BBY), and recently concluded that the company did not qualify as a contractor and needs to pay sales taxes on the products it installs.

Analysts expect that demand for installation services from retail chains will see growth, and that much of this demand will come from baby boomers. This generation typically favored the DIY model, but as appliances and other products become more complex and baby boomers age, it is expected that they may be in the market for installation services. Investors will be closely following lawsuits between home improvement retailers and state governments over the coming months to see how they impact the installation services business.

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