Tuesday, May 9, 2017

Changes in Indiana Contract Law


Residential contractors in Indiana can trash their old contracts effective June 30, 2017. On July 1, Indiana’s old Home Improvement Act is replaced by Indiana’s Real Property Improvement Act (Indiana Code Annotated § 24-5-11-1 to § 24-5-11-14) To have a legal agreement after 7/1/17, residential contractors in Indiana have to make some changes:
  1. Work formerly classified as home improvement is now real property improvement.
  2. A written contract is now required for every interior or exterior improvement on residences with four units or less: new construction, alteration, replacement, reconstruction or repair, including work done to a basement.
  3. The 3-day cancellation notice has to change. Owners now have three days to cancel after the later of either (A) both the owner and the contractor signing the agreement or (B) a final written determination of insurance coverage for any claim of loss.
  4. Use of Email: The contract must include the email address of both the contractor and someone who will respond to inquiries from the owner. An owner can cancel the job by email.
Several new statements are now required in the contract:
  • The contractor, subs and suppliers are prohibited from making a claim against the owner’s insurance company.
  • The contract is conditional until all licenses and permits have been granted.
  • Disclosure that the project will require labor, materials or equipment from third-party subs or suppliers.
  • The full contract price (less any discounts offered) has to appear in the agreement.
How important are these changes? You decide. An agreement that violates the new Real Property Improvement Contracts Act gives an owner the right to collect damages up to $500. For a willful deceptive act, an Indiana court can award an owner three times actual damages or $1,000, whichever is greater, plus attorney fees.

Why all these changes?
The answer begins with a November 2010 audit of sales tax collected by Lowes Home Centers. The Indiana Dept. of State Revenue discovered that Lowes was charging sales tax on their home improvement contracts based on the wholesale cost of materials to Lowes, not the retail price of materials sold at Lowes outlets.

The Indiana Dept. of State Revenue objected and issued an assessment against Lowes. Lowes appealed that assessment and won in the Indiana Tax Court. The court’s December 2014 decision: Indiana’s Dept. of State Revenue didn’t have authority to equate Lowes time and material home improvement contracts with lump sum real property improvement contracts on which sales tax was due on the full retail cost of materials. That decision gave Lowes an advantage over residential contractors across the state. Lowes could charge their customers less sales tax! As you might expect, the advantage didn’t last long.

Indiana Senate Bill 353, signed by Governor Holcomb on April 25, 2017, re-set the balance. Under the new Real Property Improvement Act, Lowes and every residential contractor in the state is labeled a real property improvement supplier. That part of the Act was made retroactive back to 2010. All have to pay sales tax on the retail price of materials -- a clear victory for the Indiana Dept. of State Revenue. But other parts of the Act make obsolete nearly every residential agreement used by Indiana contractors.

If you need contracts that comply with Indiana’s new Real Property Improvement Act, have a look at Construction ContractWriter. The trial version is free.