Construction-related installation labor (labor to affix or convert tangible personal property to realty) is taxable in 14 states to varying extents. Since repairs to realty (restoration of real property to its original condition) were featured in the previous installment, I’ll try to avoid covering similar ground to the extent possible. However, overlapping treatments of installation and repairs are built into the sales and use tax statutes of a few of the states, so some duplication of the applicable commentary is inevitable.
The states that tax all construction-related installation labor are Arizona, Hawaii, New Mexico, and Washington. In Arizona, contractors are taxed under a separate transaction privilege (sales) and use tax category entitled the “prime contracting classification.” Within that classification, a flat 65 percent of gross proceeds derived from performing construction contracts are subject to the tax.
Connecticut, Kansas, and Texas exempt installation labor when it results in new construction (subject to the individual definitions applicable to each state). These states also exempt installation associated with remodeling or reconstructing owner-occupied residential realty. Installation involved in remodeling or reconstructing all other types of realty is taxable, with the exception of the reconstruction, remodeling, renovation, or repairs of bridges and highways in Kansas.
In New Jersey, New York, and West Virginia, installation labor is not taxable if the project qualifies as a capital improvement (i.e., the result is a permanent addition that increases the value or useful life of the underlying realty). Of course, the criteria for capital improvement status vary somewhat among these states and occasionally even among individual audit districts within the same state. In addition, New Jersey specifically taxes labor to install landscaping, floor covering, or alarm systems, whether or not the end result is a capital improvement.
The following states apply their own individual variations:
Arkansas: Neither installation nor repairs of “nonmechanical” materials and fixtures attached to realty (including plumbing and lighting fixtures) is taxable. The first-time installation of mechanical or electrical equipment (such as air conditioning units, elevators, and ceiling fans), or carpeting, is also exempt. Any subsequent labor needed to replace or repair the latter items will be taxable.
Mississippi: For contracts of $10,000 or less, and for all residential construction, certain enumerated construction services are taxable. Construction services that are not enumerated are exempt. This is true regardless of whether the services involve installation, remodeling, or repairs. The taxable services include plumbing, heating, air conditioning, excavating, landscaping, electrical work, sheet metal work, insulating, elevator or escalator work, and welding. For nonresidential contracts over $10,000, a 3½ percent “contractor’s tax” (in lieu of sales or use tax) is imposed on the total amount of the contract, including any installation, repairs or maintenance services involved.
South Dakota: Although construction services are not subject to sales or use tax, a special “realty improvement tax” is levied on construction contract gross receipts.
Wisconsin: Certain specific units are treated as tangible personal property even after they are affixed to realty. Installation of these items is taxable, while the labor to install other types of property is exempt. For example, installation of the following items is taxed because their affixation to realty is not considered to change their classification as personal property: broadcasting towers; curtains; drapes; electric dust collectors; gas and electric logs; laundry and dry cleaning machines; manufactured homes on leased land (even when affixed to a foundation); railroad signs and signals; roof-mounted satellite dishes; temporary electrical service; traffic signs and signals; transformers (on easement/leased property); and above-ground utility transmission lines (on right-of-way).
Wisconsin considers the installation of other property to result in a nontaxable addition to realty but regards the subsequent repair of the same (now affixed) property to be a taxable service to personal property. This schizophrenic treatment applies to central air conditions; awnings; bathroom fixtures; boilers; burglar alarm fixtures; bathroom (but not non-bathroom) cabinets and counters; carpeting; internal walk-in coolers; dishwashers; electric signs; furnaces; garbage disposals; heating, cooling, and ventilation units; incinerators; intercoms; ovens; pumps; sinks; swimming pools; water heaters; and water softeners.
Returning to a more rational approach, Wisconsin regards both installation and repairs of the following items as exempt services to real estate: ventilation ducts; bridges; buildings and related structural improvements; non-bathroom cabinets, counters, and faucets; canopies that are not awnings; ceramic tile; underground cabling; concrete foundations; dams; ditches; doors and door controls; elevators; fencing; fire suppression systems; floors; foundations; general electrical wiring; land improvements other than landscaping; linoleum floor covering; loading platforms; manufactured homes on a foundation on owned land; ponds; roads; roofs; sanitation and plumbing systems; sewers; sidewalks; stairways and stair lifts; storm doors and windows; street lights; underground tanks, irrigation systems (nonfarm), and utility lines; water lines; wells; and most windows.
For more detailed information on Wisconsin’s unique construction requirements, see the state’s Publication 207, Sales and Use Tax Information for Contractors, available directly from the Department of Revenue or on the Department’s website.
As always – your questions and comments are not only welcomed – but greatly appreciated.
Next week we'll examine the ways that different states tax property manufactured internally by contractors prior to installation.
Other recent “Construction / Contractor Tax” posts by Dan Davis:
- Arizona's New Contractor Tax Rules: Watch for Misleading Terminology!
- Contractors: Watch Out for Arizona Tax Changes
- Construction Contracts with Exempt Entities (State Breakdown)
- Supporting Your Exemptions: Acceptable Documentation
- Common Construction Exclusions and Exemptions