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Construction Contracts: Which States Tax Installation Labor?

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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.

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Comments

75 Responses to Construction Contracts: Which States Tax Installation Labor?

  • Posted by Mike on June 25, 2015 6:44pm:

    Dan we are a commercial flooring contractor in pa all our work is subcontracted from general contractors what portion of our work is taxable when performed in new jersey

    • Posted by Author photo of Dan DavisDan Davis on June 29, 2015 6:52am:

      Mike,
      New Jersey treats flooring contractors differently from most other types of construction contractors, in that tax is due on the total job whether or not a capital improvement is involved. Unfortunately, you'll need to charge NJ tax to the general contractors on both the materials and installation labor when the job is performed in the state.

  • Posted by James on June 11, 2015 8:55am:

    I have a new small irrigation repair company in Colorado. I have a customer that wants a remodel on his sprinkler system in his back yard how do I tax him? Or do I tax him for labor? Parts? Can you help me?

    • Posted by Author photo of Dan DavisDan Davis on June 15, 2015 7:48am:

      James,
      If your contract is for a lump-sum amount, you'll only owe tax on your costs of the installed materials. (If you pay tax to your vendors on the materials, you'll have no further obligation. If you buy the materials without tax, you'll need to report their costs as purchases subject to use tax on your sales and use tax return for the applicable period.) The installation labor is not taxable.
      If your contract shows separate figures for labor and materials, you'll need to report sales tax on the greater of the amount billed for materials or the materials' costs. Again, the installation labor will not be taxable.

  • Posted by Paulette on June 5, 2015 10:23am:

    Washington charges sales tax on contract labor. Regarding installation of graphics on truck fleets, if a California company installs graphics on a vehicle within the Washington state line, must the California entity collect sales tax and remit to the state of Washington? The corporate headquarters where the p.o. was issued and will be paid from is California.

    • Posted by Author photo of Dan DavisDan Davis on June 6, 2015 5:29am:

      Construction contracts involve labor to affix tangible personal property to real property. Since trucks are tangible personal property rather than real property, labor to install graphics on them is not really contract labor, at least in the construction sense. However, such labor is taxable in Washington in any case, and the California company must collect the Washington tax and remit it to the state. (The actual transaction took place in Washington, and that made it subject to the state's sales tax.)

  • Posted by Al on June 5, 2015 4:14am:

    What would legally be the correct way to handle sales tax on the overhead and profit of construction jobs. In NJ and NY it appears that most contractors were charging sales tax on everything including overhead and profit. Seems trickier for other states though.

    • Posted by Author photo of Dan DavisDan Davis on June 5, 2015 5:27am:

      The tax treatments in New York and New Jersey depend on whether the job qualifies as a capital improvement, which is an installation that increases the value or useful life of the underlying real estate. In general (with a few specific exceptions in Jew Jersey), if a job qualifies as a capital improvement, the contractor only owes tax on its cost of materials and should not charge tax to the customer. If the job does not qualify as a capital improvement (e.g., it's for repairs or maintenance), tax is generally due on the entire amount billed to the customer. This treatment is not typical for most other states.

  • Posted by Ann on June 5, 2015 2:06am:

    Please clarify: In SC is labor to put down pine straw subject to tax? thank you. Ann Stidham

    • Posted by Author photo of Dan DavisDan Davis on June 5, 2015 5:13am:

      Labor to put down pine straw would not be taxable in SC. (I doubt whether it would even be regarded as a construction service, but it would be exempt whether it was or not.)

  • Posted by Matthew on June 3, 2015 7:07pm:

    I am an electrical contractor in Illinois. I recently completed a job for a company based out of Minnesota and Wisconsin. The install was performed in a new building they had purchased in Illinois. I paid sales tax on all materials installed. Their accounting department is asking me if I had paid the sales and use tax or if they have to. The job was a set proposal amount. Are the sales tax laws different in Wisconsin and Minnesota as opposed to Illinois? Thank you.

    • Posted by Author photo of Dan DavisDan Davis on June 4, 2015 5:33am:

      Since you installed the materials in Illinois, the Illinois rules are the ones that apply. Your payment of sales tax on the installed materials was the correct procedure, as you probably already know. (You can tell the customer's accounting department that you paid the appropriate sales tax, and they don't owe any such tax to the state.) Minnesota's laws are fairly similar to those of Illinois for this type of job; Wisconsin's are more complicated.

  • Posted by Casey on May 7, 2015 7:30am:

    We are a Texas based corporation and we are providing construction services in Virginia (New Project). We billed our customer a lump sum contract which encompasses material that we fabricated in Texas, Freight via Common Carrier and Installation provided by our sub-contractors. Because the contract was not itemized, is the entire contract subject to sales & use tax?

    • Posted by Author photo of Dan DavisDan Davis on May 7, 2015 8:53am:

      Casey,
      Virginia regards construction contractors as consumers of the materials they install and does not tax construction services such as installation. The labor involved in fabricating the materials is also exempt, unless you are also engaged in making retail sales of such fabricated items (which I'm assuming is not the case). As a lump-sum contractor, your company is only responsible for paying Virginia sales or use tax on the costs of the materials consumed in the project. If you paid Texas sales tax when you bought the materials, you're entitled to offset the Texas tax paid against the Virginia use tax owed. (If you paid a higher rate to Texas, you could offset the entire VA tax owed, but you wouldn't get credit for the excess.)

      • Posted by Casey on May 7, 2015 11:47pm:

        Dan thank you so much. You have saved me such a headache!

  • Posted by Betty on April 3, 2015 6:41am:

    We have a small AC company in Texas and I want to know if we are suppose to apply sales tax to service call charges. If no materials were used to tax and it was just a service call fee to go to a residential customers home do we tax that amount?

    • Posted by Author photo of Dan DavisDan Davis on April 4, 2015 8:22am:

      Betty,
      Labor to repair residential real estate is not taxable in Texas. Therefore, you should not charge sales tax on the service fee to your residential customer, and no tax will be due. (Note that it would be different for nonresidential property.)

  • Posted by David on April 1, 2015 1:39am:

    In 2014 I had a contractor complete a remodeling improvement project of my Texas residence (bath and bedrooms). The contractor paid sales tax of supplies and materials for the job. Can I deduct the sales tax on my federal tax return? I have all the receipts and can total up the tax paid.

    • Posted by Author photo of Dan DavisDan Davis on April 1, 2015 4:35am:

      David,
      Whether or not you can deduct the tax depends on the nature of the underlying contract. If the contract was for a lump sum (with no breakdown of the materials, labor, etc. within the contract itself), then the contractor would be regarded as the consumer of the materials. In that case, the tax paid was the contractor's liability rather than yours, so you would not be able to deduct it. However, if the contract was "separated" (showing separate figures for materials, labor and tax), the amount of tax billed would be considered your liability rather than the contractor's, so in that case you would be entitled to deduct it.

  • Posted by Isaac on March 27, 2015 2:47am:

    I have a Commercial Millwork Installation company based in MD. We frequently work in DC, VA and occasionally DE. We primarily install custom Millwork on the behalf of MD fabricators for commercial clients (usually thru a GC).
    We pay MD sales tax on all of our purchases (specialty hardware, expendables, occasionally prefabricated or contract manufactured casework). Are we then required to charge the client an additional 6% on the finished product? Is the Millwork fabricator required to do this? -Thanks.

    • Posted by Author photo of Dan DavisDan Davis on March 27, 2015 5:51am:

      Isaac,
      If I understand you correctly, your company does not fabricate the cabinets but simply installs them. Sometimes you install cabinets provided by fabricators and sometimes you purchase the cabinets from the fabricators (tax-paid) and then install them. It appears you are handling your MD sales taxes correctly, with one stipulation: although installation labor is not taxable in MD, the labor charge should be separately stated to your customer. In cases where you've purchased the manufactured casework, I recommend making one charge for installation and another along the lines of, "Prefabricated cabinets at cost (includes MD sales tax)." You then should not have to bill the customer for any additional tax. (Note that this advice applies to MD only.)

  • Posted by Scott on March 11, 2015 7:24am:

    Is installation taxable in IL and WI?
    We have a contract to provide just the installation of custom milwork in WI and IL. We will not be fabricating the milwork.
    My research on IL indicates, installation is not taxable as long as it is separately contacted or stated.
    Am I right? what about WI?
    Thank you.

    • Posted by Author photo of Dan DavisDan Davis on March 12, 2015 6:19am:

      Scott,
      As long as you're not providing the millwork or taking title to the materials at any point, the installation labor will be exempt in both states. IL law is straightforward about the separate tax treatment of labor and materials; WI can get messy, but in your case, there shouldn't be a problem.

  • Posted by Steve on February 19, 2015 12:17pm:

    I just had cabinets installed in my kitchen during a remodel in California. It was a lump sum contract. Now there is a tax charge of over $1000. Can they charge tax on cabinets or the labor (which was itemized separately)?

    • Posted by Author photo of Dan DavisDan Davis on February 20, 2015 4:07am:

      Steve,
      It depends on the circumstances. If the cabinets were prefabricated before installation (which would mean 90% or more of the total charges for labor and materials was incurred before the cabinets were affixed to the walls), then the tax would apply to all of the pre-installation charges for building the cabinets. The labor to actually affix the cabinets to the walls would be exempt. If the cabinets were not prefabricated, tax would only apply to the costs of the component materials.
      If the contract was lump-sum, however, the tax should have been included in the lump-sum amount specified in the contract, whether or not the cabinets were prefabricated. You might want to review the terms of the contract to see if it allows for the addition of tax over and above the lump-sum amount specified. If it doesn't, you might have an argument for withholding the tax under commercial law. (The taxing agency [Board of Equalization] won't help you with this.)

  • Posted by Ellen on February 19, 2015 2:41am:

    We are furnishing and installing windows, mirrors, storefronts and shower enclosures to a Hotel in NYC. The hotel DOES NOT have a Certificate of Capital Improvement. We are a subcontractor on the project
    We are a registered business in NY.
    How do we handle the sales tax for both materials and labor?

    • Posted by Author photo of Dan DavisDan Davis on February 19, 2015 5:43am:

      Ellen,
      The prime contractor is responsible for charging sales tax to the customer on both the materials and labor, since this is not a capital improvement project. The prime should issue you a Contractor's Exempt Purchase Certificate, which would relieve you of the responsibility for charging tax to the prime or paying tax on your materials costs. (If you were contracting directly with the hotel, you'd have to charge tax on the materials and labor, but since you're a sub, the tax is the prime's responsibility.)

  • Posted by Sherri on February 17, 2015 1:12am:

    We are a NJ based custom metal fabricator, working as a sub contractor, providing product for the contractor. 99% of our work is installed in NYC, most of that being Capitol Improvement projects (but not all). Sometimes we install products purchased and sometimes the contractor will do the install.
    My question: In this position is there any time when we would have to collect sales/use tax from the contractor? (We have been paying tax on all material purchased.)

    • Posted by Author photo of Dan DavisDan Davis on February 19, 2015 5:35am:

      Sherri,
      1. On capital improvement projects where you install your products, you would owe tax on the cost of the component materials. Since you're already paying tax to your suppliers (I'm assuming you're paying the NYC tax for materials used in NYC), you would not have any further liability and would not have to collect tax from the contractors. (I'm also assuming that you're not in the business of selling identical products to others at retail.)
      2. On a capital improvement project where you sell your products to the contractor and the contractor installs the products, you need to charge tax to the contractor on your selling price. You'd then be entitled to a credit or refund of the tax you paid on the materials costs.
      3. On non-capital improvement projects, you need to obtain a Contractor's Exempt Purchase Certificate from the prime. This relieves you of the need to charge tax to the contractor or pay tax on the materials costs. (If you do pay tax on the costs, you'll be able to claim a refund or credit.) The prime contractor will be responsible for charging tax on his entire billing to the customer.

  • Posted by Lee on February 11, 2015 12:36am:

    I just purchased a pool from a major retailer in Mass and prepaid the same retailer for installation in a seperate transaction. I noticed they charged sales tax for the installation. Is this correct?

    • Posted by Author photo of Dan DavisDan Davis on February 11, 2015 5:21am:

      If the charge for installation was stated separately, it should not have been taxed. Sounds like the retailer made a mistake.

  • Posted by Sara on February 2, 2015 4:00am:

    We are a Missouri custom blind/drapery fabricator that also installs some product in Kansas. We have been told that we should be collecting and paying sales tax on the whole sale for our Kansas customers....on both product and labor. Our potential customers have reported to us that the bigger stores such as Lowe's & Home Depot do not charge tax. Are we misinformed on what we should doing in regards to charging tax?
    Thanks,
    Sara

    • Posted by Author photo of Dan DavisDan Davis on April 6, 2015 6:09am:

      Sara,
      I apologize for not responding sooner; I remember your post and thought I had responded, but obviously I was mistaken.
      In Kansas, construction installation labor is generally exempt when applied to residential property and taxable when applied to commercial property. (Note that labor to perform original construction, rather than a remodel, is exempt regardless of the nature of the underlying property.) However, Kansas law regards some types of installation labor as components of taxable retail sales rather than construction. Unfortunately, drapery installation falls within the retail sale (and therefore taxable) category. Whether or not blinds would be treated similarly would depend on the type of blinds and degree of installation required; for instance, mini-blinds would fall into the retail sale category, but custom wood blinds requiring a substantial amount of installation labor would probably fall into the construction category. In the latter case, the installation labor would be exempt, as long as the underlying property was a residence.

  • Posted by David on January 28, 2015 10:33pm:

    We are a builder in pa looking to land a built on site residential garage in alabama. Do we charge the customer any tax at all. The material will be bought in pa and the customer will have foundation in.the garage is not attached to the home.

    • Posted by Author photo of Dan DavisDan Davis on January 29, 2015 4:10am:

      For purposes of this answer, I'm assuming you'll be building the garage and affixing it to the foundation yourselves rather than subcontracting out the labor. If that's the case, you'll be considered a consumer (end user) of the materials under Alabama law, and as such you would not charge any tax to the customer. You will owe state and local Alabama use tax on the materials, but you'll be entitled to claim a credit for any PA tax that you might have paid when you bought them. (If the PA tax you paid was equal to or greater than the AL tax due, you won't owe any additional tax.)

  • Posted by Bill on January 26, 2015 3:27am:

    I live on Long Island NY and had an electrician install one GFI electrical outlet on the outdoor patio. The bill was $235 + $20 sales tax. Is the sales tax correct for this job?

    • Posted by Author photo of Dan DavisDan Davis on January 26, 2015 4:16am:

      Since the job probably wouldn't qualify as a capital improvement, the whole charge would be taxable. The tax charged sounds about right.

  • Posted by Adrienne on January 22, 2015 6:15am:

    I live in Pennsylvania, I am having my kitchen remodeled. I have received an estimate for the cabinets, countertops and sink, included in this estimate is tax on everything including the labor. Should I be paying tax on the labor?
    Thanks in advance.

    • Posted by Author photo of Dan DavisDan Davis on January 22, 2015 9:04am:

      Adrienne,
      Under Pennsylvania law, the labor to install those items is not be taxable. They also should be paying tax on the materials directly to their vendors rather than charging it to you. It sounds like they made a mistake on their estimate.

  • Posted by Jim on January 11, 2015 10:48am:

    Good blog! We recently moved to Washington State and are getting bids for repair of utility room from water line burst. Contractor added 9.4% state sales tax to the entire subtotal of the bid: materials, labor, overhead and profit. Is this standard procedure in WA. Just moved here from NV where it is materials only that are taxed. Comments?

    • Posted by Author photo of Dan DavisDan Davis on January 13, 2015 4:36am:

      Jim,
      The sales tax treatment shown in the contractor's bid is correct. Unlike Nevada, Washington regards construction contracts (including modifications and repairs to realty) as retail sales. Thus, in Washington the entire charge for repairs to realty will be taxable, including labor, materials, overhead and profit.

  • Posted by William on December 1, 2014 3:45am:

    Are Capital improvements (custom cabinets) subject to sales tax in CA

    • Posted by Author photo of Dan DavisDan Davis on December 2, 2014 5:14am:

      Contractors installing custom cabinets in California are generally considered consumers of the materials they install. This means you would owe tax on your cost of each physical item that becomes part of the installed product. If you pay tax on these materials to your vendors, you'll have no further liability (unless you actually specify a greater amount of tax as a line item in your contracts with your customers). If you don't pay tax to your vendors, you should report use tax on the costs of the installed materials on your sales and use tax returns. I also recommend contracting on a lump-sum basis, which means you would specify one lump-sum price in your contracts without breaking it down further into parts, labor, tax, etc.

  • Posted by Shelley on November 1, 2014 3:16am:

    We live in AZ. Have a remodeling project for our home. The total cost of project is $88,624.22 The general contractor is showing on our contract a taxable amount that I believe is based on the full amount of the contract. They are quoting $7533.11. Az state/county tax rate is 6.3% and City tax is 1.65% in Scottsdale. From what I am reading we should be taxed on 65% of the $88,624.22 figure. And the taxes for city are based on our homes location not his office. Please confirm.

    • Posted by Author photo of Dan DavisDan Davis on December 16, 2014 6:39am:

      Shelley,
      I apologize for my delay in responding. Your interpretation of Arizona tax law regarding contractors is correct. I'm assuming that this remodel does not include any sales of free-standing property such as furniture, refrigerator, washer/drier, etc.; those would not be considered part of the construction and would be fully taxable as retail sales. However, the tax amount of $7,533.11 is 8.5% of the $88,624.22 cost, which appears wrong for two reasons: (1) it evidently applies to the entire cost rather than 65%, and (2) the rate apparently does not apply to your location.

  • Posted by Carla on October 28, 2014 4:53am:

    Thanks Dan, I appreciate you taking the time out of your busy schedule to help me out by sharing your knowledge.

  • Posted by Lori on October 24, 2014 2:07am:

    I'm in Texas we are a Electrical contractor - basically install electrical wiring for our computers. Mostly commericial.
    Question - We do work for an out of state home warranty company. We went out to service a call it took 3 hours to find dilama.(we did not fix )Do we charge taxes for labor?
    Second part of that question:
    The dilema was not covered by Warranty company. So the customer (which is residential )now wants to go straight thru us.
    Do I charge sales tax on labor to her ?
    Do I charge sales tax on material to her?

    • Posted by Author photo of Dan DavisDan Davis on December 16, 2014 5:55am:

      Lori,
      I apologize for the late response. There seems to have been some kind of glitch in the system that forwards questions to me.
      Texas taxes residential customers differently from commercial customers. All of your charges to a nonresidential customer (including labor) would be taxable. With residential customers, you would not charge or report sales tax on the labor. If your contract with the residential customer is lump-sum, you would only owe tax on the cost of the materials you installed. (If you've already paid tax to your vendor on the cost, no additional tax would be due.) If your contract with the residential customer is a "separated" contract (time and materials), you would be required to collect tax from the customer on the greater of the cost of the materials or the amount stated in the contract. (You would, however, be entitled to claim a credit on your sales tax return for any tax you paid to your vendors on the materials costs.)

  • Posted by Arlene on October 23, 2014 7:12am:

    Dan, I am about to review no residential real property contracts completed. I am trying to familiarize myself with the tax legislation in Mississippi. Where I am from, the contractor charges a sales tax included in the contract price and sometimes will charge the full sales tax on top of it, which is in error and can be claimed as a refund. Am I correct after reading that tax is included in a RP contract in addition to an additional tax shown in Miss? In other words, there aren't any potential refund opportunities with respect to RP contracts?
    Many thanks,
    Arlenei

    • Posted by Author photo of Dan DavisDan Davis on December 16, 2014 6:22am:

      Arlene,
      I apologize for responding so late. Due to apparent forwarding glitches, I apparently missed several questions.
      Mississippi sales and use tax laws regarding construction contractors are unique. The amount and type of tax due can vary with the price of the contract, whether the contract is residential or non-residential, and the nature of the services provided. Whether or not a refund of overpaid tax would be available would depend on the preceding variables plus the individual fact pattern (nature of contract, how tax was billed and/or remitted to the state, etc.). In addition, if sales tax was overcharged to the customer, you'd probably be required to return any refund you received from the state to that customer.

  • Posted by Carla on October 22, 2014 7:55am:

    Question: In AZ the construction contractors are considered to be a retail sellers rather than consumers, they will pay priviliege tax at the time of purchasing their construction material and pass the 65% tax fee to the ultimate consumer. is this correct?
    I believe this scenario apply to New construction and/or repair and remodeling
    Thank you!

    • Posted by Author photo of Dan DavisDan Davis on October 22, 2014 10:18am:

      Carla,
      You're right that AZ construction contractors are considered retail sellers. However, the privilege tax is due on 65% of the contractor's gross proceeds from the contract, so the contractor would either bill the customer tax on 65% of the gross or just bill the customer a lump-sum amount and then compute and report the tax on the 65%. (The state's website tells you how to compute the tax in this manner; just enter "factoring" into their "search" box.) Since the tax is computed on 65% of the gross amount billed (and not on materials purchased), the contractor should buy all construction materials for resale.

  • Posted by Jeremy on October 20, 2014 4:38am:

    I run a small HVAC company in Texas. When we perform a residential repair are we to collect tax on materials from the customer if we paid the tax at the time of purchase for the materials?
    The reason I ask if that one of our supply houses did not have our re-seller number on file so we were being charged tax when we purchased materials from them.
    Additionally, we do work for an out-of-state home warranty company. Do we charge tax on materials for jobs we perform based on work orders from the home warranty company?

    • Posted by Author photo of Dan DavisDan Davis on October 22, 2014 10:37am:

      Jeremy,
      The way Texas sales and use tax applies to residential repairs depends on how your contract with your customer is structured. (Unlike repairs to commercial real estate, labor on residential repairs is never taxable in Texas.) If you use a lump-sum contract, tax only applies to your costs of materials. In that case, if you paid tax to your supplier, you'd owe no further tax to the state and would not collect tax from the customer. However, if you used a separated contract (time and materials), tax would be due on the greater of the cost of the materials or the amount you billed to the customer. Thus, if you paid tax to your supplier and billed your customer a marked-up amount for the materials, you'd owe additional tax on the markup. In that case the best approach probably would be to bill your customer the full tax on the billed price of the materials, report that amount to the state, and also claim a credit for the tax you paid to the supplier. The tax would work the same way on the home warranty repairs.

      • Posted by Jeremy on October 28, 2014 3:44am:

        Thanks Dan. I appreciate you taking the time out of your schedule to help us out by sharing your knowledge.

  • Posted by Chris on October 15, 2014 2:56am:

    for a company located in texas, should sales tax be charged for installation costs (labor) for job performed in Idaho?

    • Posted by Author photo of Dan DavisDan Davis on October 15, 2014 6:40am:

      Chris,
      Installation labor is not taxable on construction jobs performed within Idaho. Idaho sales or use tax will be due on the costs of any materials installed.

  • Posted by Joe on October 4, 2014 7:42am:

    My company owns numerous restaurants in Texas, New Mexico, Arizona, Colorado, Illinois, Georgia, Alabama, and Ohio. We perform remodels and pay subcontractors to provide the material and labor. This is asking a lot, but I was wondering too about the sales tax. In particularly, I just received an invoice from an electrician in Phoenix for labor only, and he did not include tax. Sometimes a contractor will charge tax on their invoices, and sometimes not. Thanks sincerely for your help.

    • Posted by Author photo of Dan DavisDan Davis on October 6, 2014 5:56am:

      Joe,
      In Arizona, contractors are given the option of either charging the state's TPT (sales tax) as a separate line item or not showing the tax on their invoices. Therefore, if you use more than one sub in the state, it's not surprising that some will show the tax and some won't. (Contractors owe Arizona tax on 65% of their gross billings. They can either bill it separately or just compute it when they report the tax to the state.)

  • Posted by barbara on October 2, 2014 5:12am:

    Hello, Dan.
    If I live in Texas, and fly to NY to install a computer and a camera (run cables) in a commercial site, do I collect Use Tax? And if so... can you direct me in how to report and pay that?
    Thank you so much for helping me, I have been looking on line for a while now and cannot find a straight answer.

    • Posted by Author photo of Dan DavisDan Davis on October 2, 2014 7:08am:

      Hi Barbara,
      For purposes of this answer, I'm assuming that you don't have a New York sales tax permit and don't normally do business in New York.
      If you're selling the computer and camera, you'll need to apply for a New York sales tax permit (at www.tax.ny.gov/bus/st/register.htm). You'll then need to collect NY sales tax on the selling price, and report and remit the tax.
      You'll be regarded as the consumer of the materials used to install new in-wall or in-floor wiring (cables, etc.). This means you'll owe tax on your cost of those materials, and no tax will be due on the installation labor.
      If all you're doing is the cable installation, and the customer is providing the computer and camera, I suggest that you buy the materials tax-paid from a New York vendor. Your liability will then be extinguished and you won't need to apply for a NY sales tax permit.
      Regards,
      Dan

  • Posted by Mike on August 29, 2014 6:49am:

    I run a small AC company in Texas, do i have to charge tax on the labor to change out a let say a condenser "the unit outside" I know I charge for sales tax for the parts involved but how about the labor?

    • Posted by Author photo of Dan DavisDan Davis on August 29, 2014 8:30am:

      Mike,
      If you're repairing a condenser on the outside unit of a residence (apartment, single family residence, etc.), the labor is exempt. If the unit is on a commercial building (retail store, repair shop, etc.), the labor is taxable.
      Regards,
      Dan

  • Posted by Randy on August 28, 2014 8:35am:

    Doing CCTV service, additions and relocations in Texas at retail locations. Is the labor portion taxable?

    • Posted by Author photo of Dan DavisDan Davis on August 29, 2014 8:33am:

      Randy,
      Cable TV services (labor) are taxable in Texas.
      Regards,
      Dan

  • Posted by val on August 27, 2014 12:50am:

    I just hired a guy I know who owns a construction company to lay flagstone in our yard. We live in arizona.We already had all the materials, they just layed it and originally reported a charge of 675.00, once completed, he quoted us 716.17 saying it was taxable labor. Is this accurate, do they place tax on labor?
    Thank you

    • Posted by Author photo of Dan DavisDan Davis on August 29, 2014 8:09am:

      Under Arizona law, 65 percent of the gross billing for a construction contract (including materials and/or labor) is taxable. The amount you were charged seems more or less correct, depending on your locality within Arizona.
      Regards,
      Dan

  • Posted by Jim on August 4, 2014 7:05am:

    Our Michigan company sells transit shelters (free-standing structures) to regional transportation authorities, universities and schools, and private businesses. Materials are produced and installation instructions prepared at our corporate offices in Michigan. Materials to out-of-state customers are shipped via common carrier. We occasionally provide installation for jobs through the hiring of subcontractors, who employ their own personnel to complete the work. Installations may take anywhere from one day up to 7-8 days.
    We also sell vertical glazing systems and canopies, which are typically attached to real property either in new construction or as a retrofit of an existing façade. Again, we may sell the installation to the customer, but the actual work is completed by sub-contractors we hire. Installations could take anywhere from a week to nearly a year.
    As we expand into other states, we are over-whelmed with time consumed and complexity of compliance.
    Does hiring a subcontractor create nexus for us (and for the sub) in every state?
    Are our subs liable for withholding that state's personal income tax from their employees, even if only working there for 2 days?
    Our company has never set foot in many of these states, but the subcontractors are a growing concern; if they don't register, are we liable for their tax?
    I know each state is different; any info you can provide is helpful; thanks.

    • Posted by Author photo of Dan DavisDan Davis on August 8, 2014 8:33am:

      Hiring subcontractors to install the property you're selling will create sales and use tax nexus in the state of installation (except, of course, for the five states that don't have a sales tax). If it's a one-time, short term job and there are no other installations expected in the state, you may be able to qualify for a temporary sales or use tax permit, which would mean you wouldn't be stuck with charging tax on your non-installed common carrier sales into the state. Even if it's a long-term job, you should be able to cancel your sales tax permit after the job is completed if you don't anticipate future installation jobs in the state. However, as long as you're considered to have nexus in the state, you'll be required to tax your common carrier sales into the state as well as the installed products.
      Whether or not the subs will be liable for withholding state income tax from their employees' wages will depend on a variety of factors, such as the individual state, the sub's level of activity in that state, etc. (The subs should check with their own accountants regarding their individual requirements. This should not be your responsibility.)
      As the prime contractor, you'll be liable for the state's sales or use tax on the installed property, regardless of whether the sub is registered in the state. In some states, you may also owe tax on the labor. (You shouldn't be liable for any withholding on the subs' employees.)
      You may want to look into just selling and shipping your products to the end users and arranging for the subs to contract separately with the customers if installation is desired.

  • Posted by Lucas on July 17, 2014 8:29am:

    We are a custom drapery manufacturer in TEXAS, I was wondering if the labor and install part of custom window treatments are taxable. I know the materials are texable, and I think the tax is on the total cost of what customers paid. However, it seems that much of our competition does not include tax in the labor part of the invoice for customers. I was wondering if they are just including the sales tax in the total price they are quoting or is there a way to exempt the labor and installation part. thanks!

    • Posted by Author photo of Dan DavisDan Davis on July 21, 2014 8:33am:

      Lucas,
      Generally Texas does not regard the sale and installation of draperies as improvements to realty. This means the whole charge for the draperies is taxable, including fabrication and installation labor. However, there are a couple of limited exceptions, which apply if (a) the removal of the drapery after installation would result in substantial damage to the underlying realty (which is rarely the case), or (b) the installation is pursuant to a construction contract involving new construction or a major remodel. In these exceptional circumstances, if you use a lump-sum contract, you will be the consumer of the materials and pay tax to your supplier (or report use tax on the materials costs on your sales and use tax return), and the charge to your customer will not be taxable. If you use a separated contract (time and materials), you'll need to collect sales tax on the materials charge but not the labor.
      Unless you're sure that one of these exceptions applies, your safest approach is to charge and report tax on the entire amount that you bill.
      Regards,
      Dan Davis

  • Posted by Renee on July 16, 2014 11:28pm:

    If work is not considered a capital improvement on a job site in the construction field should tax be charged on labor? If sales tax is charged does it get added in on sales and use tax that is filed quarterly? Thanks for responding Renee

    • Posted by Author photo of Dan DavisDan Davis on July 17, 2014 3:57am:

      Renee,
      I'm assuming you're referring to a New York contract. If you're in another state, my answer probably won't apply.
      If the job is not a capital improvement, your company should charge sales tax on the entire contract price, including labor. The contract price should be included in the taxable amount reported on your quarterly sales and use tax return. If you also paid tax on the installed materials when you bought them, you should claim a refund from the state of the tax paid.
      Regards,
      Dan

  • Posted by JIm on July 3, 2014 6:02am:

    I'm a NYC manufacturer of custom millwork. Our customers are contractors and our jobs are capital improvements. we fabricate and install custom millwork cabinets, doors and paneling in commercial spaces, usually law firms and financial offices. My questions is about paying sales tax on our subcontractors charges. We often subcontract out the work we get. So i have three questions:
    If we buy the cabinets, doors and or paneling from a manufacturer, which we call a subcontractor, and do the install ourselves. Do we pay sales tax on the cabinets purchased from the subcontractor?
    If the subcontractor also does the installation do we pay sales tax to the subcontractor for his services?
    If we buy the cabinets from a subcontractor and we buy the installation from another distinct subcontractor, who should we pay sales tax to?
    thanks

    • Posted by Author photo of Dan DavisDan Davis on July 4, 2014 11:04am:

      Jim,
      Please note that all of my answers are based on the assumption that the jobs are capital improvements.
      1. If you buy the cabinets, doors, or panels from a manufacturer and then install them yourselves, you should pay sales tax to the manufacturer on your purchases. No other sales or use tax will be due.
      2. The same answer applies if you buy the materials from the manufacturer and a subcontractor installs it. Since it's a capital improvement job, no tax is due on the subcontractor's services.
      3. If you buy the cabinets from a subcontractor and then have a different subcontractor install them, you should pay tax on your purchase of the cabinets only. No tax is due on the installation services.
      Note that in all cases involving capital improvements, sales or use tax is only due on your costs of materials. The installation labor will be exempt regardless of who provides it.
      Regards,
      Dan Davis

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