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Construction Contracts with Exempt Entities (State Breakdown)

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The United States government and its agencies are the only entities that are universally exempt from sales and use tax. This exemption proceeds from the U.S. Constitution, which prohibits states and their subdivisions from taxing the federal government. The great majority of states also exempt sales to themselves and their political subdivisions, apparently recognizing that shifting money back and forth from one hand to the other would not be particularly productive. (California, which does tax sales to itself and its subdivisions, is a notable exception.) A smaller majority of states exempts sales to nonprofit and public benefit agencies, although the agencies exempted are by no means consistent from state to state.

Since in most states contractors are considered consumers of the materials they install, the tax burden usually falls on the contractors rather than their customers. In such cases, the exempt status of a customer will not flow through to the contractor. States that tax contractors as consumers of materials used to fulfill contracts with exempt entities include: Arizona, Arkansas, California, Florida, Georgia, Idaho, Kentucky, Louisiana (except for a few specific charities), Maryland (except for designated nonprofit agencies), Michigan, Mississippi, Nevada, North Carolina, North Dakota, Pennsylvania (with limited exceptions for certain building machinery and equipment), South Carolina (with a limited exclusion for property transferred to the federal government), South Dakota, Tennessee, Virginia, Washington, West Virginia (capital projects only), Wisconsin (except for materials specifically designated as tangible personal property after installation), and Wyoming.

Hawaii’s general excise tax is considered the contractor’s obligation and therefore, with a couple of very limited exceptions, applies to materials installed on behalf of all entities regardless of the nature of the customer. The same is true of New Mexico’s gross receipts tax. (Hawaii’s general excise tax and New Mexico’s gross receipts tax are the sales tax equivalents in those particular states.)

Several states do allow contractors to buy materials without tax when they intend to incorporate those materials into realty owned by exempt agencies. Generally the agency claiming exemption must give the contractor either an exemption certificate or a copy of a state-issued form confirming the entity’s exempt status. The contractor must then provide copies of the document to its vendors. (In a few states, the contractor self-issues the applicable exemption certificates to its vendors.)

States with exemptions for materials installed under contracts with exempt entities include: Colorado, Connecticut, District of Columbia, Iowa, Kansas, Maine, Massachusetts, Missouri, New Jersey, New York, Ohio, Oklahoma, Rhode Island, Texas, Utah (primarily for nonprofit agencies), and Vermont.

In Alabama, Arizona (for federal contracts only), Minnesota, and Nebraska, exemptions for materials installed on realty owned by exempt entities are permitted through the use of state-specified agency agreements. Under such an agreement, the contractor is permitted to buy materials as the agent of its exempt customer, causing title to the materials to pass to the customer at the time of purchase. The vendor is then regarded as selling directly to the exempt agency (rather than to the contractor) and accordingly is relieved of responsibility for collecting the tax.

The form required for an agency agreement varies among the applicable states and, of course, most states don’t recognize such agreements at all. A few states not only refuse to recognize agency agreements but also hold installing contractors responsible for tax on construction materials even if their exempt customers have purchased them directly.

In states that tax construction services (such as installation and repairs to realty), the providing contractor is considered the retailer of such services rather than the consumer. Thus, unlike materials regarded as consumed by the contractor, the services component of a construction contract usually will be eligible for the customer’s exemption. (Arizona, Hawaii, and New Mexico are exceptions, since their taxes apply to gross construction proceeds without distinguishing between materials and services.)

Caveat: the individual details of each state’s exempt entity provisions are myriad and beyond the scope of this article. When such exemptions appear applicable, the relevant statutes, regulations, and state pronouncements should be thoroughly reviewed.

Questions? Comments?

BTW - In my next post, I'll look at the sales and use tax effects of prime contractor/ subcontractor relationships. Let me know if you have any particular issues that you'd like me to consider regarding that topic.

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Comments

15 Responses to Construction Contracts with Exempt Entities (State Breakdown)

  • Posted by Jeanne on January 6, 2016 7:43am:

    I worked for KMK Construction, Inc. in Eliot ME and they have a Government Contract for a project in Jacksonville FL. Would you be able to stir me in the appropriate direction to obtain a form to apply for Tax Exemption

    thank you Jeanne

  • Posted by Frank on December 7, 2015 12:35pm:

    I have a contractor that is contracted with a NJ agency that is tax exempt. The structure (bridge)being worked on spans into PA, and is co-owned by a nonexempt agency. The contractor is taking tax free permanent material in NJ and the questions is whether this should be permitted in PA as well. While the structure is co-owned the contract is exclusively with the NJ Agency. In essence is the NJ agency also tax exempt when work is out of State?

  • Posted by Denise on November 9, 2015 8:52am:

    The company I work for does work for pipeline companies. We provide rental of mats (mats make a road for companies to drive on to get access to sites). I can't figure out if we should be paying sales tax or charging our customers sales tax. We work mainly in Michigan. Any help would be appreciated.

  • Posted by Renee on November 3, 2015 9:18am:

    We are a subcontractor in Georgia. I am trying to find out if there is ever a time that we can purchase materials tax exempt when those materials will be used to fulfill a contract. The owner of the project has a sales tax certificate of exemption. Everything that I have been able to find states that the contractor can not buy the materials tax exempt. Would the owner of the project have to apply for a refund of sales tax that was paid on the materials that were installed on the project?

  • Posted by Vanessa on April 15, 2015 8:41am:

    In New York, purchases of tangible personal property that is used to create a building/structure or maintain, service or repair a building/structure are exempt when the building/structure is owned by an exempt organization. The tangible personal property must become an integral component part of the building, structure or real property. Would purchases of computers and printers qualify as "integral components" if the computer/printer is installed as part of the construction project? Thanks.

    • Posted by Author photo of Dan DavisDan Davis on April 15, 2015 10:14am:

      Vanessa,
      Computers and printers would retain their status as tangible personal property and would not be regarded as integral components of a building, structure, or other realty. However, in New York a direct sale of computers and printers (or other tangible personal property) to a qualifying exempt entity would be nontaxable in any case. If your company were making such a sale (without making any intervening use of the property before the sale), it could buy the property from its vendor for resale (without tax) and then sell it to the exempt entity without charging tax, as long as the exempt entity gave your company a completed exempt organization certification form.

  • Posted by Pauline on November 6, 2014 11:12pm:

    The general contractor did a remodeling job on our KS location but only bill us the lum sum, he said around 20% is material and 80% is labor, should we accrue Tax on this 80% since it is remodeling for commerical property? Thanks so much!

    • Posted by Author photo of Dan DavisDan Davis on December 16, 2014 7:18am:

      Pauline,
      I apologize for my late response.
      As long as your contractor is licensed in KS, it is the contractor's responsibility to properly report and remit the applicable sales and/or use tax. You do not need to (and should not) accrue tax on any part of the contract.

  • Posted by Eileen on October 15, 2014 12:46pm:

    We are and industrial sandblasting and painting, coatings company in Texas. We charge sales tax on labor and all products that we use to complete jobs. My question is: are we tax exempt when we purchase the paints, coatings and sand, they change form when it is sold to the customer? If so, what certificate do I need to get?

    • Posted by Author photo of Dan DavisDan Davis on October 17, 2014 6:43am:

      Eileen,
      I assume your company charges sales tax on labor and all materials because it's engaged in projects that would be classified as real estate repairs and remodeling (which is the correct procedure in Texas). You're therefore entitled to buy the paints and coatings for resale, using a Texas resale certificate. However, unlike the paints and coatings, the sand you buy for sandblasting does not become a part of the real estate and constitutes a supply item consumed in the repair/remodel process. This means the sand doesn't qualify for exemption, so you can't buy it under a resale certificate.

  • Posted by James on August 7, 2014 7:39am:

    We are an HVAC contractor in Texas. The question has come up about doing work for an exempt entity. Example: we are hired by a GC to do the HVAC on a church. All new construction. Would our materials be exempt if we got a resale certificate from the GC like we would for remodel?

    • Posted by Author photo of Dan DavisDan Davis on August 8, 2014 9:28am:

      In all cases, you'll need to get and retain a copy of the church's exemption letter, which the Texas Comptroller's office issues to all exempt entities. You can get this from the church or from the prime contractor. If your contract with the prime is lump-sum, you would issue a Texas exemption certificate (not a resale certificate) to your suppliers to buy the materials without tax; you would charge no tax to the prime; and you would not need a resale or exemption certificate from the prime. If your contract with the prime is separated (time & materials), you can issue either an exemption or a resale certificate to your suppliers, and you should also get a resale or exemption certificate from the prime.

  • Posted by Kara on June 28, 2014 10:11am:

    We are a MD subcontractor doing a job in DC for a tax exempt organization. If we purchase material specifically for the job in VA and ship it to our MD office does the cusomers tax exemption flow thru still exist or does it only flow thru if we pick up in VA or ship the materials to DC?

    • Posted by Author photo of Dan DavisDan Davis on July 1, 2014 7:49am:

      Kara,
      The process you're describing involves exemptions in three jurisdictions: VA, MD, and DC.
      To buy the materials in VA without being charged VA sales tax, you'll need to make a written request for exemption certificates to the VA Department of Taxation. Your request should explain that the materials will be used on a job in DC, and it also should explain why the property would be tax-exempt if it were purchased in DC. When you get the exemption certificates, you'll provide one to each vendor.
      You may temporarily store the property in MD prior to shipping it to DC without incurring MD tax, but you should maintain a clear record of the transaction flow to support the MD exemption.
      You'll support your DC exemption by obtaining the customer's exempt entity certificate number.
      Regards,
      Dan Davis

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