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Construction Contractor Issues: New Sales Tax Resource

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Welcome to “Construction Contractor Issues.”  My goal for this blog is to bring some clarity to the varying tangles of multi-state sales and use tax rules that afflict the construction industry.

Although the wording may differ in each state’s statutes, virtually all sales tax administrative agencies define construction contractors as businesses that convert tangible personal property into real property.  Unfortunately, everything starts to diverge
from that point forward.  Even some of the criteria that define tangible personal property, real property, and tangible property in general may be inconsistent from state to state, and that’s only the beginning.

In most states, construction contractors are considered consumers (end users) of materials they install, but in a few states (Arizona, Hawaii, New Mexico, and Washington) they
are regarded as retail sellers.  In addition, at least half of the states that treat contractors as consumers have exceptions to that rule.  The exceptions may relate to the nature of the property installed (fixtures versus materials, subject to varying definitions), the type of improvement to realty (capital improvement versus repair or remodel), the structure of the contract (lump-sum versus time and materials, etc.), and a host of other factors.

A majority of the states exempt construction-related services (installation, project management, engineering, architecture, site clean-up and trash removal, maintenance, and storage), but a significant minority taxes one or more of these activities.  As with installed property, the taxability may vary with the type of improvement, the nature of the property installed, the structure of the contract, and other particulars.

Here are some of the issues we’ll be looking at:

  •  When, where, and to what extent are contractors regarded as consumers of the fixtures and materials they install?  When, where, and to what extent are they regarded as retailers?  What difference does it make, anyway?  (Hint – a big difference.)
  • In which states does installation create nexus? (Easy answer: in all states that have enacted sales and use tax laws.)
  • When and where are construction-related services subject to sales and use tax?  Which services are taxable in the applicable states, and to what extent?
  • What exemptions and exclusions are available to contractors, and in which states?  What are the requirements for exemption?
  • How does the form and wording of a contract affect sales and use tax liability, and how do the effects differ from state to state?
  • Where and how are subcontractors treated differently from prime contractors?
  • How does the tax apply to contractors whomanufacture the materials or fixtures they install, and how does the treatment differ from state to state?
  • When are projects that are performed for nonprofit and/or government agencies exempt?  Which agencies qualify, and in what states?  What are the requirements for exemption?
  • How are construction contractors audited for sales and use tax purposes?  How do you prepare for an audit, and what are the hot-button issues?

These are just a few of the topics that I plan on covering in this blog.  (BTW - How does that list look to you?  Let me know if you have any items to add...)

I’m always open to your input, suggestions and comments.  I look forward to your participation.

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Comments

10 Responses to Construction Contractor Issues: New Sales Tax Resource

  • Posted by Lori on June 16, 2015 2:52am:

    Question: PA prefabricated home business contracts with a NJ manufacturer to build the shell of the home. The shell is shipped to the end users location in PA where this PA Company will go to assemble the shell and complete the fit-out. Should the NJ manufacturer be charging PA Company sales tax? Or Should PA Company be paying use tax to PA and submitting a resale certificate to NJ manufacturer on the shell of the home?

    • Posted by Author photo of Dan DavisDan Davis on June 16, 2015 5:03am:

      Lori,
      In PA, the company selling and installing a manufactured home has two options. It can charge the customer sales tax on 60 percent of its selling price, or it can pay sales and/or use tax on its costs of the materials involved. This means the PA company can either pay the PA tax to the NJ manufacturer (assuming the NJ manufacturer is registered with PA to collect the state's tax) or it can issue a resale certificate to the manufacturer and then either report use tax on the cost or charge the home buyer sales tax on 60 percent of its sale price.

  • Posted by KC on April 15, 2015 11:26pm:

    We are an HVAC Mechanical Contractor in MD We did a contract job in Virginia in 2012. The equipment was shipped from the manufacturer in Oklahoma to Maryland and stored at the riggers until it was ready to be installed in Virginia. We just received notice that the manufacturer did not charge us sales tax and now wants us to pay it. Do we have to pay it?

    • Posted by Author photo of Dan DavisDan Davis on April 21, 2015 8:08am:

      It depends on circumstances and which state's tax they're trying to collect. If the manufacturer is trying to charge Oklahoma sales tax and the equipment was shipped directly from the manufacturer's location to Maryland, the sale was not subject to Oklahoma tax because it was a sale in interstate commerce. If they're trying to charge Maryland tax, they have a case if either (a) they delivered the equipment into Maryland using their own truck, or (b) the sale was negotiated through a location or representative maintained in MD by the manufacturer. Any specific terms in your purchase contract regarding the location of title passage, responsibility for paying sales tax, etc., could also have a bearing.

  • Posted by cassi on March 11, 2015 2:26am:

    I have found this website helpful. We do business in multiple states and it has been very complicated to understand what to charge tax on and where. Can you help me understand if we would charge tax on services like design and project management?

    • Posted by Author photo of Dan DavisDan Davis on March 11, 2015 5:09am:

      Cassi,
      This varies a great deal from state to state. Design fees (engineering and architecture) are exempt in most states, but they are taxed in Hawaii, New Mexico and South Dakota. They are subject to the contractor's excise tax (not sales tax) on nonresidential contracts over $10,000 in Mississippi, unless the total project cost exceeds $100,000,000. In Washington, they're exempt from sales tax but subject to Business and Occupations tax. DC taxes landscaping architecture but exempts other engineering and architecture fees.
      Project management fees are generally taxable in states where construction services (labor) are taxable and exempt in states where the services are exempt.
      Where exemptions are available for any of these charges, the fees should be separately stated and clearly distinguished in the contract and elsewhere. It's even better if architecture and engineering (design) fees are made the subject of a separate contract.

  • Posted by James on January 1, 2015 9:11am:

    I'm a timber framer and sometimes I'm hired as a sub to cut a frame for a building which the contractor will assemble and finish. Should I be collecting tax for my labor? Secondly I also have my own customers where I purchase the raw materials, cut the mortise and tenon etc.pay the tax on those raw materials, and raise the finished frames. Do I charge my customer tax on the raw materials only or on the total bill? I'm in VT.

    • Posted by Author photo of Dan DavisDan Davis on January 1, 2015 10:18am:

      Jim,
      The following comments are specific to Vermont:
      When you cut and sell a frame that you won't be installing yourself (as in your first example), you need to collect tax on your entire charge, including labor. When you build a frame that you also install, tax is not due on the installation labor. However, rather than being due on the cost of materials, tax is due on the amount you would charge for the completed frame if you were selling it to a contractor without installation. (You would be able to take a credit for the tax you already paid when you bought the raw materials.)

  • Posted by Melissa on August 12, 2013 10:49am:

    In RI does the GC or subcontractor pay the sales tax? I am trying to figure out if I need to add sales tax on my bid.

    • Posted by Author photo of Dan DavisDan Davis on August 13, 2013 8:58am:

      Melissa,
      In RI, the party responsible for the tax is the one who actually furnishes and installs the materials. The general contractor should pay RI sales tax to its vendors on any property that it furnishes and installs, and the sub should do the same for any property that it furnishes and installs. If the installer doesn't pay the RI sales tax to a vendor, it has to report and pay use tax on the materials costs on its RI sales/use tax return.
      Your company should include RI tax measured by its expected materials costs when computing its bid. (Installation labor isn't subject to RI sales or use tax.)
      Regards,
      Dan

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