What contractors should know about sales and use taxes

What contractors should know about sales and use taxes

Contractors working on buildings and other construction projects face a confusing array of sales and use tax rules, which vary from state to state. Performing a contract in another state may subject you to a set of rules different from those familiar to you, even after becoming familiar with the rules in the state where you do most of your construction work, Moreover, how you are taxed in a particular state often depends on the role you play in the construction contract.

It is important for construction contractors to be familiar with the sales and use tax laws in their home state, the state in which they purchase supplies and materials and the state in which they perform the construction project.

This article focuses on sales and use tax, rather than income tax. Technically, a use tax is imposed on the consumer of taxable products or services. Sales tax is imposed on the seller or provider of those products or services.

In most cases, a sales tax is passed through to the consumer. This article uses the term "sales and use tax" to describe both types of taxes.

Building or improving real property

In the majority of states, a contractor who performs real property improvements is deemed to be a consumer of the supplies and materials incorporated into the project. When you purchase the materials and supplies you are required to pay tax.

Paying tax at the time of purchase may actually be advantageous, because the state will generally not charge sales or use tax again at the completion of the project. So any markup you charge to your customer on the materials, supplies and labor will not be subject to sales and use tax.

Learn more about sales and use taxes.

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