What are the rules for sales tax on construction labor and materials? Each state has their own laws when it comes to charging sales tax for construction services, including labor and materials. Proper sales tax compliance is incredibly important — otherwise, you could be facing steep fines. Let’s talk about how you can avoid those.
In this article:
- In most states, construction labor is NOT considered a taxable service. However, in some states, like Arizona and New Mexico, you must charge sales tax for construction labor.
- Sales tax must be paid to the state — whether paid by you upon purchase from your vendor or deferred to your client to pay. Which method you use will also depend on the state.
- Subcontracting or working with government/nonprofit entities introduces additional complexities around who pays sales tax on construction materials.
Are you required to charge sales tax on construction services?
The answer to this depends on which state(s) you operate within. Most states consider construction labor to fall under the non-taxable service umbrella. However, some states (like Arizona and New Mexico) require you to charge sales tax on construction labor.
In this case, you’d need to register for a sales tax permit, include sales tax in your charges to clients, and then regularly remit these sales taxes to the state. Proper bookkeeping is essential to avoid errors and potential penalties.
Tax law is constantly in flux, and some states have even been changing what’s considered a taxable service. To stay on top of these changes, it’s important to work with a CPA who is deeply knowledgeable on state tax law, especially when it comes to the construction industry’s tax laws.
What about sales tax on construction materials?
Direct Client Projects
As a construction company or contractor, are you required to pay sales tax on construction materials you purchase for a specific job?
In many states, the answer is yes. You are seen as the “end user” of the construction materials, and therefore it’s up to you to pay sales tax to your vendor for the purchase of any materials. In this case, you’d want to factor these costs into your pricing to your client.
On the other hand, in some states, you can actually pass off the sales tax to your client. Since the state views you as the “go-between,” you can present a resale certificate to your materials vendor to purchase the materials tax free. However, you then must charge sales tax — calculated correctly! — to your client for these materials. To do this, you must have a sales tax permit and regularly remit sales tax to state and local authorities.
Subcontracting
The information above generally applies to subcontracting — only this time, the general contractor is your “client,” which means you will be dealing financially with them.
Working with Government Entities or Nonprofits
Working with nonprofits and some government agencies that have tax exempt status can introduce some complexities into the equation. In some states, you as the contractor may be able to act as the entity’s “agent” and purchase the materials tax free.
In states where you cannot act as the end user’s agent, you may consider allowing the client, with your oversight, to purchase the needed materials using their tax exempt status.
Work with a CPA firm that specializes in the construction industry
Are you adhering to your state’s rules regarding sales tax on construction labor and materials? We serve more than 150 construction clients each year, meaning we know the unique tax situations contractors and construction companies face. Get in touch with us here.