Like other industries, the construction industry has to comply with certain tax rules and regulations. If you’re in the construction business, it’s important to understand the impact these rules and regulations will have on your business, for example, on sales tax on construction services.
Tax laws can be confusing and complex no matter the industry. Construction services sales tax is no different. These laws can vary based on the type of project, the client and the state you are in. That’s why you should always consult with a professional.
How Sales Tax on Construction Works for Sellers and Buyers
One of the most confusing aspects of taxes in the construction industry is who pays what and when. In the U.S., sales tax is typically charged on the tangible property and not on services or labor. Some states have a labor tax but very few. So the issue that comes into play is who pays the sales tax on construction services: seller or buyer?
General Rules of Construction Contracts
While the construction contract taxation rules vary by state, there are general rules that apply to all states.
- The sale of real property such as building projects is exempt from the sales and use tax.
- Construction contractors who convert tangible personal property over to property considered real are the users who are taxable
- Construction contractors are the ultimate consumer of tangible personal property used in the project spelled out in the construction contract. Ultimate consumers are the last people to buy and use the material.
Now let’s break it down even further.
Taxation for Building Materials
Regardless of the State, every contractor that purchases material and converts it into real property is the taxable party at the time the material is sold to the contractor. In other words, construction contractors pay sales tax when the material used in construction projects is purchased.
Whether a construction company collects sales tax depends on the contract terms. There are two ways a contractor can charge for a job:
The construction contractor adds up all of the material, parts, and labor and charges the buyer all in one lump sum.
- Time and Materials
The contractor itemizes labor and materials and charges the buyer for each line item.
Materials for Resale
In itemized contracts or time and materials, labor is the separate line item. The builder uses material to sell it before converting it into real property. In essence, they are reselling the material that they bought for project. Because of it they are then considered retailers and not the builders so the sales tax is collected by the contractor from their customer.
Some states provide a tax exemption that lets contractors purchase material tax-free if property is considered as another or second sale. If it qualifies as a tax exemption, then you would collect sales tax when you sell the material to the customer.
If the state doesn’t provide a provision for contractors to purchase supplies for resale free of tax, then you will need to determine what the procedure is to receive a credit for the sales tax paid with what was incurred when the supplies are resold.
If the contractor isn’t able to provide an itemized material list, then the contract is considered lump-sum and the contractor wouldn’t charge the customer any sales tax.
Registration Responsibility for Contractors
Contractors must register anywhere for applicable tax types where work is being performed. Contractors are not always regarded as the consumer of resources. Some states consider theyas the retailer, that’s why they will need a sales tax registration to buy items for resale so that they can collect on the sales tax.
What happens if tax rates changed after the purchase of materials?
This fully depends on the state. Sometimes you can finish the transcation for the materials that haven’t been delivered at the old tax rate. Check with the tax assessor to see if they allow the original tax rates to apply for contracts that haven’t been completed.
What if I bought materials in a state but then used them in a completely different state?
Some states offer a tax exemption for supplies bought in a state but are to be used in a different state. Touch base with the state to see if it offers this provision. Even if you don’t pay sales tax in the country you bought materials in, there are still exist ‘use tax’ in the state where work is being performed.
Can a customer’s exemption on sales tax flow over to the contractor?
No, in that case, the customer should get the materials to take advantage of the exemption for sales and use purposes. The only time this doesn’t apply is if the contractor is the exempt organization’s authorized agent.
It’s hard for businesses and individuals to stay on top of and comprehend all of the tax laws within the different industries. That’s why it is so beneficial to hire an Enrolled Agent to shoulder the responsibility of the industries’ rules and regulations, which gives you time to focus on other aspects of your business or personal life. Contact our Enrolled Agent for professional tax accounting in Brooklyn, NY.