Contractors' Sales Tax on Purchases

April 13, 2006

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The following are commonly asked questions and answers regarding taxes on purchases made by those in the construction industry:

If I buy building materials in order to resell them, when is sales tax due? If you operate in a state that requires construction contractors to pay sales or use taxes on purchases of supplies and materials, you may have one of two options. First, you should check to see if your state provides an exemption that allows construction contractors to buy materials and supplies tax-free if the property is specifically designated as resale property. If there's such an exemption, then you can buy resale property tax-free and collect sales taxes when you resell the material.

However, if the state you operate in does not allow construction contractors to buy material for resale tax-free, you're going to have to check with the state to find out the procedure for applying a credit for sales taxes paid against the tax incurred when the material is resold.

If you purchase materials and supplies in your home state for use on construction jobs outside the state, do you have to pay home state sales tax? Some states provide an exemption for purchases of materials and supplies that are to be used for an out-of-state construction job. If you're in a state that has such a provision, become familiar with the process for obtaining and using any required exemptions. This will help you to avoid cash shortages from having to pay unplanned for use tax in your home state.

As a construction contractor, you are generally responsible for paying sales tax on all supplies and materials at the time they are purchased. However, if your home state law is similar to that found in California, you may buy materials and supplies tax-free if they're going to be used on a construction job out-of-state. The way you go about getting this exemption is by providing a written document, such as an exemption certificate, to the California vendor you're buying the supplies and materials from.

Now, even though this may get you out of paying sales tax in your home state, don't forget that you've still got to pay use tax in the state where the construction job is being done. You didn't really think they'd let you get away that easy, did you?

What do I do if the sales tax rate changes after I've signed a contract to purchase supplies and material but I haven't taken delivery? As states find themselves strapped for cash, an easy way to generate revenues is to bump up the sales tax rate. How this will affect the contract price of materials and supplies not yet delivered will depend on the state where you have the contract. While most states will give you a break and let you complete the purchase at the old tax rates, you should touch base with your state tax assessor just to determine if they allow old tax rates to apply to current periods for uncompleted contracts.

Should I include some provision for sales or use tax in my construction contracts? It is up to you whether you want to include a stated provision in your contract for the payment of sales taxes. However, when you negotiate a contract with a customer, make sure that you account for the right sales or use tax rate when bidding on a job. To do this, you should check with the states that you operate in to verify that you have included the right tax rate either to roll into the contract or to pass directly onto the customer.