Sales Tax in the Construction Industry

April 13, 2006

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The construction industry is mostly made up of businesses which construct or make improvements to houses, buildings and undeveloped land (real property). In the majority of states, construction firms do not have to collect sales taxes on the services they provide. However, they're treated as a consumers of supplies and materials used in construction projects and must pay sales or use taxes at the time of purchase.

The states that require construction contractors to pay sales tax on purchases may provide exemptions to this general rule. Whether you qualify for the exemptions will not only depend on the types of contracts that you negotiate with your clients, but also who your clients are (for example, are they non-profit or governmental agencies). There are also other issues that affect your tax liability, such as whether your business is a reseller of property, and which state you should pay taxes to, for jobs that you do out-of-state. In the following analysis, we're going to look at these issues and address possible solutions that may help you in your business as a construction contractor.

As a construction contractor, the type of work you typically do for customers is related to the construction, improvement, modification, or demolition of buildings and land ("real property"). Generally, work is done under a signed written agreement with your customer that lays out the terms of the work to be done, the type of materials to be used, and an estimate of the total cost of the job.

When negotiating a construction contract, most contractors use either a "lump-sum" contract or a "time and material" contract. While other types of contracts may be used in contracting with the government, these two are the most typically for nongovernmental contracts.

With a lump-sum contract, you are agreeing to perform the contract for a lump-sum amount. This amount will include materials, supplies, services, overhead and profit all "lumped" together in one line item.

Using a time and material contract, the stated contract amount will be based on and include actual rates for all workers at the site, and separately charge for supplies and materials used. In fact, you may even bill separately for overhead and profit margin.

In some states, the type of contract you decide to use may have an effect on the timing of when you will have to pay sales taxes on materials and supplies purchased. For example, if you're putting up a building for a customer in Florida, you'll have to pay sales or use taxes when you purchase supplies and material if the construction contract is a lump-sum contract. In the alternative, if you separately state and itemize the materials, supplies and labor in a time and materials contract, then the state will treat you as a reseller. This means that you will not pay sales tax when you buy the materials and supplies. Instead, you must charge sales tax to the customer on the materials and supplies and will incur sales tax liability when your customer finally cuts you a check.

Read on to learn about sales and purchase issues common to your specific industry.