The construction project is finished, the thousands of project components and tasks have been navigated, and everyone’s standing around beaming. That is except the state’s department of revenue, which has a few questions about sales taxes.
Sales taxes, often the smallest tax item connected to construction projects, can become a big headache for contractors because states have different, and sometimes changing, rules about how contractors must treat sales and use taxes. If a contractor’s work has, is or will cross state lines, it’s important they know what they don’t know about sales tax laws and rules.
Lump-sum and time and materials are the two main types of construction contracts. With lump sum, sales taxes on items purchased for the job are rolled into all the other costs (though specific documentation is essential for every project financial activity) and the owner gets the bill.
Time and materials contracts are in some ways similar to a legal or hospital bill: There are itemized charges for each service with charges listed down to copies of documents or individual items purchased for the project and the time it takes to get the job done.
There is typically a distinction between sales and service. For example, as described above, a contractor may have to buy cement, rebar, wood, etc., and sales tax is paid on each item, which is billed to the owner in contract arrangements. The contractor’s professional services are in most cases not subject to sales tax, just as the tax doesn’t show up on an attorney’s or physician’s professional services.
Depending on the state in which work performed, sales and use taxes may apply in some aspects of a contractor’s work, but not others. For example, on the question of charging sales and use tax for construction labor, here are general descriptions from the websites of Tennessee, New York, and Kentucky:
Tennessee: “If the labor service is performed on real property, the charge for labor is not subject to sales tax. Real property can include things like houses, real estate, built-in appliances, HVAC units and parking lots. Charges for labor performed on tangible personal property (car repair, lawn mower repair, etc.) are subject to sales tax."
New York: “A contractor or subcontractor must charge sales tax to its customers if the work performed is repair, maintenance, or installation work…Repair and maintenance are both words used to describe a job where the purpose is to keep real property in good working order, readiness, or safety, or restoring it to that condition.”
Kentucky: “…contractors (that) are making improvements or repairs to real property, and improvements or repairs to real property are not services that are subject to sales tax.”
Exemptions are another factor. If a contractor is doing work for a tax-exempt organization, the sales tax exemption extends to job-related, contractor-purchased items. The contractor either has an exemption certificate to show at time of purchase or applies for a refund, which again requires strict documentation. In some cases, if the contractor doesn’t have state certification, the organization itself will have to make the purchases.
This isn’t a 35,000-foot look at applicable taxes: It’s a from-the-International Space Station view. Here are suggestions if a contractor is planning to work, or working, in another state (or even for companies working only in one state):
- Subscribe to state revenue department tax bulletins; don’t be taken by surprise.
- Don’t assume that another state’s laws will be the same, or even similar, to another state’s: It’s better to ask for permission than forgiveness.
- Consult in that state with an accountant or accounting firm experienced in construction accounting.
This article first appeared in KnoxNews.