Construction contractors doing work in more than one state have the unfortunate responsibility of understanding and complying with complex sales tax laws. To make matters worse, statutes vary from state to state.
Know How States Handle Sales Tax for Construction Materials
In most states, including Maryland and Virginia, construction contractors are regarded as the consumer, or end user, of the materials they install. Materials and supplies a contractor purchases to incorporate into real property are subject to sales tax. However, the contractor will not have to charge, collect or submit sales tax upon the sale of the finished product. The responsibility to collect and submit the sales tax is on the supplier.
In a few states, including the District of Columbia, construction contractors are regarded as a retail seller of the materials they install. The construction contractor issues a resale certificate to the supplier and is exempt from paying the sales tax on the materials and supplies they purchase to incorporate into real property. Instead, the contractor charges, collects and submits sales tax on the materials they install to their customer, who is considered the end user.
Exceptions to the Rule
It is important that construction contractors determine on a state-by-state basis whether they are considered a consumer or a retail seller. The construction contractor then must determine on a state-by-state basis whether there is form of contract exception, type of construction exception, or an end user exception.
Are You a Consumer or Retail Seller?
The form of a contract can determine who is responsible for paying the sales tax in many states. In Maryland, the taxability is unaffected by any form of payment under the real property construction contract or subcontract, whether lump sum, cost plus, time and material, or otherwise. However, in some other states, contracts stipulating amounts for materials, labor and other factors sometimes cause tax to apply to retail selling prices for materials, rather to their cost.
The type of construction can determine whether a construction contractor is considered a consumer or a retail seller. In Maryland, when contractors install cabinets in nonresidential property, the transaction is treated as a retail sale of tangible personal property. Thus, the contractor does not pay sales tax when they purchase the materials. Instead, they charge and collect sales tax from their customer. However, cabinets installed in residential property are considered realty, making the contractor the end user … and responsible for paying sales tax on the materials they purchase.
What About Materials to be Used by a Tax-Exempt Organization?
A construction contractor purchasing materials that will be incorporated into the real property of a tax-exempt organization could be subject to special rules regarding the payment of sales tax in many states. For instance, in Maryland, a contractor purchasing materials that will be incorporated into the real property of a private, charitable, educational or religious organization can use the nonprofit organization’s exemption certificate to purchase the material tax free. However, purchases of materials that will be incorporated into the real property of the state of Maryland or the U.S. government are taxable.
What’s a Contractor to Do?
The area of state sales tax for construction contractors is complex. Statutory differences between states create compliance nightmares. The discussion above only scratches the surface of the topic. Contractors should review any compliance issues with your CPA to avoid a sale and use tax audit, which could result in a large tax assessment.
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