If You’re a Contractor You May Owe More Sales Tax

Sales tax for contractors can seem quite simple on the surface but there are some unique factors to consider.

Generally speaking, a contractor is considered the end user consumer of any materials they purchase and are required to pay either sales or use tax on the purchase of these materials.  Additionally, generally speaking, a contractor’s receipts – that is what they charge their customer – are not subject to sales tax. 

There are exceptions and nuances to these rules and a few are noted below:

1.    Contractors will often purchase materials and have them delivered to their corporate office or warehouse, and the vendor will charge the applicable tax based on where the materials are shipped.  Later, the contractor will use these materials as part of a project – perhaps in a different location from where the materials were originally shipped.  Depending on the location of the project, additional use tax may be due. 

Consider an example where a contractor in Georgia purchases materials and has the material delivered to their warehouse in Atlanta.  The vendor charges, and the contractor pays 8% sales tax – 4% state, 3% county, and 1% local.  The contractor then installs the materials at a client site in Greensboro, NC.  The combined sales tax rate in Greensboro is 6.75%.  It seems like there is no additional tax due – the contractor paid 8% in Atlanta and the total rate in Greensboro is 6.75%.  However, the tax paid is offset against tax due at the respective state, county and city level.  The total Greensboro rate of 6.75% consists of 4.75% state rate and 2% county rate.  Due to the rate difference at the state level, there’s an additional .75% tax due to North Carolina.  The county tax has been satisfied as well as the local tax.

2.    In other states, the general rule that the contractor’s receipts are not subject to tax is not accurate. 

• For example, in Texas, lump sum contracts to remodel existing commercial property are subject to sales tax.  In this same Texas situation, the contractor would issue a Texas resale certificate on the purchase of any materials used in the performance of the contract. 

• Similarly, in New Mexico, charges for construction services and all tangible property that will become an ingredient or component part of a construction project are subject to the New Mexico gross receipts tax.  Additionally, the purchase of the tangible property by the contractor would not be subject to the gross receipts tax – the property is purchased for resale like in Texas.

While there are some general rules that are applicable to contractors, there are nuances from state to state.  The list above does not constitute a complete list of state by state exceptions.  Please consult a tax advisor regarding your specific situation.