Everything You Need to Know About Sales Tax Rules for the Construction Industry

The “construction industry” is a broad term. If you run a renovation company, are a general contractor or subcontractor, or make improvements to undeveloped land, you’re part of the construction industry. 

While the industry offers many opportunities to find customers and make money, there are also pitfalls that can slow down (or even block) your success. One of those obstacles is not understanding the industry’s sales tax rules. 

Do You Need To Collect Sales Tax?

Unfortunately, the answer is “it depends.” The nature of the construction industry makes this not quite the cut-and-dried question it is for other industries. 

Collecting Sales Tax on services

Usually, a business owner needs to collect sales tax on tangible items like bicycles, candles, clothing, or jewelry. However, service providers aren’t usually required to collect sales tax. In most states, construction companies don’t have to collect sales taxes on their services. 

Notice we said “usually” in the paragraph above. Some states have passed laws that require sales tax to be collected on some or all services. In Arizona, Arkansas, Hawaii, Mississippi, New Mexico, and South Dakota, contractors DO need to collect sales tax on their services. 

Related: 25 Tax Deductions for Tradesmen and Contractors That Can Save You Money All Year Long

Collecting Sales Tax on Materials

What if a contractor who’s operating in the construction industry sells a load of wood or a truckload of tile? Should they collect sales tax then?

Again, there’s no hard-and-fast rule for collecting sales tax on materials. It depends on how the contractor is charging for the job. 

Construction companies and contractors are usually paid in one of two ways:

1. The lump sum way. If contractors use this method, they calculate the costs of materials, equipment, and labor and then quote and charge the customer one lump sum for their services. 
2. The time and materials way. Construction contractors may decide to itemize the project’s materials, labor, overhead, and other expenses. Then they charge the customer by the item.

Contractors using the lump sum pricing strategy often add in the sales tax they paid on the materials and recoup it in the price. 

It’s a bit different when contractors use the time and materials pricing strategy. In this scenario, the contractor needs to accurately charge the customer for the exact amount of sales tax. Since sales tax rates vary by state, it’s important to keep up with each purchase’s sales tax to ensure the charges are correct. 

With the time and materials pricing strategy, contractors may be able to avoid paying sales tax on the front end by showing the vendor proof the end customer will be paying it. This proof is called a “resale certificate” which proves the contractor is a registered reseller in the state. 

Once the contractor makes the sales and collects the sales tax, they must file a sales tax filing and submit it to the state. 

Related: How Can A CPA Help Your Small Business?

Sales Tax Tips For The Construction Industry

Since there aren’t any blanket rules for how companies in the construction industry handle sales tax, you must closely manage your processes to ensure you do it right. Otherwise, you could be on the hook for unexpected taxes and penalties. Three important takeaways for staying on top of your sales tax requirements are:

#1. Know The Laws In Your State

Forty-five states and the District of Columbia charge sales tax. Each one sets its own rates. This makes it challenging for contractors who are buying materials and/or working with customers in multiple states. It’s vital to take the time to understand each state’s tax rates and requirements. 

#2. Be Prepared For Requirements to change Depending on The Customer

Some customers may be exempt from paying sales tax. If you’re doing a job for a nonprofit or government agency, for example, they would be tax-exempt. In some states, you may be able to purchase the materials tax-free on their behalf. Some states, however, don’t allow contractors to do this, so the customer would need to purchase their own materials to use their tax-exempt status. 

#3. Work With An Experienced CPA Firm

If your head is hurting after reading this article, we understand. Sales tax rules are complex and confusing! Hiring a CPA can ensure contractors follow sales tax rules to the letter and avoid nasty surprises. 

Choose Chaliff + Associates To Keep Up With Sales Tax Requirements For Your Construction Business

Instead of taking time out of your busy day to figure out your sales taxes, why not trust the professionals? We are experienced in helping all types of contractors operating in the construction industry stay on top of their sales tax obligations. 

Let us handle your sales taxes and, while you’re at it, your bookkeeping and accounting. We can free up your time to do what you do best, which is to run your business and serve your customers. Schedule a call with us today to learn how we can help you with your bookkeeping and accounting needs!