Everyone knows in the business world that when a customer (the buyer) purchases something from your business (the seller), they must pay sales tax, right? And it’s the responsibility of the seller to collect that sales tax and remit it to the appropriate taxing authority. Easy enough! Well, surprise, surprise – it turns out that in a lot of industries, including the construction industry, this issue can be extremely confusing.
Is Construction Work liable for Sales Tax?
The short answer is: it depends on the laws, requirements, and regulations of the state where the construction work takes place. Read on for a more thorough examination of whether construction work is taxable or not.
Sales Tax on Goods vs. Services
Sales taxes are state-driven (that is, there is no federal sales tax), and are imposed by and collected at the state, county, and sometimes, at the municipal level. States in the U.S. have been collecting sales taxes on products and goods sold by businesses since the 1930s. Traditionally, business services have not been taxable.
However, as more and more businesses move from a product-based business model to a service-based model, more and more states are beginning to actively assess and collect sales taxes on business services. According to Avalara, states like “Delaware, Hawaii, New Mexico, South Dakota, and Washington tax most services,” while others, including Texas and Minnesota, are actively expanding service taxability.
Is Construction Work a Good or a Service? Does It Even Matter?
Before we spend too much time answering the first question posed in the heading above, we wanted to go ahead and skip to the second question for the following reason: the “black and white” divide between good and services with regard to sales taxes is a thing of the past.
Increasingly, more and more states are taking a more sophisticated and nuanced view of what all businesses – including those in the construction industry – sell to their customers.
‘Just how nuanced,’ you ask? Take Texas, for example.
In the Longhorn State:
- Labor to repair, remodel, or restore residential real property is not taxable. But the supplies, materials, equipment, and taxable services that go into the residential project are taxable.
- The total amount charged for remodeling, repairing, or restoring nonresidential real property is taxable. This includes:
- rebuilding real property;
- upgrading any part of an existing structure;
- replacing any part of an existing structure, except for minor replacement of parts during maintenance of the real property, such as replacing a belt on a machine; or
- repairing damaged, broken, or defective parts of a structure.
- reroofing and repainting (unless it’s defined as maintenance)
- The supplies, materials, equipment, and taxable services that go into a new construction commercial project are taxable, but the labor is not taxable. This includes labor on:
- building new structures;
- completing unfinished structures;
- initial finish out work to the interior or exterior of a structure;
- building, repairing, or remodeling homes, duplexes, apartments, nursing homes, or retirement homes (but not hotels);
- repairing real property damaged in an area declared a natural disaster by the President of the United States or the Governor of Texas when the repair labor is separately stated from the materials.
The bulleted list of items above barely scratches the surface of all the relevant sales tax rules that impact construction work in Texas. And Texas is far from alone when it comes to states getting into the nitty-gritty on what is and is not taxable in the construction business.
Other Factors that can Impact Taxability
There are many other factors that come into play when determining whether construction work is taxable or not. As usual, almost all of these factors will vary on a state-by-state basis. Some of these items can include:
- the Type of Contract used (Lump Sum vs. Time & Materials)
- the State’s Definition of important terms such as “Construction Contractor,” “Real Property,” “Dual Contractor/Retailer,” and others
- Sales Tax Exemptions
- Specific Tax Clauses
Bottom line: you must consult with the experts in your area at both the state and county/local level to find out which sales taxes (if any) apply to the goods and services your company sells!
Conclusion – You Must Verify Sales Tax Requirements in the States Where You Work
We wish we could give you an easy, bullet-proof answer to this question that would work across the board in every state. However, that’s just not possible as there are way too many variances from state-to-state when it comes to sales taxes on construction work.
One thing we do know, whether the construction work that your company engages in is taxable or not, it’s still crucial for you to get paid all of the money that you’ve earned on your projects. And that is something that we can help you with.