If you are running a small construction or handyman business, it may seem that you are not going to need to worry about collecting sales tax. This is because your business provides services, which are typically found to be intangible transactions. Yet with states looking at services as ways to increase their sales tax income, it might be worth taking a deeper look at how sales tax can potentially impact the construction industry.
Basics of Construction and Sales Tax
The first point to note is that in a majority of states, construction firms do not have to collect sales taxes on the services that they provide. However, when it comes to purchasing supplies and materials for their construction projects, they generally have to pay sales tax or a use tax when they make those purchases.
While you may have to pay those taxes at the time of purchase, your customer will not have to pay sales tax on the completed project. Therefore, any markup to account for the purchase of materials, as well as to cover labor, will not be subject to sales tax. However, there are a few states that treat construction contractors as resellers. These means that the state sees the contractor as a middle man that purchases materials solely for resale. Therefore, the contractor does not pay sales tax when purchasing the materials, but they must then collect sales tax from their costumers, who are deemed the end user of the materials. This is more likely to come up on itemized versus lump sum contracts.
However, if you are paying sales tax on materials at the time of purchase, then it is important to find out if any of those purchases may qualify for an exemption. The ability to qualify for exemptions will depend on the type of contracts that you negotiate, but also who your clients are. This means that if you are working for non-profit or governmental agencies, there may be exemptions on the sales taxes being paid for materials and other supplies.
Lump Sum Versus Time and Material
When a contractor works on a job, it is typically done with a signed written agreement. This agreement lays out the terms of the work to done, materials to be used, and an estimate of the total cost of the project. As a contractor, you may want to consider including a stated provision that would cover sales tax payments. Check with the states that you are operating in to verify that you have included the right tax rate in your contract or to be passed onto the customer.
There are two types of contracts that are typically used. A lump sum contract means that you are bidding the job for one single stated amount, regardless of how long it actually takes to complete. This amount also normally includes materials, services, supplies, profit and overhead, by lumping them together into that single amount.
On the other hand, a time and material contract is based on a stated amount that includes the actual rates for all workers, and provides an itemized bill for all materials and supplies used on the job. In fact, the contract may include a separate invoice for profits and overhead.
While it might seem better to charge the sales tax to the customer, this also means that you now have to go through the process of filing a sales tax return and cut a check to the state based on the gross sales from the new construction.
Potential Sales Tax Liabilities
If you are a subcontractor, you will typically have little contact with the customer, but you will still be responsible for paying sales tax on your materials and supplies. Another area where you might want to be cautious is if you are working for a tax exempt customer. By letting them purchase the materials and supplies, you can allow their exemption to provide a tax savings. However, states do review these transactions very carefully, so it is best to use this option if you are working as the organization’s authorized agent or if they send their own representative to make the purchase.
As you can see, there are many considerations for a contractor who is offering their services to a customer. While they might pay those sales taxes upfront when purchasing materials, they can then pass that cost onto their customers. Therefore, it is important to check your state’s laws regarding contractors and sales tax.
