When Are Sales to Construction Contractors Taxable?
Anybody that has a profit-seeking motive in the construction business will be interested in knowing when sales tax applies to construction contractors.
Persons who engage in selling tools, equipment, fuel, supplies, and other tangible personal property to construction contractors, real estate developers, or speculative builders for use or consumption incur a sales tax obligation.
Also, persons who (apart from acting as construction contractors themselves) engage in selling building materials, fixtures, plants, and other tangible personal property to construction contractors, speculative builders, or real estate developers, who convert such items into real estate so as to take such items off the market as tangible personal property, incur Retailers’ Occupation Tax liability when making such sales.
Determining the Tax Base
When the Purchasing Contractor Buys Finished Items
When the purchasing construction contractor (whether he is the prime contractor or the subcontractor) buys the item that he will convert into real estate in finished form:
The tax base is what such construction contractor pays for the item.
When the Contractor is Also the Manufacturer
When the construction contractor-installer (whether he is the prime contractor or a subcontractor) is also the manufacturer of the finished item that he will incorporate into real estate for his customer:
The tax base is what such construction contractor pays for the materials that he incorporates into such finished item, Plus whatever such construction contractor may pay for nails, screws, or other items of tangible personal property that he buys and incorporates into real estate for his customer in the course of making the installation of the finished item.
Resales of Tangible Personal Property
Sales of tangible personal property to construction contractors, real estate developers, or speculative builders who resell such property in the form of tangible personal property would not be taxable sales.
However, in this situation:
The construction contractor
Real estate developer
Or speculative builder
Would be making taxable resales.
Frequently Asked Questions
When are sales to construction contractors subject to sales tax?
Sales are taxable when contractors purchase tangible personal property such as tools, equipment, or supplies for use or consumption rather than resale. These transactions incur a sales tax liability.
What is the tax base if a contractor buys a finished item?
If the contractor buys the item in finished form and will incorporate it into real estate, the tax base is the amount the contractor paid for that finished item.
How is the tax calculated if the contractor manufactures the item?
If the contractor manufactures the item and installs it, the tax base includes the cost of materials used in making the item, plus the cost of ancillary items like nails or screws used during installation.
Are sales to contractors always taxable?
No. If a contractor purchases tangible personal property with the intent to resell it as tangible personal property, that sale is not taxable. However, the contractor must charge sales tax on the resale.
Who incurs Retailers’ Occupation Tax in contractor-related transactions?
Sellers of building materials or other tangible goods to contractors or developers, where the goods are converted into real estate, incur Retailers’ Occupation Tax on those sales.
