Who Pays the Sales Tax in a Construction Setting?
Normally, the sales tax is paid on the materials when it is purchased. If not, you need to make sure it is correctly listed on the invoice as a separate line item.
Subcontractors are not off the hook. They need to show that they have also paid their sales tax.
Transcript
Who Pays Sales Tax — General Contractor, Subcontractor, or Customer?
I’m Mansoor Ansari with Nexus Tax Defense.
The general rule is that sales tax is paid on materials used in construction at the time of the purchase.
If you do not pay sales tax at the time of the purchase on your construction materials, then you would have to itemize your bill to your client and have the sales tax broken out on a separate line item to clearly show how much they have paid.
Again, you are also breaking up the labor separately as well so that there is no confusion on how much sales tax needs to be paid.
Whether you are the general contractor or the subcontractor, you will need to collect and pay sales tax on the construction materials. So you’re simply not off the hook when you’re a subcontractor.
Dealing with Exempt Organizations
But what happens when you’re dealing with an exempt organization?
- Try your best to have them purchase all the materials using their tax-exempt status.
- That way, you don’t have to worry about paying sales tax at the point of purchase on your construction job.
- This would, in turn, be a labor-only job, and make sure to note this as such on your invoice.
Important:
Most states don’t allow contractors to use an organization’s tax-exempt status unless a contractor is the tax-exempt organization’s authorized agent.
Sales Tax Across State Lines
What happens when sales tax is due on materials purchased in one state but used in another state?
For the most part, you will be paying use tax in the state where the materials are being used for construction.
Since each state uses its own rules, make sure to check on the specifics before you get started on your construction project.
Thanks for listening.
Frequently Asked Questions
Who is responsible for paying sales tax on construction materials?
In most cases, the party purchasing the construction materials is responsible for paying the sales tax at the time of purchase. If the tax is not paid upfront, it must be clearly broken out as a line item on the client invoice.
Do subcontractors have to pay sales tax?
Yes, subcontractors must also collect and remit sales tax on construction materials. They are equally responsible for compliance and cannot assume the general contractor’s tax obligations cover them.
How should labor and materials be invoiced for sales tax clarity?
Labor and materials should be listed separately on the invoice. This separation ensures transparency in tax reporting and helps clarify the exact amount of sales tax owed for materials only.
What should contractors do when working with tax-exempt organizations?
Contractors should try to have the tax-exempt organization purchase materials directly using their exemption status. This converts the job to a labor-only invoice. However, most states require the contractor to be an authorized agent to use that exemption.
How is sales tax handled when materials are purchased in one state but used in another?
If materials are bought in one state and used in another, use tax typically applies in the state where the materials are used. Contractors must check the tax rules of each state involved to ensure proper compliance.