Sales and Use Tax Guidelines for Contractors

by Andrew J. Toth, CPA

The question of how sales tax should be handled for construction contractors comes up quite often, so we have compiled this list of guidelines:

1. If the contractor is buying materials and not paying sales tax upon purchase, they must remit the use tax upon use or remit retail sales tax upon sale unless the ultimate recipient could have purchased the materials exempt. Note: Even if you have an exempt job or customer, certain items are still subject to use tax such as tools, gloves, safety equipment, rental equipment, cranes and loaders.

   a. If the contract is a time and material contract, the labor and materials should be stated separately, and only the gross proceeds from the sale of the materials are subject to tax. The tax should be billed to the customer then remitted to the state on Form ST-103 using lines 1-5.

   b. If the contract is a lump-sum contract or the material is converted into realty on land owned by the contractor or the material is utilized for the contractor's benefit, the contractor is liable for use tax and must remit such tax on a Form ST-103 using line 6.

2. If the contractor is paying sales tax upon purchase, the contractor has no further liability if materials are used pursuant to a lump-sum contract, converted into realty on land owned by the contractor or utilized for the contractor's benefit.

   a. If the materials are used pursuant to a time and material contract and the materials are not marked up from purchase, the taxpayer has no further liability. However, technically if the contractor does have time and material contracts, they would be considered a retail merchant and should buy materials exempt then charge the customer retail sales tax.

   b. Being a retail merchant would allow the contractor to mark up the cost of the materials for their handling cost, etc.

   c. If there is a markup on the materials and the contractor has paid the sales tax on their cost, the contractor should charge sales tax on the markup. This can raise flags under examination especially if the contractor is not a retail merchant.

3. Determination on whether a contract is a lump-sum or time and materials contract is made by the legal documents and not necessarily how the contract is invoiced.

If you would like to discuss how sales and use tax apply to your circumstances, please contact us.