Sales tax laws are constantly evolving and typically vary by state, making it difficult to stay on top of their complexities and ensure compliance. The construction industry in particular must have a strong grasp on these rules though, as it’s common for contractors to be managing projects and materials across state lines. Because of this, it’s important to make sure you have a pulse on what’s required for your construction company, and the steps you must take to remain in compliance.
Sales Tax Rules
Due to state-specific guidelines, it’s recommended that construction contractors do not take a “common sense” approach to understanding sales tax rules. In addition, there are numerous forms and other administrative requirements to manage and it’s essential to understand when to pay sales tax to a vendor and when to be charging a customer sales tax. In general:
- Contractors must pay sales tax to vendors when purchasing tangible personal property used in constructing, altering, repairing or improving real property;
- Contractors are responsible for self-assessing use tax and remitting to the state if they are not charged sales tax by a vendor; and
- Labor is typically not subject to sales tax.
To understand if a contractor is constructing, altering, repairing or improving real property, however, consider the party’s intent, degree of affixation and whether substantial value is added to or prolongs the useful life of the real property.
There are a number of sales tax exemptions that must be considered as well. These include manufacturing, sales for resales and nonprofit entity exemptions. For manufacturing exemptions, it’s important to note that most states provide a sales tax emption for tangible personal property used in manufacturing, but states’ rules do still vary. For example, Georgia’s statute does not specify that the manufacturing activity has to take place in Georgia to qualify. Therefore, property stored in Georgia and used in manufacturing out of state may qualify for an exemption.
Factors that May Affect Taxability
As a contractor, you should have an idea as to when to charge sales tax, when to pay it to vendors and when to accrue the sales tax for yourself. To understand this, consider asking yourself the following questions:
- What type of contractor are you?
- Who is buying your materials?
- What type of work are you doing?
- Does the ownership title stay with you as the contractor?
- What is the type of build/what type of work is being performed?
- What is the method of affixation?
For more information on sales tax rules and issues relevant to construction contractors, listen to a recording of our recent Sales Tax Issues Contractors Need to Know webinar here.
We’re Here to Help
Bennett Thrasher’s state and local tax advisors work with our construction clients on navigating their sales tax rules and issues. To learn more about our services, contact Stephen Bradshaw or Peter Stathopoulos by calling 770.396.2200.