In 35 states the labor on construction work is not taxed. In 4 it always is. In 7 it depends on what kind of work it is, and in 5 there is no state sales tax at all. And in 37 states you are paying sales tax on the materials whether or not it appears anywhere on your invoice, because the contractor paid it at the counter and it is inside the price.
SiteKiln is written for contractors. This page is for you, the homeowner. It is general information, not tax advice.
Why the tax is often invisible
There are two ways a state can treat a contractor buying materials, and which one applies decides whether you ever see the word "tax" on your paperwork.
The consumer model, used in 37 states. The contractor is treated as the final consumer of the materials. They pay sales tax when they buy the lumber, and that cost is inside the number they quoted you. You will not see a tax line. You paid it anyway.
The retailer model, used in 5 states. The contractor buys materials tax-free for resale and charges you tax on the job. You will see a tax line, and the total may look higher than a quote from the same contractor in a neighboring state doing identical work.
And in 3 states it depends on how the contract is written. Colorado, Indiana and Texas treat a lump-sum contract as the consumer model and a time-and-materials or separated contract as the retailer model. The same job, quoted two ways, is taxed two ways. Nebraska is stranger still: the contractor elects which one they are.
So a quote with no tax on it is not evidence that no tax was paid, and a quote with tax on it is not evidence you are being overcharged. They are usually the same money arriving by different routes.
The four states that always tax the labor
| State | What happens |
|---|---|
| Hawaii | General excise tax of about 4% on ALL gross receipts including labor, plus a 0.5% surcharge on Oahu |
| New Mexico | Gross receipts tax, 4.875% state and up to about 9.06% combined, applied to labor. A nontaxable transaction certificate prevents it stacking down the chain |
| South Dakota | Both taxes apply. A 2% contractor's excise tax on gross receipts including labor, ON TOP of 4.2% sales tax on the materials at purchase |
| Washington | Custom prime construction is retail sales tax on the full charge, labor and materials. A B and O gross receipts tax runs alongside it |
South Dakota is the one worth knowing about, because it is not one tax or the other. It is both, and the 2% on labor is easy to miss when comparing quotes.
The seven states where it depends on the work
This is where most homeowner confusion lives, and it usually comes down to one distinction: is this a repair, or is it a capital improvement?
- New York taxes repair, maintenance and installation labor, and exempts capital improvements. This is why a contractor may ask you to sign a capital improvement certificate, and why the same crew charges tax to fix your steps and no tax to build you new ones.
- Texas taxes nonresidential repair and remodel work on both labor and materials. New build, and repair to residential property, carry no labor tax.
- Connecticut taxes labor at 6.35% on existing commercial or income-producing property, and exempts new build and owner-occupied residential.
- Kansas taxes labor on a commercial remodel and exempts residential new build.
- West Virginia taxes construction services at 6% by default, and exempts only work that meets a three-part capital improvement test.
- Wisconsin taxes labor where the item stays personal property after installation rather than becoming part of the building.
- Arizona runs its own system: prime contracting transaction privilege tax on gross receipts with a 35% deduction, while maintenance, repair, replacement and alteration work is taxed on materials at purchase with the labor exempt.
Notice the pattern. Several of these states are drawing a line between fixing what is there and adding something new, and they land on opposite sides of it. Do not carry an assumption across a state line.
The five with no state sales tax
Alaska, Delaware, Montana, New Hampshire and Oregon have no statewide sales tax. Two caveats worth having:
- Alaska has local borough and city sales taxes, up to roughly 7.5%, so "no sales tax" is a statement about the state and not about your address.
- Delaware and Oregon both run gross receipts taxes on business, which are not charged to you as a line but are a cost inside your price like any other.
What to actually ask, and when
Before you sign, ask one question: is sales tax included in this number, or added to it? You are not challenging anybody. You are making sure the two quotes on your table are the same shape.
If your state draws a repair versus improvement line, ask which side the contractor is treating this job as, and why. If it is a capital improvement, expect to sign something confirming it. Sign it if it is true. Do not sign it to save tax on a repair: in New York and elsewhere, that certificate is a statement you are making, and an audit lands on the person who signed it.
If the quote is time and materials in Colorado, Indiana or Texas, ask what the lump-sum version would look like, because the tax treatment changes with the contract type and it is legitimate to compare both.
If you are in South Dakota, check that the 2% excise on the whole job is in the number you are comparing.
What this does not decide
Sales tax is a state and local matter and rates move. This page is about which MECHANISM your state uses, because that is the part that is stable and the part that explains what you are looking at. It is not a rate table, and a contractor quoting your job knows their own state's current rate better than any website does.
If a number looks wrong, the state revenue department publishes the answer, free, and will usually talk to a homeowner directly.
Common questions
Do I pay sales tax on labor for home improvement?
In 35 states, no. In Hawaii, New Mexico, South Dakota and Washington, yes. In seven more it depends on whether the work is a repair or a capital improvement, and in five states there is no state sales tax at all.
Why is there no sales tax line on my contractor's invoice?
In 37 states the contractor is the final consumer of the materials and pays the tax at the counter, so it is inside the price rather than on the invoice. You paid it either way. Only five states have the contractor charge it to you.
What is a capital improvement certificate?
A statement that the work permanently improves the property rather than repairing it, which exempts the labor from tax in states like New York. Sign it if it is true. The person who signs it carries it in an audit.
Why is the same job taxed differently in the next state?
Because states pick different mechanisms, not different rates. Some tax gross receipts including labor, some tax materials at purchase, and seven draw a line between repair and improvement that lands in different places.
Does the type of contract change the tax?
In Colorado, Indiana and Texas, yes. A lump-sum contract is treated as the consumer model and a time-and-materials or separated contract as the retailer model, so the same work quoted two ways is taxed two ways.
Is Alaska really tax free for building work?
There is no statewide sales tax, but local boroughs and cities levy their own, up to around 7.5%. So the answer depends on your address rather than on the state.
Where these figures come from
The classification on this page is SiteKiln's own, held per state in the site's jurisdiction data and marked verified on all 51 rows. It records two things separately for every state: whether labor is taxable, and which model applies to materials.
The counts here were taken across all 51 rows: labor not taxable in 35, always taxable in 4, conditional in 7, and no state sales tax in 5. Materials follow the consumer model in 37, the retailer model in 5, a contract-type split in 3, an election in 1, and are untaxed in the 5 no-sales-tax states.
The honest bit
This is the single most misunderstood line on a construction invoice, in both directions. Homeowners suspect they are being charged tax that does not exist. Contractors get accused of inventing it. Most of the time the money is the same and only the plumbing is different.
The one place it genuinely costs you is comparison. Two quotes from two contractors, one of whom shows tax and one of whom has buried it, are not comparable numbers, and the honest quote can look like the expensive one. Ask the question once, up front, and it stops being an issue.
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