Do I charge my customer sales tax on a construction job?

In most states, no. Here is the rule most of the country follows: you, the contractor, are treated as the end user of your materials. You pay sales tax when you buy them, you do not add a tax line to the customer's invoice, and your labor is not taxed. The tax is real, but it is baked into your material cost, so you price it in and the customer never sees a separate line.‍‌‌​‌​​​​‌‌‌​​​‌​​‌​‌​​‌‌‌‌‌​‌‌​‌‍

But this is the single most state-specific tax there is, and getting it wrong costs you either way. So know which model your state uses before you bill. Check Working in Your State for your exact rule.

The two models, and which one you're in

There are two main models and two smaller ones, and the smaller ones are where people get caught:

• Contractor as consumer. 37 states and DC. You pay the tax on materials at the supply house. You do not charge the customer sales tax, and labor is generally exempt. You just build the material tax into your price.
• Contractor as retailer. 5 states: Arizona, Hawaii, Mississippi, New Mexico, Washington. You buy materials tax-free using a resale certificate, then collect tax from the customer, sometimes on materials only, sometimes on labor too.
• Either, depending how you write the contract. 3 states: Colorado, Indiana, Texas. A lump-sum contract leaves you a consumer; time and materials, or a separated contract, turns you into a retailer. Same job, same state, two different tax answers decided by your paperwork.
• Your choice. 1 state: Nebraska, which lets a contractor elect which one to be. It is the only state that does.
• No state sales tax at all. 5 states: Alaska, Delaware, Montana, New Hampshire, Oregon.

A warning about the retailer five. Four of them are not really running a sales tax on you at all. Arizona charges a transaction privilege tax, Hawaii a general excise tax, New Mexico a gross receipts tax, and Washington a business and occupation tax. Those are taxes on YOUR receipts, which behave differently from a sales tax you collect and pass on, and they are the reason each of those states "has its own twist". Do not price a job in one of them off a general rule.

And one state fits none of these boxes. South Dakota is a consumer state on materials, so you pay 4.2% at the supply house like most of the country, and then South Dakota charges a 2% contractor's excise tax on your gross receipts, labor included, on top. Both apply. If you read the consumer paragraph above and priced a South Dakota job from it, you are 2% light on every invoice.

If you are in a consumer state and you wrongly charge the customer sales tax, you have overcharged them. If you are in a retailer state and you fail to collect it, you owe it out of your own pocket. Same job, opposite mistake, depending on which side of that line your state falls.

Five states have no sales tax at all

Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax on materials or labor. Alaska is the catch: no state tax, but many local boroughs and cities levy their own, so check locally. Everywhere else, it applies in one of the two models above.

Is my labor taxed?

Usually not. Labor is exempt in 35 states and DC, and there is no sales tax at all in another five. That leaves eleven where you have to look:

• Labor is taxable: Hawaii, New Mexico, South Dakota, Washington. In three of those it is a gross receipts or excise tax on what you invoice, so it reaches labor because it reaches everything.
• Labor is taxable in some cases: Arizona, Connecticut, Kansas, New York, Texas, West Virginia, Wisconsin. The usual dividing line is commercial repair and remodel work on one side and new construction and residential work on the other, so the same swing of a hammer is taxable or not depending on the job. Texas is the clearest example: nonresidential repair and remodel is taxable on labor and materials, a new build is not.

Eleven states out of fifty is not "rare enough to ignore" when two of them are Texas and New York. Do not assume the answer from a neighboring state.

Your contract type can change the answer

In a number of states, how you write the contract flips the treatment. A lump-sum contract usually keeps you as the consumer, paying tax on materials and charging the customer nothing extra. A time-and-materials or itemized contract can turn you into a retailer who has to collect tax on the materials line. If your state is one of these, how you bill matters as much as what you build.

Common questions

Do I need a resale certificate?

Only if your state treats contractors as retailers. In those states a resale certificate lets you buy materials tax-free and then collect the tax from the customer. In the more common consumer-model states you pay tax at the supply house and do not need one. Confirm your state's model in Working in Your State.

Do I charge sales tax on a job for a tax-exempt customer like a church or a school?

Not necessarily, and it depends on your state and how the contract is written. In many states the contractor still owes tax on the materials even when the end customer is exempt, because the customer's exemption does not automatically pass to you. Check Working in Your State before you assume it does.

Do I owe tax on materials I bought in another state?

Often yes, through use tax. If you buy materials tax-free or in a lower-tax state and then use them on a job in your own state, your state can charge use tax to make up the difference. The rules vary, so check Working in Your State.

Is the sales tax I pay on materials deductible?

Yes. In a consumer-model state the sales tax you pay on materials is part of your material cost, so it is deductible along with the materials themselves. You do not track it as a separate line; it rides along with the cost of the supplies on your Schedule C.

What happens if I did not charge sales tax but my state says I should have?

You can be assessed the uncollected tax out of your own pocket, plus penalties and interest, and you usually cannot go back and bill the customer for it. That is exactly why you confirm your state's model before you price the job. See Working in Your State.

The honest bit

• Construction sales tax varies more state to state than almost anything else, and localities add their own on top. A general rule will not keep you right. Confirm your state's model, and your locality, before you price a job. See Working in Your State.
• If your state makes you a retailer, get your resale certificate set up correctly and keep it on file, or you lose the tax-free purchase.
• This is general guidance, not tax advice. A local bookkeeper or CPA who knows your state's construction rules earns their fee here, because this is exactly the kind of thing that stays boring right up until it is an assessment with penalties.

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