Construction contractors face a complicated tax situation, and questions around state-level sales tax obligations are common. It is a reasonable point of confusion because, in addition to evolving nexus standards, many states require different tax treatment for tangible materials than they do for services. To reduce compliance risk, you need to understand the rules in each state where your construction business has nexus and to recognize where nexus exists.
Why Does Materials vs Services Matter?
At the most basic level, distinguishing between goods and services matters because they're often taxed differently. Materials are typically taxable, whereas services like installation and design may be taxable, partially taxable, or untaxed in a particular state.
To HELP Reduce Risk:
- Learn the rules before you contract for a project, as regulations vary by state.
- If you use a resale certificate to avoid paying taxes on materials you purchase for a job, be sure to collect the appropriate sales tax from the customer.
- Work-in-progress reporting analysis can help you optimize WIP processes for better materials tracking, improved tax reporting, and easier compliance.
The Texas Exception: Contract & Property Types
For our Houston contractors, navigating the Texas Comptroller’s rules requires specific attention to how you structure your bids and what type of property you are working on. In Texas, your sales tax obligation is largely dictated by two factors:
1. New Construction & Residential Projects: Labor is generally not taxable. However, the way you pay tax on materials depends entirely on your contract format:
- Lump-Sum Contracts: You (the contractor) are considered the consumer. You must pay tax on all materials and supplies when you purchase them. You do not charge the customer tax.
- Separated Contracts: You are considered the retailer. You can issue a resale certificate to your suppliers to purchase materials tax-free, but you must collect state and local sales tax from your customer on the separately stated materials charge.
2. Non-Residential (Commercial) Repair & Remodeling: Unlike new construction, when you repair or remodel a commercial building in Texas, the total charge for the job—including both materials and labor—is subject to state and local sales tax.
To HELP Reduce Risk in Texas:
- Understand which rules apply and keep meticulous records of job costs.
- Adopt line-item billing when required to clearly differentiate charges for materials and labor.
- Consider a tax planning engagement to evaluate your contract templates and procurement practices for maximum tax efficiency and ease of compliance.
Do You Have Nexus?
Every state sets rules for nexus, and these regulations often change. You must collect, report and remit sales tax due on goods and services in every state where you have nexus.
To HELP Reduce Risk:
- Seek advice from a well-qualified state and local tax (SALT) specialist before you engage in business activities within a state.
- Automating state sales tax processes can ease your compliance burden.
- Consider a sales tax nexus study to clarify your obligations across jurisdictions.
Untangle the Materials Versus Services Sales Tax Conundrum
Good record-keeping is essential to manage your state and local tax obligations, but it’s only the first step. Protect your construction business by working with a tax professional who monitors current rules in each jurisdiction. Your tax advisor can show you effective strategies to reduce state tax liability and ease the burden of compliance. To see how Mauldin & Jenkins can help, contact us.
