Tax law is by far the most complicated field of law in the United States. And if the federal tax system isn’t enough, each state has different laws and requirements around taxes.
Small business owners have a responsibility to learn and comply with those obligations under both the federal system and the state or states they do business in. In most states, this is going to include some kind of sales tax.
For construction companies, this is where the complications show up. Not every state agrees on where or when sales tax should be charged on construction company services and materials. This can make it challenging to figure out how to handle sales tax for your business.
Sales tax requirements can also vary depending on the kind of contract and the specific work project.
What is Sales Tax?
Sales and use tax is a tax imposed on retail sales in a specific specified area. State and local municipalities set the sales tax rate and collect sales tax directly from businesses. Businesses must pay a certain percentage of each sale to the tax authority, so they add that percentage to the consumer’s price at the point of purchase.
Specific sales tax rates vary by state. You must register your business with your state and local authorities to collect and then remit that sales tax revenue. Failure to pay sales tax, however, will lead to being punished with significant fines.
Sales tax can show up in two possible ways for contractors and construction companies: services and materials.
Taxes on Construction Services
Some states and local tax authorities apply a sales tax to construction services themselves. For contracts in certain areas or particular industries, you will owe the government a check for the sales tax after a contract is paid.
It’s essential to know your requirements to include the sales tax in your customer’s bill properly. If you’re not prepared, you’ll have to add the sales tax to the bill as a last-minute surprise, or you’ll have to pay it yourself after the fact.
Taxes on Construction Materials
Taxes on construction services are not particularly common, but taxes on materials are something you are more likely to face.
Some states require construction companies to pay sales tax when they first buy materials, while others allow that transaction to remain tax-free, but they expect you to include sales tax later in your bill.
If you live in a region with a sales tax, someone will need to pay the sales tax on your construction materials. Depending on the circumstances, however, you could either pay it or charge the customer for it. Either way, you will need to factor it into your cost analysis and billing.
When is Sales Tax Due on Materials Purchased?
Whether or not you need to collect or pay sales tax on materials regularly depends on how states and local tax authorities recognize the construction business. If the state considers the construction company a merchant buying and reselling those materials to clients, only the resale should be taxed.
This often depends as well on the nature of your contract. If your company uses an itemized contract that lists separate costs for materials and labor, you may need to collect sales tax for the materials at that point of purchase.
If you use a lump-sum contract that puts all of those costs together, you likely won’t need to collect that sales tax. However, you would need to pay sales tax for those materials to your supplier in that case.
Determining What is Taxable
Just like some construction services are or aren’t taxable under certain circumstances or specific industries, you may find that sales tax rules for construction also vary for particular construction materials.
You should seek out information from your state department of revenue or a local chamber of commerce to help you find out how sales tax will work for construction companies in your area.
Exceptions or Exemptions
States frequently encourage development by granting tax exemptions for specific materials or construction projects in specified areas.
You may also find yourself working for tax-exempt organizations like churches or other nonprofits. These organizations are not charged sales taxes. Any materials you buy for projects involving those organizations should also be tax-exempt.
Take the time to learn how your state and city handle sales tax on construction projects. Getting well-connected in your local area and building relationships with local businesses and officials will help you stay informed.
Tax Implications of Construction Bidding
All of these variables and complications in the rules around sales tax make the contract bidding process more complicated. Before you bid on a project, you need to be sure about what your tax needs are.
Without accurate information about sales tax due or unique exemptions available, you may find yourself underbidding or overbidding by a significant amount. You want your bid to be reasonable enough to get the job, but you don’t want to end up losing money on the contract because you forgot to factor in sales tax.
Leave Your Construction Sales Taxes to a Professional
An accounting professional’s support with local experience is invaluable during the construction bidding process. You need to have someone who knows how sales tax on construction works. An accountant can help you calculate sales tax due and seek out exceptions that will help you keep your costs down and your revenue high.
A good accountant can also efficiently set up the sales tax registration and collection process for you, giving you a system that will run smoothly and satisfy your customers and the state.
These overlapping requirements are a lot to handle, but you don’t have to do it alone. It can be easy to get overwhelmed by all the countless exceptions and complications, but you shouldn’t let them be a distraction from work itself. Remember why you do the work you do, and don’t be afraid to seek professional guidance.