Success in the construction industry requires the ability to cost effectively create a building envelope, structure or support system and virtually every financial decision regarding your construction company, has a tax consequence. The summary outlined below covers the most common sales tax implications for construction contractors.
Materials & Supplies
Contractors must pay sales tax on the cost of all materials, supplies, and equipment to complete a construction contract.
Tax Tip: You may pass this tax onto your customers as part of the materials cost. Do not itemize it separately on customer invoices.
If you sell repair parts or materials to your customers WITHOUT installation, you have made a retail sale.
Tax Tip: Charge sales tax on the total selling price of retail sales and itemize on your customer’s invoice.
If you are a contractor and also make retail sales, the rules for when and how you pay tax on your purchases depend on:
- Whether you know how the items will be used when you buy them
- Whether they will be used in a construction contract or sold at retail
- In some cases, whether you are “primarily a retailer” or “primarily a contractor”
You are primarily a contractor if at least 50 percent of your business purchases are used for construction activity
- Pay sales tax on all purchases.
- If you sell any items at retail, deduct cost of materials you already paid sales tax on.
You are primarily a retailer if at least 50 percent of your business purchases are for retail sales.
- Do not pay sales tax on your purchase.
- Give supplier completed Certificate of Exemption.
Contracts with Exempt Organizations
You owe sales tax when you contract with exempt organizations such as churches, schools, and government agencies. In order to buy materials tax exempt, the exempt organization must designate you as its purchasing agent. The written contact must include all of the following:
- The appointment has been made.
- The exempt organization takes title to all materials and supplies at the point of delivery.
- The risk of loss for all materials and supplies is that of the exempt organization.
- The exempt organization has responsibility for all defective materials and supplies including those incorporated into realty.
You are responsible to keep documentation to show the purchasing agent relationship exists, such as a letter indicating the above information, copies of written contract including all four items noted above, and evidence of the organization’s exempt status. You must also keep records of all materials and supplies purchased for the exempt project.
An exempt organization cannot appoint a contractor as its purchasing agent for the purchase or lease of equipment used by the contractor in completing the construction contraction. The exemption only applies to building materials, equipment, and supplies that become part of the improvement to real property.
Aggregate & Concrete Sales
If an aggregate seller delivers and spreads aggregate material so no further leveling or movement is required by the purchaser, the sale is considered an improvement to real property and not taxable. The aggregate seller is required to pay sales or use tax on their cost of any taxable products or services used to complete the contract.
An aggregate seller must charge sales tax on both the material and delivery charges when they dump aggregate material in a pile and/or when the construction contract does not require them to deposit the material so that no further leveling or movement is required.
Ready-mixed concrete sold from a ready-mixed concrete truck, without installation, is taxable, including transportation, delivery, or other service charges.
The U.S. Supreme Court struck down the physical present nexus standard established in the 1992 decision Quill Corp v. North Dakota in the landmark South Dakota v. Wayfair, Inc. case. States can now require certain retailers, with no physical presence, to collect and remit the applicable sales or use tax on sales delivered to locations within their state.
Starting October 1, 2019, Minnesota’s Small Seller Exception does not require remote sellers to collect sales tax until their sales during a period of 12 consecutive months total either:
- 200 or more retail sales shipped to Minnesota
- $100,000 or more in retail sales shipped to Minnesota
Note: When calculating this exception, do not include any sales where the purchaser is buying for resale. Purchaser should give you a completed Form ST3, Certificate of Exemption claiming an exemption for resale. August 2017 is the earliest month to include to calculate if the business qualifies for the Small Seller Exception.
What Does This Mean?
The biggest impact of the Wayfair case on the construction industry is the requirement of all Minnesota sellers, regardless of their location, to collect state and local sales taxes based on where your customer receives the taxable product or service. Construction businesses tend to operate in multiple locations and construction sites and it will be important to determine if/when local sales taxes are payable. See examples below detailing how to source the sale and determine which taxes are applicable:
A construction business is physically located in St. Paul, Minnesota. A customer from Rochester, Minnesota visits the store in St. Paul and purchases materials. In this example, the customer takes the materials with them when they leave, so the possession of the items were transferred at the physical location of the store. The tax assessed on the materials is the Minnesota general rate sales tax plus any applicable local taxes for St. Paul.
A construction business is physically located in St. Paul, Minnesota. A customer from Rochester, Minnesota purchases materials online and has them shipped to their home in Rochester. The tax assessed on this sale would be Minnesota General Rate sales tax and any applicable local taxes for Rochester, since possession of the items were transferred when the items were received by the customer at their home. Sourcing would also be Rochester if the customer went in to the physical location and asked for the materials to be shipped to their home. Keep in mind, the cost to ship the materials should be included in the sales price and the entire amount taxed.
You are responsible for researching or contacting each state to determine your sales tax registration and reporting requirements. If you are not up to speed on all the changing and new state tax laws, it may put your construction business at risk for penalties and interest charges on unpaid tax liabilities – potentially in multiple states.