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.
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.
MATERIALS & SUPPLIES
As a contractor, you must pay the sales tax on the purchase price of the materials used. If you sell repair parts or materials to your customer WITHOUT installation, you have made a retail sale. If you are a contractor and also make retail sales, the rules for when and how you pay tax on purchases depend on:
- Whether you know how the items will be used when you buy them.
If you know how the items will be used when you buy them, the sales tax treatment of your purchase depends on how you will use or resell the items.
- Whether they will be used in a construction contact or sold at retail.
If the items will be used in a construction contract, pay sales tax when you buy them. If the items will be sold at retail, give the seller a completed Certificate of Exemption – Form ST3.
- 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. If you are primarily a contractor, pay sales tax on all purchases. If you later sell any of these items at retail, deduct the cost of the materials you already paid the sales tax on.You are primarily a retailer if at least 50 percent of your business purchases are for retail sales. If you are primarily a retailer, do not pay sales tax on your purchase. Give the supplier a completed Certificate of Exemption. Collect sales tax from your customer when you sell taxable items at retail. If any items purchased exempt for resale are used later in a construction contract, you must report the cost of the items as use tax purchases when filing your sales and use tax return.
EQUIPMENT & MACHINERY
Machinery and equipment are considered tangible personal property. Contractors should buy these items exempt for resale by providing the seller with a completed Certificate of Exemption. When billing customers, the contractor must tax the following, unless a customer provided a completed exemption certificate:
- Machinery and equipment
- Installation labor and setup labor of the machinery and equipment
- Delivery charges for the machinery and equipment
Materials delivered to contractors in Minnesota, for use in an out-of-state contract, are subject to Minnesota sales tax, unless the materials are not subject to tax in the state or country where the contract work is done. Materials delivered by a vendor directly to a construction site outside Minnesota, are not subject to this tax.
The Minnesota Department of Revenue website has a sales tax calculator to determine the state and local sales and use tax rate to apply to taxable purchases. To find the appropriate sales tax rate for a particular jurisdiction, enter a valid address and city, or enter the full nine digit zip code. The nine digit zip code method is the most accurate.
An appropriate tax planning strategy can help you create saving opportunities both now and in the future. You need someone on your side with a deep understanding of all tax laws and rules to navigate the seemingly endless amount of new and changing tax regulations that can complicate compliance efforts. Smith Schafer can provide this expertise.
Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 500 Minnesota construction and real estate entities. Click here to schedule a 30 minute free consultation and learn tax saving strategies that best fit your situation. We look forward to speaking with you!