Understanding Sales Tax Rules for the Construction Industry
Updated: Oct 3, 2018

Although most states do not impose sales tax on construction services, contractors must be aware sales tax rules when they purchase and bill for supplies that they use. Lump-sum contracts and time and materials contracts can create very different sales tax obligations.
The construction industry consists of businesses that construct or make improvements to houses, buildings and undeveloped land (real property). In the majority of states, construction firms do not have to collect sales taxes on the services they provide. However, they're treated as a consumers of supplies and materials used in construction projects and generally have to pay sales or use taxes at the time of purchase.
When Are Construction Materials Subject to Sales Tax?
In most states, construction contractors must pay sales tax when they purchase materials used in construction. This means that any materials and supplies you purchase are taxable at the time of purchase. However, you won't have to pay sales or use tax upon the sale of the finished construction. In some cases, this can be an advantage because any markup you charge to your customer on the materials, supplies and labor, won't be subject to sales tax.
A few states treat construction contractors like resellers, who purchase materials solely for resale to an end user. and do not require that the contractor pay sales tax when purchasing materials. More states provide this treatment for itemized contracts than lump-sum contracts.
Lump-sum contracts: Arizona, Hawaii, Mississippi, Nebraska, and New Mexico
Time and Material (Itemized) contracts: Arizona, Colorado, District of Columbia, Hawaii, Indiana, Mississippi, Nebraska, New Mexico and Texas
In addition, the states that require construction contractors to pay sales tax on purchases may provide exemptions to this general rule. Whether you qualify for the exemptions will depend not only on the type of contracts that you negotiate with your clients, but also who your clients are (for example, are they non-profit or governmental agencies.)
Generally, work is done under a signed written agreement with your customer that lays out the terms of the work to be done, the type of materials to be used, and an estimate of the total cost of the job. It is up to you whether you want to include