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5 Things Construction Contractors Should Know About Sales Tax

Construction teams charge for their services, as well as for the materials they use to perform those services. As your construction crew builds homes, businesses, and stores in communities throughout the nation, you must follow sales tax laws specific to the area in which you’re working.

Because these laws vary from state to state, it’s important to be familiar with those rules before accepting payments. Here are a few things construction contractors should know about sales tax.

Sales Tax on Services

In most states, construction teams aren’t required to pay sales tax on the services they provide. Some states tax specific services as stipulated in their own local laws. Connecticut, for example, taxes construction services on existing industrial, commercial, or income-producing real estate. Services like carpet cleaning and maintenance are taxed on every type of property in that state. Similar differences exist in other states that tax services, with laws applying to specific property types and the work performed there.

Sales Tax on Materials

Construction contractors are treated as customers in some states, paying sales tax on the materials they purchase from suppliers and then recouping that cost when they charge the customers. However, in other states, you’ll be treated as a retailer, purchasing a product and then selling it to customers. Those states are Arizona, Hawaii, New Mexico, and Washington. In California, construction contractors are considered retailers of fixtures but not construction materials. Similar exceptions exist in other states.

Contract Stipulations

In some states, whether you are taxed depends on the type of contract written on a particular job. If your contract states a lump sum for a job, you will be able to pay sales tax as stipulated by local law. However, in states like Florida and Colorado, if materials are itemized on the contract, you will be required to pay sales tax on those materials as though they were retail sales.


In some situations, construction crews may be able to get an exemption to existing sales tax laws. A contractor building a church, for instance, may be able to purchase materials without paying sales tax. The organization that has tax-exempt status would likely issue a certificate to construction contractors chosen for a job. That certificate would be presented when you purchased materials to allow you to avoid sales tax on those items.

Bidding a Job

Prior to bidding a job, you should determine what amount of sales tax you’ll pay on materials and include that amount in the bid. This sales tax can either be rolled into the lump sum or itemized on the contract, depending on the most effective way to break it down in that specific state. If you’re crossing state lines to bid on a job, it’s important to thoroughly investigate the laws as they apply to contracts in that state to avoid underbidding a job.

As a construction contractor, you need to know up front how much to charge customers for your services. This includes the cost of materials and any sales taxes you’ll be required to pay. 

Avalara Author
Stephanie Faris
Avalara Author Stephanie Faris