Construction contracting service is one of the most complex activities in multi-states sales tax. This is due to the different taxability rules in each state
on the type of construction performed by the Contractor. In some states, labor is exempt from sales tax, while in others, it is taxable.
Even if the labor is not taxable in a state, if the Contractor invoices its customer a lump sum amount, the entire amount may become taxable.
To add complexity, Labor services might be categorized as different components in some states. For example, California differentiates between
installation labor and assembly labor service. Depending on the state, sales tax might apply in none, one, or all of the labor components. If
contractor is not careful to collect the proper sales tax, an auditor might assess significant back taxes in a future audit.
It is necessary to understand what are considered as "materials", and what are "fixtures". In general, materials are installed and
become a part of real property, and fixtures are "personal property" which can be removed from the real property. In general, the construction contractor can pay sales tax
to its supplier for materials. However, the contractor would need to collect sales tax from its customer for the fixtures because in general, the sales tax
on fixtures are applied to the retail sales price, not on the purchase price from the supplier. It can be confusing and time consuming to track each state's definition of
certain services because the sales tax treatment can be different from one state to the other.
Recently most states have defined economic nexus thresholds but economic nexus does not apply because a Construction contractor
already has physical nexus in the state in which they conduct business. In order to facilitate the sales tax treatment and internal processes
for construction contractors, we have a devised a low risk,
low effort sales tax systematic plan for our construction contractor clients who provide contracting services in many states
. Multistates sales tax can be quite risky for service contractors because
the contract amount is usually large which might result in large sales tax liabilities.
If you perform construction contracting services such as installing,
assembling, selling parts, maintenance services, subcontracting or other similar activities in many states,
please contact our sales tax consultant to save cost and time.