Do Contractors Charge Sales Tax on Labor or Materials?

It depends on the state and the job. In many states a contractor improving real property is the consumer of the materials: it pays tax when buying them and charges no tax on labor. Other states tax repair or installation labor, and a few tax the whole contract price. Contract type and improvement-vs-repair status can change the answer.

Why sales tax on contracting work is confusing

Sales tax was built for selling goods across a counter. Contractors take goods (lumber, wire, pipe, shingles) and turn them into part of a building, which in tax terms usually stops being "tangible personal property" and becomes real property. Each state decides who pays tax in that handoff, and whether the labor that does it is taxable. Three questions decide most cases:

1. Is the work an improvement to real property, or a repair, maintenance or installation service? Several states draw this line, and it often decides whether labor is taxed.
2. Is the item a material or a fixture? Materials lose their identity (drywall, concrete). Fixtures keep it (a furnace, a water heater, a ceiling fan). Some states treat them differently.
3. How is the contract written? A lump-sum price, a time-and-materials bill, or a contract that sells materials separately from installation can each be taxed differently.

The three main models states use

How five states handle labor and materials

California: contractors consume materials and sell fixtures

The California Department of Tax and Fee Administration (CDTFA) says "construction contractors are generally the consumers of the materials they use" and owe tax on what they pay for them. It also says contractors "are the retailers of fixtures that they provide and install," so tax applies to the selling price of fixtures. Installation labor is generally not taxed; under a cost-plus contract, a separately stated fee is treated as nontaxable installation labor. Most contractors need a seller's permit, with exceptions for those who only furnish and install under lump-sum contracts. See the California tax guide.

Texas: residential vs. nonresidential decides it

The Texas Comptroller's real property repair and remodeling guidance says "labor to repair, remodel, or restore residential real property is not taxable." Under a lump-sum contract, the contractor pays tax on materials when buying them and doesn't charge the customer tax. Under a separated contract, the contractor buys materials with a resale certificate and charges tax on the materials, not the labor. Nonresidential repair and remodeling is different: the contractor collects tax on the total charge, labor included. New construction labor is not taxable, and scheduled, periodic maintenance of real property isn't either (parts and materials still are). See the Texas tax guide.

New York: capital improvement vs. repair

New York taxes the result of the work. A capital improvement must meet three tests: it substantially adds value or prolongs the property's life, it becomes part of or is permanently affixed to the real property, and it's intended to be permanent. For a capital improvement, "there is no sales tax due on the charge to the customer," and the contractor pays tax on the building materials it buys. Repair, maintenance and installation services are taxable to the customer. Contractors should get a completed Form ST-124, Certificate of Capital Improvement, from the customer on capital improvement jobs. See the New York tax guide.

Washington: tax on the whole contract price

Washington's Department of Revenue says prime contractors "must collect retail sales tax from the landowner on the gross contract price," with no deduction for costs. That means labor, materials and subcontracted work are all in the taxable amount. Contractors buy materials that become part of the project with a reseller permit, so they aren't taxed twice, but pay sales or use tax on tools, equipment and supplies they consume. Public road and federal government contracts follow different rules. See the Washington tax guide.

Florida: contractor as final consumer, unless it's a retail sale plus installation

The Florida Department of Revenue says that under lump sum, cost plus, fixed fee, time-and-materials and similar real property contracts, the contractor is the final consumer of materials and supplies: it pays tax to suppliers and should not charge tax to the customer. A retail sale plus installation contract works differently: the contractor lists and prices all materials before work begins, sells them as a separate transaction, and charges sales tax. See the Florida tax guide.

How the same job is taxed in different states

Sales tax on labor by trade

Sales tax vs. use tax

Sales tax is collected by a seller. Use tax is the matching tax you owe directly when you use taxable items in the state without paying sales tax on them, for example materials bought from an out-of-state supplier that didn't charge tax, or items bought for resale that you then used on a job. Contractors run into use tax constantly; see use tax for contractors.

Common mistakes

• Assuming labor is never taxable. In Washington, and for some work in New York and Texas, it is.
• Charging tax on a lump-sum improvement job in a state where the contractor is the consumer. You may be over-collecting from the customer and still owe tax on your purchases.
• Buying everything with a resale certificate. If you're the consumer of the materials, you owe tax (often use tax) on them.
• Not writing contracts deliberately. Lump-sum vs. separated pricing can change the tax; decide it on purpose, with your CPA.
• Ignoring local rates and job location. Rates often follow the job site, not your shop address.