The Standard Contractor's Rule

First of all, a definition: in this discussion, "contractor" means a construction contractor - someone taking tangible personal property and turning it into real property.

In most states the standard way these situations are taxed is that the contractor pays tax on his building materials - the stuff that goes into the building. He does not charge his customer tax. The logic is that the contractor is actually using those materials to perform the non-taxable service of building real property.

The other view is that the contractor is the last person to buy the building materials as taxable tangible personal property. Therefore, he pays the tax. Either way, states have gravitated towards the treatment of the contractor's purchases as being taxable.

Of course, the cost isn't eaten by the contractor. She will pass it on to her customer as part of her materials cost. But the sale to the customer is not a taxable sale and therefore there should be no tax on it, as such.

This same treatment is usually used for contractors that repair or improve real property as well.

Maybe half of the states have an exemption that allows the contractor to purchase their building materials tax free if the project is for an exempt organization, like a church or a school. But it is not universal.

Finally, there are states that do not do it this way. They either consider the entire sale from the contractor to the buyer to be taxable, the services to be taxable, or some combination thereof.

And then there are a couple of states that have a contractor's occupation tax. Sigh.

Sales Tax Guy
See disclaimer and make sure you check the rules in YOUR STATE.