State & Local Tax Blog

Construction Contractors Subject to Tax on TPP

Based on a CCH survey of state tax departments, 41 states and the District of Columbia impose sales tax on purchases of tangible personal property (TPP) that are incorporated into realty. Three states responded to the survey with additional explanation — California, Nebraska, and Texas. As we pointed out in this article, Are Use Tax Amnesties Useful?, contractors are more prone for state audits because these rules are so complicated, and these survey results support that. This chart is helpful, but there are a few puzzling responses. Let’s check out a few states and see what the survey said.
California’s response to the CCH survey was brief, but still points to the complex nature of contracting rules. “Construction contractors owe tax either as the consumer or seller, depending on the facts.” The survey response gave no other details, but that’s because they’d need several pages to do so. A detailed review of the California regulations is needed to address contractor use tax issues in California.
Texas’ response was a lengthy explanation:
“Construction contractors under lump-sum contracts that do new construction or who do residential real property improvements are consumers. Construction contractors who do new construction and separate the charges for material and labor are retailers and purchase material for resale but must collect tax on the charge for material. Construction contractors that remodel or repair nonresidential real property under either lump-sum or separated contracts are retailers performing taxable services and purchase materials for resale.”
Does that clear it up for you in Texas? If you’re a contractor doing business in Texas, you know that complying with the labyrinth of rules and policies is daunting to say the least.
Nebraska offered the most vague response, “Yes, based on the option selected.” Hmmm…
Four states responded that they do not subject construction contractors to tax on purchases of TPP that are incorporated into the realty of their customers.

We Have a Chart for That

We have prepared a chart of the survey results for your reference. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source.

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