Sales Tax on Your Invoice: Labor, Materials and the States That Differ

“Do I charge sales tax on my work?” There is no national answer, because there is no national sales tax. Each state writes its own rules, and for contractors those rules turn on three things: what kind of property the work is on, what kind of work it is, and how your contract and invoice are written. The same roof can be taxed three different ways in three different states.

This article walks through three states whose tax agencies publish plain guidance for contractors, Texas, New York and Washington, then turns them into the questions to put to your own state before you send the next invoice.

Texas: homes are not taxed on labor, but the lawn is

The Texas Comptroller's publication on repair and remodeling (94-116) says that when you repair or remodel residential property, you are a contractor, and the labor is not taxable. Its list of jobs where construction labor is not taxable includes “building, repairing, or remodeling homes, duplexes, apartments, nursing homes, or retirement homes (but not hotels).”

The materials are where the contract matters. Texas recognizes two kinds:

• Lump-sum contract (one price for the whole job). You pay tax on all your supplies, materials, equipment and taxable services when you buy them, and you do not charge your customer tax.
• Separated contract (materials and labor charged separately). You give your suppliers resale certificates instead of paying tax on the materials that go into the customer's property, then collect state and local tax from the customer on what you charge for those materials. The Comptroller adds that your charge for the materials must be at least as much as you paid for them.

Commercial work is different. Repairing or remodeling nonresidential property is taxable, and the Comptroller counts reroofing and repainting as repair or remodeling (if the repainting is maintenance, as the publication defines it, no tax is due on the repainting labor). On those jobs you collect state sales tax, plus any local tax, on your total charge.

And some trades that feel like home services are taxed even at a house. The Comptroller's publication on landscaping and lawn care (94-112) says landscaping and lawn and plant care services are taxable on the total charge, including mowing, trimming, edging, pruning, fertilizing and tree trimming. There is a narrow exception for a self-employed person with no employees, partners or other people providing the services and gross receipts from them of $5,000 or less over the most recent four calendar quarters. Building or repairing decks, retaining walls, fences or pools, or installing underground sprinkler systems, is not landscaping, and the Comptroller says to separate landscaping charges from charges for new construction or for repair or remodeling because different rules apply.

The rate: Texas charges 6.25 percent state sales tax, and local governments can add up to 2 percent, for a combined maximum of 8.25 percent. For the licensing side of working in Texas, see Contractor Licensing in Texas.

New York: capital improvement or repair

New York draws its line by the kind of work, not the kind of property. The Department of Taxation and Finance says capital improvement work is not taxable, while repair, maintenance and installation work is. A capital improvement, in its Tax Bulletin ST-104, is an addition or alteration that meets all three of these conditions:

1. It substantially adds to the value of the real property, or appreciably prolongs its useful life.
2. It becomes part of the real property or is permanently affixed to it, so that removal would cause material damage to the property or the article itself.
3. It is intended to become a permanent installation.

The bulletin's own examples: building a deck, installing a hot water heater or installing kitchen cabinets are capital improvements; repairing a broken step, replacing a thermostat on a hot water heater or painting existing cabinets are taxable repair and maintenance. Publication 862 lists many types of projects and says which side each falls on. For roofs, it lists complete replacement of a roof (the entire building, or the complete side of a peaked roof) as a capital improvement, and repair or spot replacement as a repair.

On a capital improvement, you pay sales tax when you buy the materials, and the department says that tax is an expense you can build into your price. You should get a completed Form ST-124, Certificate of Capital Improvement, from the customer and not collect sales tax on the job. Receiving the form relieves you of liability for tax on the work; keep it, and give a copy to any subcontractor on the job so the sub's charges are exempt too. If no certificate is received, the contract or other project records can still be used to show the work was a capital improvement. The bulletin says records must be kept for at least three years.

On a repair, Tax Bulletin ST-129 says all charges for materials and labor that you bill, including expenses and markups, are taxable. You pay tax when you buy the materials and can then take a credit for that tax on your return when the materials go to the customer. The bulletin's example, at an illustrative 8% rate: $130 of materials and $250 of labor make a $380 subtotal, $30.40 of tax and a $410.40 bill, and the contractor takes a credit for the $8 of tax paid on the $100 of materials. It also says contractors doing this work must be registered for New York sales tax and hold a valid Certificate of Authority.

Washington: construction is a retail sale

Washington goes the other way. Its Department of Revenue says custom prime contracting, being hired by the landowner to complete an entire construction project, is subject to retail sales tax unless a specific exemption applies. The taxable amount “includes charges for permits and other fees, labor, profit, materials and charges for subcontractors.” Its list of construction activities includes painting, plumbing, electrical wiring, HVAC, roofing, flooring, windows, masonry, concrete, drywall, landscaping and cleaning and repairing furnaces and septic tanks.

A few details from the department's construction guide that change how you bill:

• The rate is the job site's. Contractors collect at the rate of the jurisdiction where they perform the work.
• State it separately. “Sales tax is considered collected only when stated separately on contract documents and/or sales invoices.”
• Subs buy for resale. A subcontractor on a custom job gets a reseller permit from the prime contractor and does not collect sales tax from it.
• Tools and supplies are yours. You pay sales or use tax on tools, equipment and supplies that do not end up in the finished work.
• There is a second tax. Washington's business and occupation tax is figured on gross receipts, with no deduction for labor, materials or other costs.

One roof, three answers

Put the three side by side for a homeowner's roof, as the agencies' guidance reads:

A contractor who works across a state line can owe different answers on the same week's invoices.

What it means for your invoice and your books

• Write labor and materials on separate lines when your state's answer turns on it. Texas treats a separated contract differently from a lump sum, and Washington counts tax as collected only when it is shown separately.
• Register before you collect. New York, for one, says contractors doing taxable work must be registered for sales tax and hold a valid Certificate of Authority.
• Keep the paper that proves why you did not charge tax: resale certificates, reseller permits, capital improvement certificates. How Long to Keep Business Records covers the IRS periods; your state may set its own.
• Price the tax you pay. Where you are the one paying tax on materials, it is a cost of the job like the lumber itself.
• Keep collected tax out of your income. IRS Publication 334 says state and local sales taxes imposed on the buyer, which you were required to collect and pay over, are not income, and that sales tax you pay on a service or property you buy is treated as part of its cost. A tax imposed on you as the seller is different: the publication says what you collect for it goes in gross receipts. What Can You Deduct? covers the rest of Schedule C.

The questions to ask your state

Your state's revenue department is the authority. All three agencies above publish guidance written for contractors, and yours may too. The Federation of Tax Administrators keeps a list of every state's tax agency. Go in with these questions, written down:

1. Is construction or repair labor on a home taxable here? On commercial property?
2. Does it matter whether the work is new construction, a capital improvement, or repair and maintenance? Where is the line, and is there a published list?
3. Am I the consumer of the materials (I pay tax when I buy), or a retailer of them (I buy for resale and collect from the customer)? Does the way I write the contract change that?
4. Are any of my services taxable on their own, such as lawn care, cleaning or pest control?
5. Which rate applies: my shop's location or the job site's?
6. What certificate or record do I need to keep when I do not charge tax, and for how long?

Ask for the answer in writing or get the publication number, and keep it with your records. Then set up your estimate and invoice templates once, so every job is billed the way your state reads it.

General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.