Real property does not include tools, implements, or machinery and equipment that are both:

• Attached or incorporated into real property for use in a business or production activity.
• Eligible for a business-related sales tax exemption under Minnesota Statutes 297A.68. For example, the capital equipment exemption, no matter their size, weight, or how they are incorporated into the real property.

Note: Leased items cannot become part of real property. For example, a leased ATM cannot be real property.

Tangible personal property becomes an improvement or fixture when it becomes part of the real property and loses its identity as separate tangible personal property. This occurs when the improvement or fixture is:

• Intended to be a permanent benefit to the real property given its current use,
• Causes substantial damage upon removal, and
• Incorporated into the real property.

*Incorporated into means an addition or alteration to real property that becomes part of, or is permanently affixed to, the property so that it is intended to become permanent or remain for an indefinite period of time and removal causes substantial damage.

Whether a building material or supply is incorporated into a building or structure depends upon a review of each situation.

Examples

• A residential customer has a kitchen island installed. If the kitchen island is placed in position, and not incorporated into the property (it can be easily moved around), it is tangible personal property. If the kitchen island is incorporated into the property, it is real property.
• A business has a walk-in cooler installed. If the walk-in cooler has raised floors that are designed for easy disassembly and removal, the walk-in cooler is tangible personal property. If the walk-in cooler has grouted-in tile or poured concrete floors, it is real property.

Building materials and supplies are tangible personal property when purchased. They become real property when they are incorporated into and intended to be of permanent benefit to a building or structure. Examples include:

The sale of building materials that includes the installation of those materials into real property.

A business that contracts to furnish materials and labor to build, alter, repair, or improve real property. This includes any specialty contractors.

A business that contracts to improve real property and also makes retail sales of building materials, supplies, equipment, and other tangible items.

There are different types of labor.

For more information, see Labor – Installation, Fabrication, Construction, and Repair.

The sale of building materials without installation. This is a retail sale.

Present use means the item benefits the building or structure and the function for which the space is intended to be used at the time the item is incorporated.

Examples of items that benefit the building or structure for its present use when the items are incorporated into the building or structure:

• Bowling alley lanes and ball returns
• Pneumatic tubing systems at a bank

A business that sells building materials but does not install the items.

The sale of building materials, supplies, equipment, or other tangible items that are not incorporated into real property by the seller or seller’s agent. See Guidelines for Contractors-Retailers.

Substantial damage means removal of the fixture or improvement will physically impair the present function of the building or structure. Substantial damage does not include minor cosmetics such as patching a hole in the wall.

Generally, substantial damage has to meet one of the following:   

• Physical damage. The removal of the fixture or improvement causes impairment (destruction) to the building or structure, requiring reconstruction and reinstalling building materials and fixtures.
• Functional damage. The removal of the fixture or improvement reduces or removes the present usefulness and functionality of the building or structure, requiring the replacement of the improvement or fixture.

Tangible personal property means personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.  

Tangible personal property includes, but is not limited to:

• Electricity
• Water
• Steam
• Prewritten computer software

You must pay sales and use tax on the cost of all materials, supplies, and equipment used to complete a construction contract. These items are taxable at the time of purchase. If the supplier does not charge Minnesota Sales Tax, you owe use tax on the purchase price. See Taxable Purchases and Use Tax.

You’re improving real property when you:

• repair, replace, or incorporate items such as furnaces, garbage disposals, built-in dishwashers and stovetops, water heaters, and central air conditioners
• work on plumbing or electrical wiring

Invoicing Real Property Repairs

When invoicing improvements to real property:

• Pass the sales or use tax paid as part of the materials cost.
• Do not itemize sales tax separately on the invoice.
• Do not charge sales tax on construction contracts.

Bleachers and lockers, regardless of how they are incorporated, are tangible items. You must charge sales tax on the item and the labor to install the item.

For more information, see:

• Revenue Notice 18-04, Improvements to Real Property
• Labor – Installation, Fabrication, Construction, and Repair

Machinery and equipment that qualifies for a business exemption under Minnesota Statutes 297A.68 are tangible items. They are not considered real property.

You must charge sales tax on the following unless the customer provides a completed Form ST3, Certificate of Exemption:

• machinery and equipment
• labor charges to install and setup the machinery and equipment
• any other charges necessary to complete the sale, including delivery charges

The customer is responsible for identifying the machinery and equipment that qualifies for a business exemption. If your customer provides you with a completed Form ST3, you may purchase those items exempt for resale. Previously, you had to enter into a purchasing agent agreement to purchase these items exempt for resale.

Appliances that are not built-in and are free-standing are tangible personal property and are taxable. These types of appliances are set in place in an opening in between cupboards.

Examples include:

• Microwave
• Refrigerators
• Washing machines

Built-In Appliances

Built-in appliances that are installed by a contractor and are designed to go under the counter, such as a dishwasher, are considered real property and are not taxable.

The sale of building materials, supplies, equipment, or other tangible items that are not incorporated into real property are taxable retail sales. 

If you make a taxable retail sale, you must charge sales tax on the total sales price, including any installation or delivery charges. 

If you purchase items to resell, give your vendor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

If you rent your equipment to someone without an operator, the rental charge is taxable.

If you sell equipment or other items used in your business, those sales may be taxable. For more information, see Isolated and Occasional Sales.

Leased items are not real property because they are not intended to be permanent.

When is a lease not a lease?

A transaction is not a lease when the security agreement or deferred payment plan contracts require the transfer of title upon completion of the required payments.

A transaction is also not a lease when the contract requires transfer of title after completion of required payments and an option price payment. The option price must not exceed the greater of $100 or one percent of the total required payments.

In these situations, you will need to determine whether the items are real property.

Utilities supplied for residential heating during construction of a residence are not taxable for the months of November, December, January, February, March and April.

The lease or rental of portable toilets with related maintenance, waste removal, and cleaning services is subject to sales tax. The entire contract price, even if the lease or rental price is separately stated from the services, are taxable. The related maintenance, waste removal, and cleaning services are taxable because they are necessary to complete the sale of the lease or rental of the portable toilet.

For more information, see Revenue Notice 18-05, Lease or Rental of Tangible Personal Property – Portable Toilets.

If you improperly charge sales tax on items that become real property, and the customer files a request for refund, we may assess you sales or use tax on the cost of materials used in the construction contract.

The sale and installation of a security or alarm system incorporated into real property is a construction contract. The charge to the customer is not taxable.

If you incorporate the system into real property, you must pay sales and use tax on the cost of all materials, supplies, and equipment used.

Security systems that are not incorporated into real property are taxable retail sales.

You must charge sales tax on the following:

• Delivery and installation charges
• Peripheral equipment (free-standing units or TV monitors) that are connected to a wall or baseboard outlets
• Any other transactions necessary to complete the sale

You may purchase security items that are not incorporated into real property exempt from sales tax. Give your vendor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

If you lease a security system, you must charge sales tax on each lease payment.

You may purchase the security systems exempt from sales tax by giving your vendor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

Charges for the removal of trees, stumps, bushes, and shrubs that are being removed for remodeling, improvement, or expansion of an existing structure are taxable.

A land-clearing contract is for the initial removal of trees, stumps, bushes, and shrubs to develop a site. These services are exempt from sales tax when sold as part of a land-clearing contract. 

Note: If the trees, stumps, bushes, and shrubs are being removed for remodeling, improvement, or expansion of an existing structure, rather than to develop the entire site, this exemption does not apply. 

Examples

• A developer purchases an empty lot to build new housing or a commercial building. The developer contracts with a landscaper to remove trees and stumps on the site. These services are exempt from sales tax because it is a new site being developed.
• A homeowner has a large area of land between his or her maintained lawn and a nearby river. The homeowner decides to clear the land and install a garden and dock. In this case, the land-clearing services are taxable because it is a pre-existing site that is being expanded.

If you grow your own nursery stock, you will owe sales or use tax depending on how the items are used. See the chart below.

Machinery Purchases

You may purchase certain machinery exempt from sales tax if it’s used directly and principally in the production of trees and shrubs for retail sale. Give your vendor a completed Form ST3, Certificate of Exemption. Specify the Farm machinery exemption. 

Equipment primarily used in landscape construction contracts does not qualify for the farm machinery exemption and is taxable. For more information, see Nursery and Greenhouse Production.

Certain items purchased to provide landscape maintenance services are exempt. This exemption applies only to businesses providing taxable services. It does not apply to individuals or businesses purchasing materials for their own use.

If you buy materials exempt from sales tax and later use them in a landscape construction contract, you must report and pay use tax on those materials. 

Example

You purchase soil to use in your maintenance projects exempt from sales tax. You later use the soil in a landscape construction contract. You must report and pay use tax on cost of the soil used for that project. 

For more information, see Lawn and Garden Maintenance, Tree and Shrub Services.

When you deliver and spread aggregate material in a manner so that no further leveling or movement is required by the purchaser, the sale is an improvement to real property. You must pay sales tax on any taxable products or services used to complete the contract.

You must charge sales tax on the material and delivery charges when:

• the aggregate materials are dumped in a pile
• the construction contract does not require you to deposit the material so that no further leveling or movement is required

Note: Sales to cities, counties, and townships are generally not taxable. For more information, see Government – Local Governments.

Delivery (hauling) of aggregate is not taxable when the charges are:

• To move customer-owned aggregate or concrete block from one location to another.
• For delivery of aggregate by third-party haulers, if the aggregate will be used in road construction as defined in Minnesota Statute 297A.61, subd. 3.

Examples

• You enter into a contract to build a parking lot. You provide and haul aggregate materials to the construction site in your own vehicles. You spread and level the aggregate materials so that no further leveling or movement is required. This is an improvement to real property and is not taxable.
• You buy aggregate materials to build a parking lot and hire a third-party hauler to pick up the aggregate from the seller’s pit and deliver it to the construction site. You owe sales or use tax on the purchase of the aggregate and the third-party hauling charges. The third-party hauling charge is taxable even if the third-party hauler is required to spread or level the aggregate materials on the parking lot. Your charge to your customer is not taxable.

For more information, see:

• Delivery Charges
• Revenue Notice 02-12, Taxable Delivery Charges – Aggregate Materials
• Revenue Notice 02-17, Taxable Sales – Delivery of Aggregate Materials and Concrete Block

Purchases of ready mixed-concrete trucks are exempt from the Motor Vehicle Sales Tax.

Purchases of fuel for ready-mixed concrete trucks are subject to Petroleum Excise Tax.

Purchases of fuel to run the power take-off units on ready-mixed concrete trucks may be eligible for a refund of petroleum tax. To request a refund, submit Form PDR-1, Minnesota Motor Fuel Claim for Refund.

Starting July 1, 2017, special fuel to operate a power take-off unit or axillary engine in or on a licensed motor vehicle is exempt from sales tax.

Leases and purchases of repair or replacement parts for ready-mixed concrete trucks may be eligible for the capital equipment exemption. The truck must be used 50% or more of the time to sell ready-mix at retail (without installation).

For more information, see Capital Equipment.

If you know the item’s use at the time of purchase, use the chart below to determine how sales tax applies.

Examples

A carpet dealer sells carpeting with or without installation.

• Situation 1: A contractor orders carpet and contracts with the carpet dealer to install it into a new home. The sale is a construction contract because installing carpet is an improvement to real property. The carpet dealer must pay sales tax on all purchases of carpet, materials, supplies, and equipment used to install the carpet. The carpet dealer does not charge sales tax to the contractor.
• Situation 2: An individual orders carpet that he will install into his basement himself. This is a retail sale. The carpet dealer must charge the customer sales tax on the sales price of the carpet.

If you do not know the item’s use at the time of purchase, sales tax is handled based on if you are primarily a contractor or primarily a retailer. You are considered:

• Primarily a contractor if at least 50% of the business purchases are used for construction activity. See the Primarily a Contractor section of this page.
• Primarily a retailer if at least 50% of the business purchases are for retail sales. See the Primarily a Retailer section of this page.

Note: You should use the prior calendar year to calculate if you are primarily a contractor or a retailer.

You must pay sales tax on all purchases. If you sell any of these items at retail, subtract the cost of the materials you paid tax on when you file your Sales and Use Tax return.

Follow these guidelines. The guidelines assume sales tax was paid on all materials.

Example

A contractor who installs and repairs roofs pays sales tax on all purchases of materials. A customer buys shingles for $100 with no installation. This is a retail sale.

The contractor charges the customer sales tax of $6.88. The state general rate sales tax of 6.875% on $100. Local taxes may also apply depending on where the sale takes place.

The contractor paid $70 plus $4.81 in sales tax when the shingles were purchased.

The contractor can credit the sales tax paid on the shingles when they report the sale on their Sales and Use Tax return as follows:

Gross Receipts              $100
General Rate Sales         $30
($100 sales price - $70 cost)

If you are primarily a retailer, do not pay sales tax on your purchases. Give your supplier a completed Form ST3, Certificate of Exemption. Specify the Resale exemption. 

Charge and collect sales tax from your customer when you sell taxable items at retail. 

If any items purchased exempt for resale are later used in a construction contract, you must report the cost of the items as use tax purchases when you file your return. 

Follow these guidelines. The following assumes you purchased all materials exempt from sales tax. 

Example

An appliance dealer sells garbage disposal units. Most sales are retail sales. Occasionally, a customer wants the dealer to install a garbage disposal.

The sale and installation of the garbage disposal is a contract for the improvement of real property. The dealer charges the customer $139 for the installed unit.

The dealer must report their cost of the garbage disposal unit as use tax when filing their return.

General guidelines to help determine the material cost when billing retail sales or construction contracts.

• If you are primarily a retailer purchasing materials exempt for resale and have occasional construction contracts, write the material cost on the office copy of the construction contract (not customer copy). Use tax is easily calculated for each sales tax reporting period by adding the material cost figures off of the office copies.
• If the mark-up percentage used by a contractor-retailer is constant for all materials, you may use a percentage to determine the material cost.
• If inventory records are updated from sales invoices, record the correct material cost on the office copy of invoices for retail sales. If tax was paid tax on material purchases, this allows you to calculate tax owed on the markup.
• Contractor-retailer records should reflect the use of all items purchased. These records should support your Sales and Use Tax liability.

To claim an exemption as an exempt organization’s purchasing agent:

1. Complete Form ST3, Certificate of Exemption.
2. On Form ST3, check the box stating you are a contractor and have a purchasing agent agreement with an exempt organization. List the exempt entity name and project description.
3. Select the Other exemption code and write in “Purchasing agent agreement with exempt organization.”
4. Give your vendor the completed Form ST3.

You must keep records identifying all materials and supplies purchased for the exempt project. The exemption only applies to building materials, equipment, and supplies that become part of the improvement to real property.

An exempt organization cannot appoint you as its purchasing agent to purchase or lease equipment you will use to complete the construction contract.

For more information, see Revenue Notice 17-10, Construction Contracts with Exempt Entities.

You may only buy materials and supplies exempt from sales tax when a company with Direct Pay Authorization designates you as their purchasing agent.

Materials delivered to contractors in Minnesota for use in an out-of-state contract are subject to Minnesota sales tax.

If the materials are not subject to sales tax in the state or county where the contract work will be done, they are not subject to Minnesota sales tax. You must give your vendor a completed Form ST3, Certificate of Exemption.

If a vendor delivers materials directly to a construction site outside Minnesota, the materials are not subject to Minnesota sales tax.

For more information, see Items for Use Outside Minnesota.

State agencies or local governments cannot make final payments to a contractor or subcontractor until the Minnesota Department of Revenue has verified they complied with Minnesota Withholding Tax law. To do this the contractor and subcontractor must submit a Contractor Affidavit (IC134) to Minnesota Revenue to apply for a Certificate of Compliance.

For more information, see Construction Contracts with State or Local Government Agencies.

If you hire or contract with a non-Minnesota contractor to perform construction work in Minnesota, you must withhold 8% (.08) of their compensation as a Minnesota surety deposit.

Payments are subject to 8% withholding only if the work was performed in Minnesota and the value of the contract exceeds $50,000.

The cash surety is deposited with the Minnesota Department of Revenue. It is used as a guarantee that the contractor has fulfilled the requirements for withholding, sales and use, franchise, and income taxes.

For more information, see Surety Deposits for Non-Minnesota Construction Contractors.

If the item being sold is taxable, charges by the seller to deliver it are also taxable. For more information, see Delivery Charges.

Building cleaning and maintenance services at businesses and residences are taxable. This includes final cleaning charges, including duct cleaning of a building after construction. Separate charges for the removal of construction debris or demolition waste are not taxable. 

For more information, see Building Cleaning and Maintenance.

If you rent equipment without an operator and tax was not charged on the invoice, you owe use tax on the rental charge.

• 297A.61, Definitions
  • subd. 3(g)(6)(iii), Building cleaning and maintenance
  • subd. 4, Retail sale
  • subd. 58, Real property
• 297A.68, Business exemptions
  • subd. 2(b)(2), Materials consumed in industrial production
  • subd. 5(b)(8), Capital equipment
  • subd. 14, Property in transit
  • subd. 19, Petroleum products
  • subd. 40, Land clearing
• 297A.70, Exemptions for governments and nonprofit groups

• 8130.1200, Sales of building materials, supplies, or equipment
• 8130.6300, Caskets, burial vaults, urns for cremains, and memorials
• 8130.9000, Soft water equipment and service dealers
• 8130.9400, Advertising signs and billboards

• 02-12, Taxable Delivery Charges – Aggregate Materials
• 02-17, Taxable Sales – Delivery of Aggregate Materials and Concrete Block (modified 6/08)
• 17-10, Construction Contracts with Exempt Entities
• 18-04, Improvements to Real Property
• 18-05, Lease or Rental of Tangible Personal Property – Portable Toilets
• 25-02, Exemptions for Townships

Sales Tax:

• Delivery Charges
• Labor – Installation, Fabrication, Construction, and Repair
• Manufactured Homes, Park Trailers, and Modular Homes
• Use Tax for Businesses

Withholding:

• Construction Contracts with State or Local Government Agencies
• Surety Deposits for Out-of-State Construction Contracts

• Building Cleaning and Maintenance
• Government – Local Governments
• Local Sales and Use Tax