Contractor – Retailer Sales Tax Guidelines

richard.kachelmeyer Mon, 02/03/2020 - 10:54

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Last Updated

January 03, 2023

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Contractor – Retailer Sales Tax Guidelines

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

If you are a contractor-retailer, the rules for reporting tax on your purchases depend on if:

you know the item’s use when purchased
it is used in a construction contract or sold at retail
you are “primarily a retailer” or “primarily a contractor”

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Know the Item’s Use [+]

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

If the item’s are for	Then
A construction contract	Pay sales tax at the time of purchase.
Resale	Give your vendor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

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.

Don’t Know the Item’s Use [+]

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.

Primarily a Contractor [+]

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.

Type of Sale	How to Handle Sales Tax
Construction Contract	Do not itemize sales tax on the customer’s invoice. Report the total contract amount on the Gross Receipts line of your sales tax return.
Retail Sale	Charge sales tax on the total sales price. Itemize sales tax on the customer’s invoice. Report on your sales tax return: The total sales as Gross Receipts. The difference between the sale price and the cost of materials as General Rate Sales. Do not include sales tax when calculating general rate sales. Keep receipts and invoices to show sales tax was paid on the 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)

Primarily a Retailer [+]

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.

Type of Sale	How to Handle Sales Tax
Construction Contract	Do not itemize sales tax on the customer’s invoice. On your sales tax return: Report the total contract amount as Gross Receipts. Report your cost for materials as Use Tax purchases.
Retail Sale	Charge sales tax on the total sales price. Itemize sales tax on the customer’s invoice. On your sales tax return, report the total sales price as Gross Receipts and General Rate Sales.

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.

Helpful Hints [+]

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.

Contractor – Retailer Sales Tax Guidelines

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Contractor – Retailer Sales Tax Guidelines