Contractor Sales Tax on Materials: Pay It or Charge It?

Do I pay sales tax on materials, or charge it to the customer?

On each job a contractor is treated as one of two things. The consumer of the materials pays tax to the supplier and charges the customer none for them. The seller of the materials (the rules call this a retailer) buys them without tax, or claims back tax paid, and charges the customer tax. Your state, the contract type and whether the work is a repair or an improvement decide which one you are.

A lump-sum job in Texas (new construction and home work), California or Michigan, or a capital improvement in New York, usually makes you the consumer. You are the seller on a Texas separated contract or business-property repair, a New York repair, a Washington prime contract, or any job where you bill the customer tax on materials. California and Michigan contractors usually stay consumers even on time-and-materials jobs.

In plain words: lump-sum is one price for materials and labor; separated states them as separate prices; time-and-materials bills your materials cost plus labor by the hour or day; cost-plus bills your cost plus a fee or percentage; use tax is what you owe when a supplier did not charge sales tax.

A case is not simple if:

• you work in more than one state;
• you mix lump-sum jobs with time-and-materials or cost-plus jobs, or a change order is priced differently from the contract;
• one job mixes repair and improvement, home and business property, or is a tenant's build-out;
• you are a subcontractor, or hire one;
• the customer claims an exemption;
• you already charged tax, or left it off, on past jobs;
• you have a state notice about tax charged twice or not charged.

If any of these fit, see Different for you? at the end of this page.

Gather the signed contracts, bids and change orders, your customer invoices, supplier receipts showing tax paid, any resale or exemption certificates you gave or received, and your sales tax permit. This page covers Texas, California, New York, Washington and Michigan. For any other state, read its revenue department's contractor guidance first: is a lump-sum contractor the consumer or the retailer, does the contract type change that, are repairs treated differently, and may a contractor buy materials on a resale certificate? The Texas audit manual, Michigan Contractor Manual, California Publication 9 and New York bulletins are agency guidance, not law; where one differs from a rule or statute, the rule or statute controls.

What decides it: my state, repair or improvement, or the contract type?

Each state uses a different test, so the same job can come out differently across a state line.

How the tests work:

• Repair or improvement (New York). A capital improvement must meet all three tests: it substantially adds to the property's value or appreciably prolongs its life, it becomes part of the property or is permanently affixed, and it is meant to be permanent. Building a deck or installing kitchen cabinets is an improvement; repairing a broken step or replacing a water heater thermostat is a repair (TB-ST-104). Publication 862 lists common jobs in each class, and says work for or by a tenant is presumed temporary, so it is not a capital improvement unless the lease or other facts show it is meant to stay with the property.
• Home or business property (Texas). Repair or remodeling of residential property (a home, apartment complex or condominium, among others) follows the contractor rules above. Repair or remodeling of nonresidential property is a taxable service on the total charge less separately stated unrelated services, and lump-sum versus separated no longer matters. New construction, and scheduled maintenance that incorporates materials, still follow the contractor rules; scheduled maintenance that incorporates none is not taxed as a service, but you pay tax on what you use. A contract mixing taxable repair with new construction, or a building used for both home and business, is taxable in total unless the taxable and nontaxable work are stated separately (Rule 3.357(b), (c)).
• Contract type (Texas and California). A lump-sum contract has one price for materials and labor. In Texas a contract that states materials and labor separately is separated, and a cost-plus contract counts as separated when labor is stated apart (Rule 3.291(a)). California treats cost-plus-a-fee like lump-sum: you stay the consumer (Publication 9).

On a lump-sum job, who pays the tax on the materials?

The contractor does, wherever the state makes it the consumer of the materials. The tax goes to the supplier when you buy, or to the state as use tax when an out-of-state supplier did not charge it (see use tax on business purchases).

• Texas. A lump-sum contractor owes tax on all materials, consumables, equipment and taxable services, and may not collect from the customer any amount represented as tax on a lump-sum charge (Rule 3.291(b)(3)). A clause saying the customer pays the tax does not change the state's rule: the customer may reimburse you, but the state does not recognize the customer's obligation under a lump-sum contract (audit manual). Each subcontract stands alone: a separated subcontractor charges you tax on its materials even when your own contract is lump-sum, and you still collect none from your customer (Rule 3.291(b)(6)).
• California. A contractor is always the consumer of materials it furnishes and installs under a lump-sum contract, and tax applies to its cost (Publication 9). Fixtures are different: a California contractor is the retailer of the fixtures it furnishes and installs, which this page does not cover (Regulation 1521(b)(2)(B)).
• New York. On a capital improvement you pay tax to the supplier and charge none once the customer gives you a completed Form ST-124 (TB-ST-130). The certificate is evidence, not the test: without one, the contract and project records can still show the job was an improvement (TB-ST-104).
• Michigan. The contractor owes use tax on materials unless it can show the supplier charged Michigan sales tax, so keep those receipts (RAB 2025-18).

The tax you pay is a cost of the job. New York says a contractor may include it in the charge for a capital improvement, and Michigan allows it in the contract price as an overhead cost (TB-ST-104; RAB 2025-18). Billing it to the customer as sales tax is not allowed in Texas or Michigan, and in California it can make you the retailer of the materials.

Buying in one state for a job in another can add tax. A Texas lump-sum contractor that takes possession of materials in Texas for an out-of-state job pays Texas tax unless the vendor delivers to the job site (audit manual). Michigan has no sales tax exemption for materials bought from a Michigan retailer to affix in another state, though its use tax does not apply (RAB 2025-18). New York credits its tax paid on materials later used outside the state (TB-ST-130).

On a time-and-materials or separated job, do I charge tax on the materials?

It depends on the state. A Texas separated contract and a New York repair make you charge tax; a California time-and-materials contract and a Michigan contractor usually do not.

• Texas separated or cost-plus. You are the seller of the materials. You charge tax on the greater of the agreed materials price or your cost, with local tax set by the job site, and you need a Texas sales tax permit (Rule 3.291(b)(4), (b)(10)). A guaranteed-maximum contract that states materials, labor and profit separately is still separated (audit manual).
• California time-and-materials. You remain the consumer unless you bill the customer "sales tax" computed on marked-up materials, or the contract passes title before installation and states the materials price separately (Regulation 1521(b)(2)(A)). When repairing a fixture, parts billed apart from labor make you the retailer of the parts; parts under a lump-sum repair make you the consumer (Publication 9).
• New York. On a repair, maintenance or installation job the customer pays tax on the total charge, whatever the bill's layout (Publication 862).
• Washington. A prime contractor collects retail sales tax from the customer on the full contract price (WAC 458-20-170(4)(a)). On a federal government job, a county or city housing authority job or a local public-road job, the contractor is the consumer of the materials and charges no retail sales tax (WAC 458-20-17001(3); WAC 458-20-171).
• Michigan. A contractor that consistently charges sales tax on the materials it affixes and itemizes labor and materials may buy them tax-free for resale and charge sales tax on their selling price. Treasury allows this in place of the use tax the law otherwise requires, and the contractor must then apply it consistently. It must hold a sales tax license, and the tax it remits must not be less than the tax on its cost (Contractor Manual; RAB 2025-18).

If I paid sales tax on materials, do I charge the customer sales tax again?

Not if you are the consumer on that job, including a Michigan contractor who paid sales tax instead of using a resale certificate: you charge none on the materials (RAB 2025-18). You charge tax on materials only where you are the seller, and there, in Texas, California and New York, tax you paid the supplier can be credited or deducted against the tax you owe, under the conditions below.

• Seller on the job. Texas lets you credit tax paid to your supplier against the tax you owe on the later sale (Tax Code 151.056(c)). California allows a "tax-paid purchases resold" deduction when you resell the property before using it (Regulation 1521(b)(6)(C)). New York allows a credit on your return for tax paid on materials transferred to the customer on a taxable repair, maintenance or installation job (TB-ST-130).
• Limits on New York's credit. It is based on your cost, not your marked-up price. It covers materials that go to the customer, not tools or supplies. You take it once you use the materials on a job where you charge tax (TB-ST-130).

Does separate invoicing change my tax position?

Usually not, but what decides it differs by state: the signed contract in Texas and California, the repair-or-improvement class in New York, the full contract price in Washington, and in Michigan whether a contractor acting as a retailer itemizes the bill.

• Texas. The order of control is contract, then bid, then invoice. Separate invoices do not turn a lump-sum contract into a separated one unless the contract requires them. A lump-sum contract that includes documents separating materials and labor becomes separated. Change orders follow the contract's type, but on a separated contract a lump-sum change order is treated as materials unless you can reasonably show the labor part (audit manual; Rule 3.291(a)(8), (a)(13), (b)(5)).
• California. A lump-sum contract does not become time-and-materials because the invoice states materials, labor or tax separately (Regulation 1521(a)(8)).
• Washington. Tax is measured on the full contract price, and showing service charges separately in the bid or contract does not make them separate items (WAC 458-20-170(1)(e), (4)(a)).
• Michigan. For a contractor acting as a retailer, a lump-sum bill that does not itemize labor and materials is taxed on the total charge (Contractor Manual).
• New York. On a capital improvement the bill may list materials and labor separately, and no tax is charged on either (TB-ST-130).

Do mark-ups and fees on materials get taxed?

Where you charge tax on materials, mark-ups tied to the materials usually belong in the taxed amount. A fee or profit tied to the whole job may not.

• Texas separated. The agreed price of materials includes profit figured as a percentage of material cost, transport, and mark-up or handling charges that relate directly to the materials. A charge figured as a percentage of the total contract cost is not part of it (Rule 3.291(a)(1)). On a cost-plus bill, a mark-up related to materials is taxed with them (audit manual).
• California. On a time-and-materials job where you bill tax, the measure is the amount on which you charge tax (Publication 9). On a cost-plus-a-fee contract, the fee is not in the measure of tax (Regulation 1521(b)(2)(D)).
• New York. On a repair, tax applies to the total charge, mark-up included. On a capital improvement the mark-up is not taxed, because no tax is charged (Publication 862; TB-ST-104).
• Delivery. California taxes separately stated delivery charges on materials you sell under a tax-billed time-and-materials contract, unless title explicitly passes to the customer before delivery (Publication 9).

What do I give suppliers when I buy materials for resale, and what do I keep?

Give a resale certificate only when you will resell the materials and your state lets a contractor buy that way. If you use the materials yourself, you owe the tax. Keep the contract, the supplier invoice and a copy of the certificate, so each tax-free purchase ties to a job where you charged the customer tax.

In Texas, if you buy goods with a resale certificate and then use them, you owe tax on them. A Texas supplier keeps the resale certificate you give it for 4 years (Comptroller FAQ). A New York contractor keeps an exemption certificate at least 3 years after the due date of the last return it relates to, or the filing date if later (Form ST-124). Certificate forms and refunds of tax paid are in resale certificates and sales tax refunds.

What if my customer is exempt, such as a nonprofit or government body?

Proof gathered before the job is what protects a contractor: in Texas and Michigan, a wrong exemption leaves the contractor owing the tax.

• Texas. Accept the customer's exemption certificate in good faith, and use your own exemption certificate with suppliers for incorporated materials and qualifying items. Equipment stays taxable. If the customer is later found not exempt, you owe the tax, penalties and interest on the purchases (Rule 3.291(c)). A written contract or purchase order from a governmental entity exempt under Tax Code 151.309, such as the United States, Texas, or a Texas county or city, is enough proof. A nonprofit is exempt only for items related to its exempt purpose, so improvements unrelated to it stay taxable (Tax Code 151.309, 151.310; Rule 3.291(c)(1), (c)(3)).
• New York. You charge no tax on work for an exempt organization or government, repair or improvement. You may buy the materials that go to the customer with the contractor exempt purchase certificate; other supplies stay taxable (TB-ST-130).
• Michigan. A nonprofit's own exemption does not generally pass to its contractor, which owes use tax on materials it affixes. Only listed exemptions, such as nonprofit hospitals, qualified nonprofit housing and church sanctuaries, apply, supported by the owner's Contractor Eligibility Statement. That statement does not remove your liability if the property does not qualify (RAB 2025-18).
• California and Washington. On a contract with the United States (in Washington, also a county or city housing authority), you are the consumer: tax applies to the materials you buy, and you charge none on the contract price (Regulation 1521(b)(1)(A); WAC 458-20-17001(3)). For other exempt customers in these states, read Publication 9 and the Washington Department of Revenue's contractor guidance; this page has not checked them.

Customer certificates are covered in exemption certificates from customers.

What if I charged tax I should not have, or did not charge tax I should have?

In Texas and New York the state looks to the contractor in both cases. For another state, read its contractor guidance before refunding or rebilling.

• Charged tax on a job where you are the consumer. In Texas you cannot keep it. Refund the customer or send it to the state. The Comptroller refunds tax collected in error only after you refund the customer or issue a credit memorandum, and generally only if you claim it within 4 years after the tax was due (Tax Code 111.104(f), 111.107, 111.201; audit manual). Tax collected from the customer cannot offset an audit assessment (audit manual).
• New York capital improvement billed with tax. Tax collected without a capital improvement certificate must be paid over. If the customer later gives you a certificate and asks for a refund, you may refund the tax and claim a refund or credit; the customer may also apply to the Tax Department directly (TB-ST-130). Claim the credit within 3 years from filing the return, or 2 years from payment, whichever is later (Tax Law 1139(c); TB-ST-810 counts the three years from the return's due date). Get the certificate within 90 days after the work, or you carry the burden of proving it was an improvement (Form ST-124).
• Did not charge tax you should have. You are responsible for collecting and paying the correct amount, and an error can mean additional tax, penalties and interest (Texas Comptroller FAQ). Accepting a certificate that was filled in wrongly can make you personally liable for the tax (Form ST-124). The customer can owe it too: in Texas for incorporated materials under a separated contract (Rule 3.291(b)(5)), and in New York when its Form ST-124 covered work that was not a capital improvement (Form ST-124).

Unpaid tax can also become personal for the people running the business:

• Texas. Tax, or any amount billed as tax, is held in trust for the state. An individual who controls paying it and wilfully fails to is liable, even after the business dissolves (Tax Code 111.016).
• New York. Officers, directors, managers and employees under a duty to act, and partnership and LLC members, must collect the tax and are personally liable for it (Tax Law 1131(1); 1133(a)).
• California. After a business ends, a responsible person who wilfully failed to pay owes tax billed to customers or owed on materials used. Notice is due within 3 years of the state learning of the closure or 8 years after it, whichever is earlier (R&TC 6829).
• Washington. When a limited liability entity ends or is insolvent, its chief executive and chief financial officers are liable for unpaid collected tax regardless of fault, others if wilful (RCW 82.32.145).
• Michigan. An officer, member, manager or partner who controlled payment and wilfully failed to pay is liable, if assessed within 4 years of the business's assessment (MCL 205.27a).

For past invoices, see invoices sent without sales tax and catching up on uncollected sales tax. Tax you collect from customers is owed to the state, so record it apart from income. Tax you pay on materials for a job where you charge none is a job cost (TB-ST-130); see job costs and gross profit and sales tax journal entries.

Example

US dollars, round and illustrative. The 8.25% and 8% rates are examples; yours depends on the job site and, on a Texas lump-sum job, on the local tax your supplier charged.

Texas bathroom remodel, lump-sum

A Texas remodeler signs a $40,000 lump-sum contract to remodel a homeowner's bathroom. The materials cost $12,000. It pays tax at the supplier, $990 (8.25% of $12,000), and charges the homeowner no sales tax. The $990 is a job cost, so the price has to cover it. If the contract is changed to state the materials price and all labor as separate prices, it becomes separated and the remodeler must collect tax on the materials instead.

Texas separated contract

A Texas contractor builds a home addition, pricing it with $15,000 of materials and $17,500 of labor stated separately, at 8.25%. It charges $1,237.50 tax on the materials only, for a total bill of $33,737.50. It bought the materials with a resale certificate, so it paid no tax at the supplier. Had it paid tax there, it could credit that tax against the tax it owes on the sale.

New York repair

A registered New York HVAC contractor repairs a customer's central air system. The parts cost $2,000, and labor is $3,000. It pays $160 tax on the parts (8%) and bills $5,000 plus $400 tax, a total of $5,400. On its return it reports the $400 and claims a $160 credit for tax paid on the parts transferred to the customer, so it sends the state $240. Had the job been a complete new central air system, a capital improvement, the contractor would pay tax on the equipment and, with a completed Form ST-124, charge the customer none.

Different for you?

• You work in more than one state or mix lump-sum and time-and-materials jobs. Each job's type decides what you buy tax-free and what you bill, and the books have to follow it: bookkeeping.
• You have a state notice about tax charged twice or not charged, or past jobs were billed wrongly. Those jobs may need correcting in the books: bookkeeping.
• Buying tax-free with a resale certificate, or getting back tax a supplier charged: resale certificates and sales tax refunds.
• Your customer says it is exempt: exemption certificates from customers.
• Materials bought out of state with no tax charged: use tax on business purchases.
• Where you must collect and whether you are registered: when you must collect sales tax.
• A state audit or information request: sales tax audit.
• Invoices already sent without the right tax: invoices sent without sales tax.
• Job costs that exceed gross profit: job costs and gross profit.
• Installing cooling, power or other equipment in data centers: sales tax on installed cooling and power equipment.