Determining the tax liability of contractors at the state level can be complex. Issues range from the taxation of materials and tools, how different states impose sales tax on construction services, the allocation and apportionment of business income for construction operations, handling changing nexus patterns, and the ramifications of entering a state to perform disaster recovery work.
Sales Tax on Construction Services
In our experience we see more major errors in how construction companies handle sales and use tax on on construction services and materials. States have a wide variety of how they tax construction contracts. Factors that can affect taxation include whether the contract is for new construction or the repair or remodeling of an existing structure; whether the property is commercial or residential property;, whether the construction contract is based on time and materials or is a lump sum , whether the contractor is a reseller or manufacturer of the item, whether the client is an exempt entity, and whether the item will be installed or used in another state.
Income Tax Apportionment
While many states require construction firms to apportion income based on the state’s standard apportionment formula, a number of states have a special corporate income tax apportionment formula for the construction industries. Some states use the same same formula as other corporations, but with special rules for computing each factor, while others require the use of one-factor based on receipts.
A number of states have enacted tax exemptions for disaster recovery work performed by out-of-state businesses related to a declared state disaster or emergency during the disaster response periods. Generally, the statutes provide that construction businesses performing recovery work are not considered to create nexus that would require that business to register, file, or remit state or local corporate and personal income, privilege license, property or sales and use taxes.
The following states (shown in blue) have disaster exemptions: