Construction Materials Sales Tax: The Complete Guide for Contractors

Sales tax on construction materials is one of the most misunderstood areas of tax law for contractors. The rules are not straightforward, and getting them wrong can cost you thousands of dollars per year, either through overpaying taxes or through penalties for underpaying.

This guide breaks down exactly how sales tax works for construction materials, which states treat contractors as consumers versus retailers, and when you can legally purchase materials tax-free using a resale certificate.

Construction Site

The Core Rule Most Contractors Get Wrong

Here is the fundamental principle that governs construction materials sales tax in the majority of states:

Contractors are considered the end consumers of materials they permanently install into real property.

This means that when you buy lumber, drywall, concrete, roofing materials, or plumbing fixtures and install them into a building, you are legally the final consumer of those materials, not a reseller. You owe sales tax at the point of purchase from your supplier.

This is the opposite of how most retail businesses work. A clothing store buys inventory tax-free and collects tax from customers. But a general contractor in most states pays tax at the supply house and does not separately charge the customer sales tax on materials.

Understanding this distinction is the starting point for everything else in this guide.

Lump-Sum vs. Separated Contracts: Why Contract Type Matters

The way you structure your contracts can directly affect your sales tax obligations. The two primary contract types have very different tax treatments.

Lump-Sum Contracts (Time and Materials Combined)

In a lump-sum contract, you quote a single price for the entire job: labor, materials, overhead, and profit bundled together.

Tax treatment in most states:

• You pay sales tax when you purchase materials from your supplier
• You do not separately charge sales tax to the customer
• The tax you paid is built into your overall bid price
• You are the end consumer of the materials

Example: You bid $85,000 for a kitchen remodel. That price includes all materials, labor, permits, and your margin. You paid sales tax on the $35,000 in materials at the supply house. The customer pays $85,000 with no separate sales tax line item.

Separated (Itemized) Contracts

In a separated contract, you break out the materials and labor as distinct line items on the invoice. This structure changes the tax treatment in certain states.

Tax treatment in states that recognize separated contracts:

• You can purchase materials tax-free using a resale certificate
• You charge the customer sales tax on the materials portion only
• Labor is typically not taxed (varies by state)
• You are treated as a reseller of materials

Example: You invoice a kitchen remodel as $35,000 in materials plus $50,000 in labor. In a state that recognizes separated contracts, you charge the customer sales tax on the $35,000 materials portion. You purchased those materials tax-free.

Which Approach Saves Money?

At first glance, both approaches seem to result in the same total tax collected. But there are important differences:

In a lump-sum contract, you pay tax on your wholesale cost. In a separated contract, the customer pays tax on the retail price you charge, which may be higher. However, the cash flow advantage and ability to present lower pre-tax bids can be significant. Use our savings calculator to estimate the impact for your business.

How States Treat Contractors: A Breakdown

States do not handle contractor sales tax uniformly. Here is how the major approaches differ.

States That Treat Contractors as Consumers (Majority)

In these states, contractors pay sales tax on materials at the time of purchase and generally cannot use a resale certificate for materials they will install.

Key states in this category:

• California: Contractors are consumers of materials incorporated into real property. Very limited exceptions.
• Florida: Contractors pay tax on materials used in real property improvements. The contractor is the end user.
• New York: Capital improvements follow the consumer model. Repairs may differ.
• Ohio: Contractors are consumers. The state uses the STEC-B blanket exemption form.
• Illinois, Pennsylvania, and most other states follow this general pattern.

States That Allow Reseller Treatment (Under Certain Conditions)

A smaller number of states allow contractors to be treated as resellers if specific conditions are met, usually involving separated contracts.

• Texas: Separated contracts allow contractors to buy materials tax-free and charge tax to the customer on the materials portion. Lump-sum contracts follow the consumer model.
• Arizona: Prime contractors on certain projects can be treated as retailers. The rules depend on contract type and the nature of the project.
• Nebraska: "Retail contractors" can buy materials tax-free and collect tax from customers.
• Mississippi: Contractors can elect to be treated as resellers under specific conditions.
• New Mexico: Applies gross receipts tax broadly, with a different structure than traditional sales tax states.

States With No Sales Tax

Five states have no general sales tax, so the question does not apply:

• Alaska (no state sales tax, but some local taxes exist)
• Delaware
• Montana
• New Hampshire
• Oregon

When You CAN Use a Resale Certificate as a Contractor

Even in states that treat contractors as consumers, there are legitimate situations where a resale certificate applies.

1. Materials Sold Over the Counter (Not Installed)

If you operate a retail counter or sell materials to customers who handle their own installation, those sales are standard retail transactions. You buy tax-free with a resale certificate and collect tax from the customer.

2. Separated Contracts in Qualifying States

In Texas and other states that recognize separated contracts, you can use a resale certificate for materials you will itemize separately and charge to the customer with sales tax.

3. Items That Remain Tangible Personal Property

Some installed items do not become part of real property. Freestanding appliances, removable window treatments, and certain types of equipment may qualify for resale treatment depending on your state. The test is usually whether the item can be removed without damaging the structure.

4. Government and Exempt Projects

Some states provide exemptions for materials used on government projects, nonprofit construction, or manufacturing facility improvements. These are separate from resale certificates but can eliminate tax on materials.

Get Your Resale Certificate --> Having a valid certificate on file ensures you are ready to take advantage of every legitimate tax-free purchase.

When You CANNOT Use a Resale Certificate

Using a resale certificate improperly can trigger audits and penalties. Do not use your certificate for:

Real Dollar Examples: What Sales Tax Costs on a Typical Job

Understanding the actual dollar impact helps you make informed decisions about contract structure and bidding.

Example 1: $150,000 Commercial Renovation (Lump-Sum)

• Materials cost: $65,000
• State sales tax rate: 7%
• Sales tax paid at supplier: $4,550
• This $4,550 comes directly out of your margin unless you built it into your bid

Example 2: $150,000 Commercial Renovation (Separated Contract in Texas)

• Materials billed to customer: $65,000 (plus your markup)
• Materials cost to you: $65,000 (purchased tax-free)
• Customer pays 6.25% Texas state tax on materials: $4,062.50
• Your out-of-pocket tax cost: $0
• Cash flow advantage: You are not fronting $4,062 in tax during the project

Example 3: Annual Impact for a Mid-Size Contractor

A contractor purchasing $500,000 in materials annually in a state with 7% sales tax:

That $35,000 difference is real money that affects your bids, your margins, and your competitiveness. Run your own numbers with our savings calculator.

How to Set Up Tax-Exempt Purchasing With Suppliers

If you are in a state where you can legitimately buy materials tax-free, here is how to set it up.

Step 1: Obtain Your Resale Certificate

Register for a sales tax permit in your state. This is a prerequisite for a resale certificate.

Step 2: Provide the Certificate to Each Supplier

Give a copy to every supplier you purchase from, including lumber yards, electrical distributors, plumbing wholesalers, and big-box stores like Home Depot and Lowe's.

Step 3: Flag Qualifying Purchases

Not every purchase will be tax-exempt. Work with your supplier to ensure only qualifying purchases (materials for separated contracts or resale) are flagged as exempt. Tools and equipment should still be taxed.

Step 4: Maintain Documentation

For every tax-exempt purchase, keep records showing:

• The specific job the materials were used on
• The contract type (separated vs. lump-sum)
• The invoice to the customer showing materials and sales tax charged

Compliance and Audit Protection

State auditors pay close attention to contractor tax-exempt purchases because misuse is common. Protect yourself with these practices:

• Never use your certificate for personal purchases. This is the fastest way to lose your exemption and face penalties.
• Match purchases to jobs. Auditors will want to see that tax-exempt materials were used on qualifying contracts.
• Keep certificates current. Expired certificates are not valid for new purchases in most states.
• Separate retail from contract work. If you run a retail counter and a contracting operation, keep clean records for each.

Key Takeaways

1. In most states, contractors are consumers of materials they install into real property and must pay sales tax at the time of purchase.
2. Contract structure matters. Separated contracts can change your tax treatment in states like Texas and Arizona.
3. The dollar impact is significant. A contractor buying $500,000 in materials per year at a 7% tax rate pays $35,000 in sales tax, money that can be redirected under the right contract structure.
4. Resale certificates are still valuable for contractors who sell materials at retail, use separated contracts in qualifying states, or install items that remain personal property.
5. Documentation is essential. Poor records turn legitimate tax-free purchases into audit liabilities.

Get Your Resale Certificate

Whether you need a certificate for retail sales, separated contracts, or multi-state operations, having one on file is a foundational step for any contractor looking to manage tax costs.

Get Your Resale Certificate -->

Have questions about how sales tax applies to your specific contracting situation? Contact our team for guidance.

Related Articles

• How a Resale Certificate Helps Contractors Win More Bids - Learn how to factor tax savings into your bidding strategy for a competitive edge.
• Do Subcontractors Need a Resale Certificate? - The rules are different when you work under a GC. Find out when subs can buy tax-free.
• Buying Construction Supplies Wholesale Tax-Free - Step-by-step guide to setting up tax-exempt accounts at supply houses and big-box stores.
• Roofing Contractors: Resale Certificate Savings - Trade-specific guidance for roofing material purchases and tax treatment.