Resale Certificate for Contractors and Construction Businesses

Contractors face some of the most complex sales tax rules. Whether you're a general contractor, plumber, electrician, or HVAC technician, understanding when you can use a resale certificate—and when you can't—is crucial for tax compliance.

This guide explains the unique rules for construction and contractor businesses.

Construction Site

The Contractor Tax Dilemma

Here's why contractors have it complicated:

You buy materials and install them for customers. Are you:

• Reselling the materials (and should buy tax-free)?
• Using materials in a service (and should pay tax)?

The answer depends on your state and type of work.

How States Treat Contractors

States generally fall into two categories:

Category 1: Contractors as Consumers

In most states, contractors are considered the end consumer of materials they install:

This means:

• You pay sales tax when buying materials
• You don't charge sales tax on materials to customers
• Your invoice is for the complete job (labor + materials)
• You CAN'T use a resale certificate for installed materials

States using this approach: Most states, including California, Texas, Florida, New York (generally)

Category 2: Contractors as Resellers

Some states (or specific situations) treat contractors as resellers:

This means:

• You can buy materials tax-free (resale certificate)
• You charge sales tax when selling materials to customers
• You separately itemize materials on invoices
• You CAN use a resale certificate

States/situations with reseller treatment: Arizona (sometimes), Nebraska (retail contractors), and various specific exceptions.

State-Specific Rules

California

General rule: Contractors are consumers

• Pay tax on materials at purchase
• No tax charged to customer on installed materials
• Construction contracts are for "work, not sale"

Exception: Retailers who also install

• Appliance retailers who install products
• May qualify for resale treatment

Texas

General rule: Contractors are consumers for real property

• Materials becoming part of real property = taxable at purchase
• Lump-sum contracts = no separate tax to customer

Exception: Separated contracts

• Itemized materials separate from labor
• Customer may pay tax on materials portion

Florida

General rule: Contractors are consumers

• Pay tax on materials
• Real property improvements = contractor consumes materials

Exception: Tangible personal property

• Repairs to personal property (not real estate)
• May have different treatment

New York

General rule: Complex, depends on contract type

• Capital improvement vs. repair matters
• Installation of tangible personal property differs

When Contractors CAN Use a Resale Certificate

Despite general rules, contractors CAN often buy tax-free in these situations:

1. Items Purchased for Resale (Not Installation)

If you buy items to resell without installation:

2. Items That Remain Personal Property

Some installed items may still be "personal property":

• Appliances (sometimes)
• Window treatments
• Certain fixtures that remain removable

3. Service and Repair Work

In some states, repairs to personal property differ from real property improvements:

• Repairing machinery (personal property)
• vs. Building an addition (real property improvement)

4. Specific State Exceptions

Check your state for contractor-specific exemptions:

• Government projects
• Manufacturing facilities
• Certain types of construction

Items Contractors Can ALWAYS Buy Tax-Free

Regardless of installed materials rules, you can use your certificate for:

Items for Resale (Not Installed)

• Materials sold at your counter
• Supplies sold to customers separately
• Products customers take with them

Inventory for Non-Contract Work

If you also operate a retail store:

• Showroom inventory
• Parts counter inventory
• Retail merchandise

Items You'll Always Pay Tax On

Real-World Examples

Example 1: General Contractor

Project: Building a home addition

Material purchases:

• Lumber → Pay tax (becomes part of real property)
• Drywall → Pay tax
• Fixtures → Pay tax
• Paint → Pay tax

Invoice to customer: Labor + materials (no separate sales tax on materials)

Example 2: Appliance Retailer Who Installs

Project: Selling and installing a dishwasher

Purchase:

• Dishwasher → Tax-free with certificate (for resale)

Invoice to customer:

• Dishwasher price + sales tax
• Installation labor (may or may not be taxed)

Example 3: Plumber

Project: Installing a water heater

Depends on state: But commonly:

• Water heater → Pay tax at purchase
• Pipes and fittings → Pay tax at purchase
• Invoice: Total job cost, no separate materials tax

Example 4: HVAC Contractor

Project: Installing central air conditioning

Commonly:

• Equipment → Pay tax (becomes part of real property)
• Materials → Pay tax
• Invoice: Complete job cost

Documentation for Contractors

When Paying Tax (Most Purchases)

Keep detailed records:

• All purchase receipts (showing tax paid)
• Job cost tracking
• Customer invoices

When Claiming Exemption

If you legitimately can buy tax-free:

• Maintain valid resale certificate
• Document why purchase qualifies
• Keep records of how items were used/sold

Minimizing Tax Costs for Contractors

Strategy 1: Separate Retail Operations

If you sell materials at retail:

• Track separately from contract work
• Buy retail inventory with certificate
• Charge tax on retail sales

Strategy 2: Understand Your State's Rules

Know exactly what your state allows:

• Consult with a tax professional
• Check state Department of Revenue guidance
• Join contractor associations for updates

Strategy 3: Proper Contract Structure

In states that allow:

• Consider separated contracts (materials vs. labor)
• Itemize properly
• Understand implications

Strategy 4: Track Everything

Good records protect you:

• Every purchase documented
• Job-by-job material tracking
• Clear invoicing

Working with Suppliers

Home Improvement Stores

Specialty Suppliers

Plumbing, electrical, and HVAC suppliers:

• Usually familiar with contractor rules
• May have accounts set up for your trade
• Understand what you can/can't buy exempt

Setting Up Accounts

1. Open contractor/business accounts
2. Provide resale certificate (for qualifying purchases)
3. Clarify which purchases will be exempt
4. Review invoices for accuracy

Common Contractor Tax Mistakes

Mistake 1: Using Certificate for All Purchases

Just because you have a certificate doesn't mean everything is tax-free. Most installed materials in most states = pay tax.

Mistake 2: Ignoring State Rules

"My friend in another state doesn't pay tax." Different states have different rules. Follow YOUR state's requirements.

Mistake 3: Poor Record Keeping

Can't prove how materials were used? Audit problems ahead.

Mistake 4: Not Charging Tax When Required

If you're in a state where you should charge tax on materials, failing to do so = liability.

Getting Your Resale Certificate

Even though many purchases won't qualify, you still need a resale certificate for:

• Retail sales
• Qualifying exemptions in your state
• Opening supplier accounts

Apply for Your Resale Certificate →

When to Get Professional Help

Contractor tax rules are complex. Consider a tax professional if:

• You work in multiple states
• You do both contract and retail work
• You're unsure about your state's rules
• You've received audit notices

Key Takeaways

1. Most states treat contractors as consumers of installed materials
2. You pay tax on materials that become part of real property
3. Certificate is still useful for retail sales and certain exemptions
4. State rules vary significantly - know your state
5. Document everything - good records protect you

Get Properly Set Up

Start with the right foundation. Get your resale certificate and understand how it applies to your contractor business.

Apply for Your Resale Certificate →

Have questions about contractor tax rules? Contact us for guidance.