Sales Tax on Construction: Materials, Labor, Exemptions, and the Rules by State

Sales tax on construction is one of the most inconsistent areas of state tax law. In Texas, a contractor pays sales tax when buying materials and charges no tax to the customer, because the contractor is the “consumer” of the materials. In New York, the contractor buys materials tax-free with a resale certificate and collects sales tax from the customer on the total contract price (materials and labor combined for capital improvements, but only materials for repairs). In California, the contractor pays tax on materials and doesn’t charge it on labor, but the rules change depending on whether the contract is lump-sum or time-and-materials. Every state that imposes a sales tax has its own version of these rules, and getting them wrong means either overpaying (buying materials with tax and charging it again to the customer) or underpaying (not collecting when required, then getting assessed on audit with penalties and interest). This guide covers the three main frameworks states use, the most common exemptions, and the practical compliance steps.

Why is construction sales tax so complicated?

Because construction sits at the intersection of goods and services, and sales tax was designed for goods sold over a counter. When a retailer sells a sink, the transaction is simple: charge sales tax on the sale price. When a plumber buys a sink from a supply house, installs it in a customer’s bathroom, and charges $1,200 for the job (of which $400 is the sink and $800 is labor), the sales tax question splits in three directions: Was the sink resold to the customer (taxable as a sale of goods)? Was the labor a taxable service? Or did the plumber “consume” the sink by installing it into real property, making the purchase from the supply house the taxable event and the charge to the customer exempt?

States have answered these questions differently, and the answers depend on variables that change from one contract to the next:

• Real property vs. personal property. Most states exempt labor on real property improvements (building a wall, installing plumbing) but tax labor on personal property fabrication (building custom cabinets in a shop and delivering them).
• Capital improvement vs. repair. New York taxes repair and maintenance work but exempts capital improvements (work that becomes part of the real property and substantially adds to its value or prolongs its useful life). A new roof is a capital improvement. Patching a leak is a repair.
• Lump-sum vs. T&M contracts. Some states (California being the primary example) tax lump-sum contracts differently from time-and-materials contracts, because a lump-sum contract is treated as a sale of the finished product while a T&M contract separates the taxable materials from the exempt labor.
• Residential vs. commercial. A few states exempt residential construction or new residential construction from sales tax while taxing commercial work, or vice versa.

The three models: consumer, reseller, and hybrid

Contractor as consumer

In these states, the contractor is considered the end user of the materials. You pay sales tax when you buy lumber, pipe, concrete, and fixtures from the supply house. You don’t charge sales tax to your customer on the contract price (because the taxable transaction already happened at the supply house). Your customer’s invoice is sales-tax-free.

This is the simpler model from a compliance standpoint. You pay tax at the register and your billing to the customer doesn’t involve tax collection or remittance. The states that use this model (or a close variant) include:

• Texas
• Arizona
• Florida (with exceptions for fabrication)
• Colorado (with local variations)
• Alabama
• Several others, each with their own exceptions

The catch: if you buy materials in a state with no sales tax or a lower rate and bring them into a consumer-model state for installation, you owe use tax on the difference. Use tax is the mirror of sales tax, designed to prevent tax avoidance through cross-border purchases. The rate is the same as the local sales tax rate, and it’s self-assessed on your state tax return.

Contractor as reseller

In these states, the contractor acts as a reseller of the materials incorporated into the project. You buy materials tax-free using a resale certificate (or exemption certificate), then collect sales tax from your customer on the contract price. The taxable amount may be the full contract price (materials and labor) or just the materials portion, depending on the state and the type of work.

States that use some version of this model include:

• New York (sales tax on the full contract price for repairs; exempt for capital improvements with Form ST-124)
• New Jersey
• Parts of Pennsylvania (depends on the type of construction)
• Hawaii (the GET applies to the gross receipts of the contractor, which functions like a sales tax on the contract price)

The compliance burden is higher: you need a resale certificate on file with every supplier, you need to collect the correct rate from every customer (and the rate varies by locality in many states), and you need to remit the collected tax on the state’s filing schedule. Getting it wrong means you owe the tax out of pocket, because the state assesses the contractor, not the customer.

Hybrid models

Most states are actually hybrids. They start with one of the two frameworks above and carve out exceptions based on the type of work, the type of property, or the type of contract. California is the most notable example.

California treats contractors as consumers of materials for lump-sum contracts and as resellers for time-and-materials contracts. On a lump-sum contract, the contractor pays sales tax on materials at purchase and doesn’t charge tax to the customer. On a T&M contract, the contractor can buy materials tax-free with a resale certificate and charges the customer sales tax on the materials portion of the invoice (labor remains exempt). The practical consequence is that the contract structure affects the tax treatment, which means a contractor who bids a job both ways (lump-sum and T&M) may quote different totals because of the sales tax difference.

Ohio taxes all sales of tangible personal property but exempts most construction labor performed on real property. The contractor pays sales tax on materials (consumer model) unless the project qualifies for a specific exemption (government projects, certain manufacturing facilities). Equipment rental is taxable as a sale of tangible personal property.

Connecticut taxes materials and most construction services (including painting, plumbing, electrical, and HVAC work) at the standard rate. Labor is taxable here, which is unusual and catches out-of-state contractors off guard.

What exemptions are available?

Even in states that tax construction broadly, exemptions exist. The common ones:

Government projects. Federal government projects are exempt from state sales tax under the Supremacy Clause. State and local government projects are typically exempt under the state’s own law. The contractor usually needs to provide the government agency’s exemption certificate to the supplier and/or not collect tax from the government customer. The exemption applies to the materials, not to the contractor’s markup or labor (in most states).

Resale certificates. In reseller-model states, the contractor buys materials tax-free by presenting a resale certificate to the supplier. The certificate shifts the tax obligation to the point of sale to the end customer. Using a resale certificate when you’re actually the consumer of the materials (in a consumer-model state, or on a lump-sum contract in California) is fraud.

Capital improvement exemptions. New York’s exemption for capital improvements (Form ST-124) is the most prominent example. The customer certifies that the work is a capital improvement, and the contractor doesn’t collect sales tax. If the work turns out to be a repair rather than an improvement, the contractor is liable for the uncollected tax.

Manufacturing and industrial exemptions. Many states exempt machinery, equipment, and construction materials used in manufacturing facilities. The exemption typically requires a certificate from the property owner and specific documentation of the manufacturing use.

Nonprofit and religious organization exemptions. Construction on churches, hospitals, and other exempt organizations is often (but not always) exempt from sales tax on materials. The rules vary significantly by state.

How does use tax work for construction materials?

Use tax applies when you buy materials in one state and use them in another. If you buy $50,000 in materials from an out-of-state supplier who doesn’t charge your state’s sales tax, you owe use tax at your state’s rate on those materials. The same applies to materials purchased online or from out-of-state distributors.

For contractors working across state lines, use tax creates a tracking obligation. You need to know where each load of materials was purchased, what tax was paid, and where the materials were installed. If you paid 6% sales tax in the state of purchase and the installation state’s rate is 8%, you owe 2% use tax on those materials in the installation state. Most states give credit for sales tax paid in another state, but only up to the home state’s rate.

The multi-state tax guide covers the broader compliance picture for contractors working across state lines, including income tax, payroll withholding, and licensing, in addition to sales and use tax.

Practical compliance steps

Know your state’s model. Before you bid a job, know whether you’re a consumer or a reseller of materials in that state. This determines whether you pay tax at the supply house, collect it from the customer, or both.

Collect the right certificates. In reseller states, present your resale certificate to every supplier. For exempt customers (government, nonprofits, capital improvement projects), collect their exemption certificate and keep it on file. A missing certificate on audit means you owe the tax.

Separate materials from labor on invoices. In states that tax materials but exempt labor (which is most of them), your invoice needs to show the breakdown. A single lump-sum amount with no separation makes the entire invoice taxable in many states, because the taxing authority assumes everything is taxable unless you prove otherwise.

Track purchases by job and by state. For use tax compliance, you need to know which materials went to which state. Your bookkeeping system should code material purchases to both the vendor and the project, with the project’s state as a reportable field.

File on time. Sales tax returns are typically monthly or quarterly, depending on your volume. Late filing triggers penalties (usually 5% to 10% of the tax due) and interest. In some states the penalties are steeper: New York charges 10% plus 1% per month (up to 30%), and California charges 10% plus interest at roughly 5% to 7% annually. Consistent late filing can move you to more frequent filing requirements and increase your audit risk.

For context on the rates you’re dealing with: as of 2026, state sales tax rates range from 2.9% (Colorado) to 7.25% (California), and local additions can push the combined rate significantly higher (9.5% or more in parts of Louisiana, Tennessee, and Washington). Texas sits at 6.25% state plus up to 2% local (8.25% combined in most metro areas). Florida is 6% state plus up to 2.5% local. On a $500,000 materials budget, the difference between a 6% rate and an 8.5% rate is $12,500, which is real money that belongs in your bid. A state audit that covers three or four years of underreported sales or use tax can produce assessments of $50,000 to $200,000 or more for a midsize contractor, depending on revenue and the rate differential.

What should I do next?

Check the sales tax rules in every state where you work before you submit a bid. The tax obligation affects your pricing: in a consumer state, sales tax on materials is a cost you need to build into the bid. In a reseller state, you’ll add the tax to the customer’s invoice, but you need to know the rate and the rules for what’s taxable. If you’re working across state lines, the multi-state compliance guide covers the full picture.

• The deductions guide covers how material costs (including the sales tax paid on them in consumer states) flow through the tax return.
• The 1099 reporting guide explains the reporting requirements when you pay subcontractors who purchase their own materials.
• The startup checklist covers sales tax registration as part of the new-business setup process.
• If your out-of-state work triggers income tax obligations too, the multi-state nexus guide covers apportionment, withholding, and compliance across every state where you have a crew.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.