Construction is one of the most confusing areas of sales tax. Materials become part of a building, labor may or may not be taxable, and the answer can change depending on how the contract is written. These construction contractor sales tax rules explain the three main models states use, with official examples from California, Texas and Washington.
Key takeaways
- In many states, contractors are the consumers of the materials they install and pay tax when they buy them.
- Some states let contractors buy materials for resale and charge tax to the customer instead, depending on the contract.
- A few states, such as Washington, treat construction itself as a retail sale and require tax on the full contract price.
- Fixtures, repair work and new construction can follow different rules in the same state.
Three Ways States Tax Construction
| Model | Who pays tax on materials | Is the customer charged tax? | Example state |
|---|---|---|---|
| Contractor as consumer | Contractor, when buying | No, tax is built into the price | California (materials) |
| Depends on the contract | Contractor or customer | Sometimes, on separately stated materials | Texas |
| Construction as a retail sale | Contractor buys for resale | Yes, on the full contract price | Washington |
California: Consumers of Materials, Retailers of Fixtures
Under CDTFA Regulation 1521, construction contractors are consumers of the materials they furnish and install, so sales or use tax applies when the contractor buys or uses them. Contractors are retailers of fixtures, such as items that keep their identity after installation, and tax applies to their sales of fixtures. If the contract does not state a price for the fixture, its cost to the contractor is used as the taxable price.
Texas: Lump-Sum vs Separated Contracts
The Texas Comptroller distinguishes two contract types:
- Lump-sum contract: one price for the whole job. On residential repair and remodeling, the contractor pays tax on materials, supplies and equipment when buying them and does not charge the customer tax.
- Separated contract: the price is split into labor and materials. On residential repair, the contractor can buy incorporated materials with a resale certificate and collect tax from the customer on the materials charge.
- New construction: under either contract type, the contractor does not charge the customer tax.
Washington: Tax on the Full Contract Price
In Washington, prime contractors must collect retail sales tax from the landowner on the gross contract price, without deducting costs. Invoices and progress billings must state the tax separately, and tax is computed before retainage is deducted. A price that says “tax included” is not enough.
Example: a $40,000 kitchen remodel with $15,000 of materials
Washington (Spokane, 9.1%): $40,000 × 9.1% = $3,640 collected from the customer
Texas lump-sum contract (Dallas, 8.25%): contractor pays $15,000 × 8.25% = $1,237.50 on materials; customer is not charged tax
Texas separated contract: customer is charged $15,000 × 8.25% = $1,237.50 on the materials line
Check the local rate for a job site with the Sales Tax Calculator; for construction, the job site location usually matters.
Practical Tips for Contractors
- Write contracts deliberately: in states like Texas, lump-sum or separated wording changes who pays the tax.
- Use resale certificates only when allowed: buying materials tax-free and then failing to charge tax is a common audit finding. See exemption certificates.
- Track use tax: materials bought out of state without tax often owe use tax where they are installed.
- Separate fixtures from materials where the state treats them differently.
- Work for exempt customers carefully: exemptions for nonprofits and governments do not always extend to contractors. See our nonprofit exemption guide.
Conclusion
Construction contractor sales tax rules depend on the state’s model and on how each contract is written. Know whether you are the consumer of materials, a reseller or a retailer of construction, document it in your contracts, and check job site rates on our state pages. For invoices, use the Add/Remove Sales Tax Calculator and the Reverse Sales Tax Calculator, or start from the Tax Rate Center homepage.
Frequently Asked Questions
Do contractors charge sales tax?
It depends on the state and contract. In Washington, contractors collect retail sales tax on the full contract price. In California, contractors generally pay tax on materials and do not separately charge it, except on fixtures.
Who pays sales tax on construction materials?
Often the contractor, when it buys them. In some states and contract types, the contractor buys materials for resale and charges the customer tax instead.
What is a lump-sum contract for sales tax?
A contract with one price for the whole job. In Texas residential repair work, the contractor pays tax on materials and does not charge the customer tax.
Is construction labor taxable?
In many states, labor to build or improve real property is not taxable, but Washington taxes construction services as retail sales.
Is new home construction taxable in Texas?
Under the Texas Comptroller’s guidance, contractors do not charge customers sales tax on new construction under either a lump-sum or a separated contract.