Winning a project in a new state can create growth opportunities for a construction company—but it can also create tax obligations before the project generates significant revenue or profit.
Unlike businesses that simply ship products across state lines, contractors often bring employees, equipment, materials and revenue-producing activity directly into another jurisdiction. Those activities can trigger state and local tax requirements involving sales and use tax, income tax, payroll withholding, unemployment insurance and local registrations.
That is why state and local tax (SALT) considerations should be addressed before a bid is finalized and crews mobilize, not after the project is underway.
Construction tax rules vary significantly by jurisdiction.
A contractor may be treated as the consumer of building materials in one state but as a retailer required to collect tax from the customer in another. The tax treatment can also change depending on whether the work involves new construction, repairs, remodeling or installation.
For example, Illinois generally treats contractors that permanently incorporate materials into real estate as the end users of those materials. Texas can treat incorporated materials differently depending on whether a contract is lump sum or separated. New York distinguishes qualifying capital improvements from taxable repair and maintenance work.
These differences can directly affect the cost included in a bid and how tax is ultimately paid or collected.
Contractors should also determine whether their activities create tax nexus in the project state.
There is no universal rule allowing a company to work in another state for a certain number of days or earn a specific amount of revenue without creating tax obligations.
Employees working at the jobsite, equipment located in the state and other physical business activities can all contribute to nexus. Once nexus exists, the contractor may face registration, income or franchise tax filings and other compliance requirements.
The better pre-bid question is not simply, “How much revenue will we earn in this state?”
Instead, ask: What activities will we perform there, who will perform them, what property will we have there and for how long?
Sales and use tax is often the issue with the most immediate impact on project pricing.
Contractors should determine:
Customer exemptions also require careful review. A government agency, school or nonprofit may be exempt from tax, but that does not necessarily mean every purchase the contractor makes for the project is exempt.
Required certificates and purchasing procedures should be established before materials are ordered and subcontractors begin work.
Mobilizing a project can create obligations beyond sales tax.
Employees working across state lines may trigger payroll withholding and unemployment insurance requirements. Temporary-work exceptions vary by state, so contractors should not rely on a universal day-count rule.
Equipment can create additional issues. Moving cranes, trucks, excavators or other assets into another state may trigger use tax depending on whether tax was previously paid, how long the equipment remains in the state and the destination state's rules.
Contractors should also look below the state level. Some municipalities impose their own sales taxes, registrations or business-license requirements. Being registered with a state does not necessarily mean a company is fully registered everywhere it plans to work.
These issues are not simply compliance concerns. They can change project economics.
If a contractor is responsible for tax on construction materials, that cost may arise as materials are purchased—well before all related contract revenue has been collected.
Other jurisdictions may require the contractor to collect and remit tax from the customer instead.
Some business taxes can also apply regardless of profitability. Ohio's commercial activity tax, for example, is based on taxable gross receipts rather than project-level net income.
Knowing these obligations before the contract is signed can help contractors price projects more accurately and forecast when tax-related cash outflows will occur.
Before submitting a bid for work in another state, contractors should consider several questions:
Once the project begins, those conclusions should be documented so accounting, payroll, purchasing and project-management teams know how the job should be handled.
The analysis should also be revisited if the project changes significantly—for example, if employees remain longer than expected, equipment stays in the state, the scope of work changes or additional subcontractors become involved.
Crossing a state line does not automatically make a construction project a tax problem. It should, however, trigger a tax review.
Addressing SALT during estimating can help contractors build the correct costs into their bids, protect projected margins, anticipate cash-flow requirements and reduce the risk of unexpected tax obligations after the work is complete.
Porte Brown's State and Local Tax professionals can help construction companies evaluate nexus, sales and use tax exposure, multistate filing requirements and other tax considerations when entering new jurisdictions.
Planning work in a new state? Contact Porte Brown to discuss the state and local tax considerations that should be evaluated before your next project moves forward.
Get in touch today and find out how we can help you meet your objectives.
