Sales Tax for Builders—Demystified

In our day to day lives, the issue of sales tax is pretty straightforward. You go to a shop and pay the price of the product plus the associated tax levied by the state and (sometimes) local government. As the end user of that product it’s relatively clear. As a business owner, however, it can get a little confusing—particularly if you’re a builder. If you find yourself wondering when and in what situations to collect sales tax, and you’re a Massachusetts-based builder, you’ve come to the right place. This brief post summarizes the key elements of the rules regarding sales tax, use tax, and where to go for additional information.

To begin, let’s establish the rules that Massachusetts dictates around sales tax and use tax.

Generally speaking, sales tax is imposed on retail sales of tangible personal property. Meaning that if you, the purchaser, buy an item for your own use in Massachusetts, it’s taxable. Currently, Massachusetts imposes a 6.25% sales tax; some local governments apply additional taxes to this base.

Use tax functions similarly, and are imposed on the “storage, use or other consumption in Massachusetts of tangible property… purchased from any vendor or manufacturer… from outside of Massachusetts.” As a handful of states do not impose a sales tax (New Hampshire being one) the use tax, in theory, is designed to make in-state vendors competitive with out-of-state sellers who operate with a different set of sales tax rules. While use tax aims to address an important issue, it is difficult to ensure compliance, as it requires the purchaser to track and self-report.

As a builder in Massachusetts sales tax liability is determined by the type of work being performed. In other words, some types of projects may require registering as a vendor with the Department of Revenue and collecting sales tax, while other projects might not. The key issue in this determination is the concept of an end user. The end user is the one who consumes the product. In Massachusetts, “contractors and subcontractors who construct, reconstruct, alter, improve, and/or remodel and repair real property [are] the consumer of the tangible property… [as they] perform the services of the contract.” In other words, if you are buying materials and supplies to use in the fabrication, repair or reconstruction of real property, you are the end user and pay sales tax at time of your purchase. And, if as the contractor you choose to incorporate the cost of sales tax in your customer charges, that is a matter between you and your client and does not involve the Department or Revenue.

There are however important caveats here. If, for one, as a Massachusetts-based builder, you purchase and install a “complete unit of tangible property… and no services other than installing, or connecting is required,” you would not be considered the end user—in fact, you would be the vendor. One common example here is finished cabinetry: if a builder installs pre-designed cabinets the Department of Revenue would consider them the vendor, requiring that they apply sales tax to the transaction, collect the tax, and remit it to the state. For many builders and remodelers, this scenario may occur from time to time.

Additionally, purchasing and installing completed units of tangible property could occur along side work constructing or remodeling. For example, a builder lays out, digs and pours footings for a shed, and then purchases a completed shed from a manufacturer. In this hybrid situation, the builder is the end user of the materials used in constructing the groundwork, but the shed itself on the other hand, is sourced by the contractor in their role as a vendor—requiring that sales tax be applied and charged to the client.

As is obvious here, there is quite a bit of nuance in determining when a contractor is considered an end user and those situation where they may be a vendor. Getting it right is critical. And it all starts with correctly tracking all of your business’s transactions. As a bookkeeping service that works only with builders, we at Co|Constructors are in a unique position to help. We understand the rules around sales tax and the best way to track sales tax liabilities using Quickbooks Online. We will work with your CPA to ensure tax compliance. And, if you’re not currently working with a CPA we can recommend one. For additional insights call 413-597-8929 to schedule a free consultation.

Note: The content provided in this post is intended for informational purposes only and does not constitute accounting, tax or legal advice. Those seeking guidance on the particulars of their sales tax situation should consult their accountant, CPA or financial advisor. A link to the Massachusetts Department of Revenue can be found here: https://malegislature.gov/Laws/GeneralLaws/PartI/TitleIX/Chapter64I