A Pennsylvania Sales and Use Tax Guide for Construction Contractors and Repair Persons
Contractors and construction developers always face an uphill battle in their sales and use tax compliance because of the potential to engage in activities that have different tax outcomes. Pennsylvania’s sales and use tax rules live up to this billing, which is why we created a guide to aid CPAs and business owners in understanding how these rules may apply to a contractor’s business. We explain key issues, including:
- Who needs a Pennsylvania Department of Revenue (PDOR) license.
- How the state distinguishes certain construction-related activities.
- The common pitfalls that can lead to an audit or assessment for a real property contractor.
Do Contractors Need a Pennsylvania Sales or Use Tax License?
Contractors in Pennsylvania could need one or both types of licenses issued by the Department of Revenue depending on the nature of their business. You may need a use tax license if you purchase materials and supplies from vendors not required or licensed to collect and remit tax. Likewise, a sales tax license may be necessary if you engage in sales activities that do not qualify as exempt improvements of real property, which would require you to collect and remit sales tax from customers.
Should Contractors Charge Pennsylvania Sales Tax for Construction Activities that Improve Real Property?
Pennsylvania sales tax does not apply to construction activities that involve the permanent attachment of tangible personal property to realty. This means contractors do not charge their customers or clients for sales tax, no matter the type of contract or invoice used (e.g., lump sum, cost plus, time and materials, etc.).
However, contractors must generally pay tax on the items they consume or transfer while fulfilling construction activities on real property. Additionally, contractors must be careful to distinguish nontaxable construction activities from taxable sales activities. We cover both issues in more detail in the below sections.
For a list of items Pennsylvania’s Code considers as construction activities, see 61 Pa. Code Section 31.11. Definitions.
Contractors Must Pay Pennsylvania Sales or Use Tax on the Materials and Supplies Consumed in Construction Activities
While contractors in Pennsylvania do not charge sales tax to their customers on construction activities, they must pay sales or use tax for the materials and supplies they buy, rent, or consume to complete a project. You will usually pay the sales tax to the supplier at the time of purchase or lease.
See 61 Pa. Code Section 31.12. Imposition of Tax.
Are There Pennsylvania Sales Tax Exemptions for Contractors or Their Customers?
Pennsylvania does not generally allow contractors to claim exemptions on their purchase of materials, supplies, and equipment for construction activities, even if the ultimate customer is a tax-exempt organization such as a government agency, public utility, school, charity, or church. However, contractors who perform taxable sales activities (i.e., non-improvements to real property) may accept exemption certificates from customers not subject to Pennsylvania sales tax.
See 61 Pa. Code Section 31.13. Claims for Exemptions.
Does It Matter Where You Buy Materials and Supplies for Paying Tax on Pennsylvania Construction Activities?
The location of your supplier and the location of your customer could affect the amount of tax you owe as well as the type of tax you must remit to the Department of Revenue (i.e., sales or use tax). In addition to Pennsylvania’s base rate of 6 percent, Philadelphia and Allegheny counties have a local rate that could apply to your purchase/use of materials in those places.
You may also need to consider out-of-state construction activities that could influence the payment of Pennsylvania sales and use tax. If you purchase or lease items in another state but use them for construction activities in Pennsylvania, you will generally owe use tax on their value.
What Contractor Sales Activities Are Subject to Pennsylvania Sales Tax?
Pennsylvania’s tax laws may consider some of your construction activities to be taxable sales activities, means you may need to collect and remit sales tax to the Department of Revenue. Taxable sales activities are either (1) retail sales of tangible personal property, or (2) the repair, maintenance, or installation of tangible personal property. Some examples of contractor work Pennsylvania presume to be sales activities includes the following:
- Free standing cabinets
- A/C units
- Appliances
- Cloth awnings
- TV monitoring systems
- Other commercial equipment commonly used in the medical, recreational, entertainment, and restaurant industry.
For a full list of items Pennsylvania’s Code considers as sales activities, see 61 Pa. Code Section 31.11. Definitions.
How Does Pennsylvania Sales & Use Tax Work on the Property a Contractor Makes?
Some contractors build the tangible personal property they later transfer to a customer as a part of a construction activity or sales activity. For example, custom built cabinetry. Whether the contractor uses the property in a construction or sale activity is what determines the sales and use tax consequence.
As a sale activity, the contractor will collect and remit sales tax on the purchase price of the item, but the contractor can claim a manufacturing exemption on the operation (i.e., for the raw materials and equipment used). However, self-manufactured items used in a construction activity will trigger the contractor’s obligation to pay use tax based on the acquisition cost of the raw materials.
Pennsylvania Sales & Use Tax Issues for Contractors That Could Lead to an Audit
Depending on the scope of your construction or contractor services, the proper collection and payment of Pennsylvania sales and use tax could be your biggest administrative challenge. Some of the biggest issues and traps we see contractors fall into are:
- Misclassifying the work as a construction activity or sales activity.
- Not paying use tax on materials and equipment bought or leased from a vendor in another state, such as through an online retail.
- Not applying for available credits or refunds for sales tax paid in another state on your supplies and equipment.
- Charging sales tax to customers on construction activities.
- Not applying local sales and use tax rates for work and services in certain Pennsylvania counties.
- Purchasing sale activity items with a resale certificate and not paying use tax when consumed in a construction activity.
Check out our Pennsylvania Sales Tax Audit & Assessment Guide for more information about key administrative processes with the Department of Revenue.
Pennsylvania Contractors That Need Sales Tax Help with Audit Defense or Assessment Appeals
If you have concerns about the above sales and use tax issues for Pennsylvania contractors, it may be time for a consultation with a sales tax professional. Our team helps business owners and their CPAs with difficult sales tax compliance questions, especially in complicated industries like construction. If you recently received notice of an audit or assessment from the PDOR, Sales Tax Helper, LLC is available to serve as a representative to manage the audit process and dispute improper assessments.
Contact us for a consultation.