Written for general contractors, remodelers, framers and carpenters, roofers, drywall, masonry and concrete contractors, and kitchen and bath installers in the US, from one-truck outfits to small GCs.
The short version
- Check your state's rule for this work.It turns on the state and the job: new or remodel, residential or not. You may pay tax on materials, or collect it.
- Choose lump-sum or separated before you price.The contract type can change who owes the tax. In Texas, a separated contract on new or residential work makes you the retailer of materials.
- Put the tax treatment on every estimate.Name the contract type that supports it. If the contract does not let you collect the tax, it comes out of your pocket.
Sales and use tax on materials is the trap audits find in construction. A contractor can be the consumer of its materials, paying tax when it buys them, or the retailer, collecting tax from the customer, and labor can be taxable or not. Which applies depends on the state, the type of work and how you write the contract, so state the treatment on every estimate.
Texas
On a lump-sum contract for new construction or residential remodeling, the contractor is the consumer and pays tax on materials. On a separated contract for that work, it is the retailer of the materials and collects tax on their agreed price. Repairing or remodeling nonresidential real property is taxable on the total charge, labor and materials, whatever the contract type; residential repair and new construction labor are not taxable. The combined state and local rate is capped at 8.25%. As of Oct 2026.
34 Tex. Admin. Code secs. 3.291 and 3.357(b)(2)
California
A construction contractor is the consumer of the materials it installs and pays tax when it buys them, but is the retailer of fixtures it furnishes and installs.
Cal. Code Regs. tit. 18, sec. 1521
New York
A capital improvement is not taxed to the customer, who gives you Form ST-124, and you pay tax on the materials. Repairs and maintenance are taxable services. As of Oct 2026.
New York Tax Law sec. 1101(b)(9)
Florida
A contractor improving real property is generally the consumer of the materials and pays tax on them.
Fla. Admin. Code r. 12A-1.051
| Labor billed to remodel the restaurant | $150,000 |
| Sales tax at up to the 8.25% combined cap | $12,375 |
| Labor plus tax at the cap | $162,375 |
| Tax at risk on the labor if the full 8.25% cap applies, plus interest | $12,375 |
$150,000 x 8.25%: the most on the labor alone, because the combined rate where the job is may be lowerTax is due on the total charge, so any materials billed on the job with no tax add to the amount at risk. Collect from the customer where the contract allows, and have a CPA confirm the position.
In Texas, a nonresidential remodel is taxable on the whole charge, labor included, and residential remodel labor is not. If the contract does not let you collect the tax, it comes out of your pocket.
Long jobs and your income tax
Long-term contracts
A contract to build or install that is not finished in the tax year it starts must generally use the percentage-of-completion method. For contracts entered into in taxable years beginning after July 4, 2025, all residential construction contracts are exempt, and other contracts expected to finish within 2 years may use the completed-contract method if you meet the gross receipts test ($32 million average for tax years beginning in 2026). Changing method needs Form 3115. As of Oct 2026.
IRC sec. 460; sec. 448(c); Rev. Proc. 2025-32
Your financial statements follow ASC 606, usually the cost-to-cost method, and that is what sureties and banks read. Your tax method can differ, so keep the reconciliation between the two.
State the sales tax treatment on every estimate, with the contract type that supports it, so the price and the paperwork tell the same story if the job is ever audited.
Asked in Greymill
The rule: repairing or remodeling nonresidential property is taxable on the total charge, labor and materials, whatever the contract type. Residential repair and new construction labor are not (As of Oct 2026).
Tax on the labor: $150,000 x 8.25% = up to $12,375, plus interest if an audit catches it
8.25% is the cap on the combined state and local rate (As of Oct 2026). The rate where the restaurant sits may be lower, so check it. Any materials you bill are taxed too.
The catch: if your contract does not let you collect the tax from the customer, it comes out of your pocket.
So put the tax line on the estimate, covering the whole charge.
I can draft the tax wording for your estimate. Have a CPA confirm the position on this job.
Ask it about your own business
Paste this into Greymill with your own figures, and Tax & Bookkeeping works it through for your business.
I run a construction or building business in [state], in the US. I do [new construction, residential remodeling, commercial remodeling or repairs] and usually write [lump-sum or separated] contracts. Here is a job I am pricing: [describe the work, the property type and the materials]. Tell me who owes sales tax on the materials and the labor, how to word the estimate and contract, and whether my income tax method for long jobs needs a CPA's review.
More for construction and building in the US
- Pricing labor when the wage is only part of what a carpenter costs meWork out the burdened cost of each productive hour, then price for margin, not markup.Read the lesson
- Profitable on paper, but payroll is due before the pay app clearsPayroll goes out weekly while pay apps take 30 to 60 days and retainage waits for completion. A weekly forecast and an honest WIP schedule keep the gap in view.Read the lesson
- Starting a job without the license, permits and notices my state requiresLicensing is set by the state and the city, home improvement contracts carry their own notices, and OSHA's construction rules apply on every site.Read the lesson
- Signing a GC's subcontract without knowing which clauses my state will enforcePay-if-paid, lien waivers, indemnity, retainage and venue clauses work differently in each state. Know which to strike before you sign.Read the lesson
- Paying my crew as 1099 subs when they work like employeesIn California an unlicensed sub doing licensed work is presumed to be an employee, and at the comp audit an uninsured sub's pay is usually added to your own payroll and charged premium.Read the lesson
- Getting prequalified with GCs and public owners instead of chasing platform leadsHomeowners check reviews and your license, GCs check your financials, bonding and safety record, and public owners check registration and bonds.Read the lesson
- The GC is late paying and I am not sure I still have lien rightsLien rights can be lost in the first weeks of a job with a missed preliminary notice, so check your notices and deadlines before you chase the money.Read the lesson
Open the interactive lesson · Every construction and building lesson · What Greymill knows about the trade
Sources
The primary sources behind this lesson, checked Oct 2026.
- IRC sec.1401 (Tax for contractors: entity, long-term contracts and sales tax)
- IRC sec. 199A as amended by Public Law 119-21 (Tax for contractors: entity, long-term contracts and sales tax)
- Notice 2026-11 secs.2.02(1), 3.03, 3.06 and 3.07; IRC sec.168(k) (Tax for contractors: entity, long-term contracts and sales tax)
- Pub. L.119-21 sec.70430(a) and (c); IRC secs.460(e)(1), 460(e)(6)(B) and 263A (Tax for contractors: entity, long-term contracts and sales tax)
- Rev. Proc. 2025-32 sec. 3 (448(c) amount) (Tax for contractors: entity, long-term contracts and sales tax)
- Form 3115 (Tax for contractors: entity, long-term contracts and sales tax)
- Cal. Lab. Code secs.2750.5, 226.8, 2781(a) to (h) (Hard cases: tax, people and site)
- IRS Backup Withholding, "What is backup withholding?" and payments subject to withholding; Instructions for Form 945, backup withholding (Hard cases: tax, people and site)
- secs. 440.02, 440.107(7) (Hard cases: tax, people and site)
- sec. 1926.652; OSHA memo May 21, 2026 (Hard cases: tax, people and site)
- 34 TAC sec. 3.357(b)(2) (Hard cases: tax, people and site)
- IRS FS-2026-13 Topic A Q1 to Q2, Topic C Q6 and Topic E Q10 (Hard cases: tax, people and site)
- Bus. and Prof. Code sec. 7030.5; Fla. Stat. sec. 489.119(5)(b) (Deliverables in house style)
- sec. 7159; GBL sec. 771; Fla. Stat. sec. 489.1425; Tex. Prop. Code sec. 53.255 (Deliverables in house style)
- G702-1992 and G703-1992 (Deliverables in house style)
- Civ. Code secs. 8132 to 8138; Tex. Prop. Code secs. 53.281 to 53.287; Fla. Stat. sec. 713.20 (Deliverables in house style)
- Form WH-347 (Deliverables in house style)