As we’ve previously discussed, sales and use tax compliance for construction contractors can be nuanced and complicated. Pennsylvania-specific issues are complicated enough, but what happens when contractors cross the border to work in another state?
Whether you are seeking to expand your geographical footprint or are pulled into another state because of a relationship with a customer or another contractor, it likely won’t surprise you to read that performing jobs outside Pennsylvania adds another level of sales/use tax complexity to your business. Because of the variation in laws among the states, no one article can give you all the answers you need, but here we will mention several issues construction contractors should keep in mind as they perform jobs outside Pennsylvania.
Projects may not be characterized the same.
It is important to know whether the work you are doing in Pennsylvania is a real property contract or sale of tangible personal property with installation. It is just as important to be able to let go of that characterization in your mind when you cross a state border, as the same job might be treated differently for sales/use tax purposes outside Pennsylvania. For instance, cabinetry is presumed to be real property in Pennsylvania, but Maryland regulations say cabinetry installed in a commercial space is generally personal property. Therefore, you would typically have to pay tax on your materials in Pennsylvania, but charge tax on your selling price in Maryland for the same job.
Where your job materials are shipped makes a difference.
It would seem that where you are performing a job is where you are using the materials for that job. But sales/use tax laws have a very broad definition of “use” for determining where tax applies. For instance, performing a job in Delaware is great because Delaware does not have sales/use tax. But if you have job materials shipped to you in Pennsylvania and then take them across the border, you may owe Pennsylvania sales/use tax on those materials solely because you received them here. If you want to avoid tax on the Delaware job, you’ll need to have the materials shipped directly to Delaware.
Exemptions are not consistent across the states.
It is often presumed that jobs performed for nonprofit organizations or governmental entities are universally exempt from sales/use tax. But this is simply much too broad of a brush stroke. If you perform jobs in Pennsylvania for public charities or governmental entities, you are probably familiar with the limited exemption for building machinery and equipment. But even that limited exemption doesn’t always hold true outside the state. For instance, Virginia law does not provide an exemption for materials purchased by a contractor for use in a contract with a governmental entity.
As you can see, the differences among the states could lead to costly errors if one were to presume sales/use tax rules like Pennsylvania’s apply in other states. In addition, there are other issues to consider when performing jobs in other states, like business registration, contractor licensing, workers’ compensation, employee withholding tax, bonding, etc.
RKL’s State and Local Tax team can help construction contractors get ahead of these issues and avoid unexpected back-end costs on a job that erode their profitability.