Navigating Multistate Tax Compliance

As construction contractors increasingly take on projects across multiple states, they encounter a complex and often bewildering web of state and local tax (SALT) rules. These rules go beyond income tax, impacting day-to-day operations and even project profitability. State taxes — including income tax, sales tax, use tax and the concept of “nexus” — can create significant challenges, especially for businesses accustomed to operating primarily in one geographic region.

Understanding these taxes, how they’re triggered and what steps contractors can take to stay compliant is essential. Mistakes can lead to costly penalties, interest and even reputational damage. We explore the major SALT challenges facing contractors in multistate operations and offer strategies to help you manage your risk and responsibilities.

What Is Nexus & Why Does It Matter?

Nexus is a tax term used to describe the level of business activity or presence a company has within a state, which creates an obligation to comply with that state’s tax laws. For construction contractors, nexus is most often triggered by activities such as establishing a jobsite, sending employees to work in a state, leasing or storing equipment, or maintaining an office or warehouse.

While some states have “bright-line” rules, which are clear, objective standards that establish whether a business has nexus, others rely on more subjective criteria. Even temporary or small-scale projects can trigger nexus, requiring registration for sales, use, income or other business taxes.

States are becoming aggressive in identifying out-of-state contractors working within their borders. They may use permit applications, public records and jobsite visits to identify companies with unregistered tax obligations. It’s important for contractors to recognize that nexus can be established even without a permanent or formal presence.

It is important to keep in mind that, as easy as it is to create nexus with the various states, contractors can just as easily create nexus with the city/county where the job may be located. Like states, some cities and counties might impose their own income tax filings or business license filings. It is important as a multistate contractor to know the tax filing requirements for not only the state where the job is located, but also the city and county.

Sales Tax

Sales tax is imposed on the sale of tangible personal property and, in some states, certain services. For contractors, sales tax issues arise at multiple points:

Purchasing Materials

In most states, the contractor’s purchase of materials for incorporation into a project is taxable. Contractors are typically considered the “end user” and must pay sales tax on materials at the time of purchase. However, in some jurisdictions, if the contractor is acting as a retailer or passes materials directly to the customer, they may be required to collect sales tax from the customer. There are several states that will look at the type of work being performed — new, remodel or repair — and the project’s taxation might change based on this determination.

This determination can completely change whether the contractor is considered the end user or if the contractor must collect sales tax from the customer. It is important to know these rules before entering a contract so that the proper tax treatment can be built into the bid.

Services Provided

In a minority of states, construction and installation services themselves are taxable. This can include labor for installation, repair or remodeling. Contractors must understand whether their service offerings fall under 
taxable categories.

Subcontractors

Relationships with subcontractors can complicate sales tax compliance. If a subcontractor purchases materials, it is important to determine who has the tax obligation — often, the general contractor may be responsible if they reimburse or pass materials through.

Sales tax rates and rules vary by state and even by locality, with some cities or counties imposing their own additional taxes. Contractors must verify not only state-level requirements but also local regulations for every project site.

Use Tax

Use tax is designed to complement sales tax. It applies when goods are purchased without sales tax (often from out-of-state vendors) but are used, stored or consumed within the taxing state. For contractors, use tax is often triggered in situations such as:

• Purchasing materials in a state with no sales tax (or a lower rate), then transporting those materials into a state with a higher tax rate for use in a project
• Leasing or moving equipment across state lines
• Buying supplies from online retailers who do not collect sales tax on the contractor’s behalf

Failure to pay use tax is a frequent cause for assessment during state audits. Many contractors are unaware that they need to self-assess use tax and remit it. States are scrutinizing contractor records, looking for purchases where sales tax was not paid and use tax should have been.

Complications With Exemptions & Certificates

Certain sales may be exempt from sales tax, such as purchases made for resale or on behalf of tax-exempt entities. Contractors can use resale certificates or exemption certificates in these cases. However, misuse or misunderstanding of certificates is a common source of penalties.

Resale Certificates

These should be used when materials are resold without being used or consumed by the contractor. For most construction work, contractors are considered end users and resale certificates generally do not apply.

Exemption Certificates

If working for a nonprofit or government entity, contractors may be able to claim exemption from sales tax on materials. Documentation must be maintained and verified. This can be a major sticking point for contractors, who need to be aware whether they are eligible to use the exemption certificate of a nonprofit in the state where the project is located. Often, there are very strict rules that might prohibit the pass-through of a nonprofit’s exemption certificate to the contractor.

States are vigilant about misuse. Improper use of certificates can result in penalties, interest, and even the loss of licenses or the ability to bid on public contracts.
 

Recordkeeping & Documentation

Maintaining accurate records is vital for SALT compliance. Contractors should track the following:

• Where materials are purchased and where they are delivered or used.
• Copies of invoices, certificates, permits, and correspondence with vendors or customers.
• Locations of equipment, vehicles and employee work assignments.
• Details about project sites and durations.
• Copies of any exemption certificates upon which they are relying.

Robust recordkeeping provides a strong defense in case of audit and helps ensure proper reporting and payment of taxes.

Strategies for Managing Multistate Tax Compliance

Assess Nexus Before Each Project

Before starting work in a new state, evaluate whether your planned activities will trigger nexus. Register with the state tax authority if required and obtain all necessary permits and licenses.

Understand Local Tax Rules

Review sales tax, use tax and income tax regulations for both the state and locality where you’ll be working. Some 
local jurisdictions have unique requirements or rates.

Coordinate Purchases & Logistics

Plan material and equipment purchases with tax implications in mind. Where possible, buy materials in-state to avoid use tax complications, or factor in tax costs to your bidding and budgeting process.

Train Employees on Compliance

Ensure all staff involved in purchasing, accounting and project management understand state tax requirements. Regular training and updates are essential, as tax laws change frequently.

Utilize Technology

Leverage accounting software and project management tools to automate compliance tracking, recordkeeping and reporting for multistate projects.

Engage SALT Experts & Advisors

Work with a CPA or tax advisor who specializes in multistate operations and the construction industry. They can help you identify risks, optimize tax savings, and respond to audits or notices.

Review Exemption & Certificate Use

Ensure that any use of resale or exemption certificates is valid and supported by documentation. Periodically audit certificate usage to minimize errors.

Monitor Legislative Changes

State and local tax laws are always evolving. Stay informed of changes that may impact your business, especially regarding nexus thresholds and tax rates.

Operating across state lines introduces a host of SALT compliance challenges for construction contractors. By understanding how nexus is established, when sales and use tax apply, and how to properly manage exemptions and documentation, contractors can avoid costly mistakes and keep their projects on track. Proactive planning, collaboration with experts and disciplined recordkeeping are essential to successful multistate tax management.

As the tax landscape continues to evolve, the most successful contractors will be those who embrace compliance as part of their business strategy — ensuring that they can focus on building great projects, not battling tax authorities.