Sales Tax on Construction Materials: A Guide for Minnesota Contractors

One of the most common surprises for contractors is how sales tax works on materials. The short version for Minnesota: on a typical construction job, you pay the sales tax when you buy materials, and you do not charge sales tax to your customer. Here is why, and where the exceptions are.

Contractors are the final consumer of materials

In Minnesota, a contractor who builds, remodels, or repairs real property is generally treated as the final consumer of the materials that become part of the job. Lumber, concrete, wire, pipe, and fixtures that are permanently attached to a building or the land are taxed when you buy them.

That means on a typical lump-sum or time-and-materials improvement to real property, you pay sales tax to your supplier and build that cost into your price. You do not add sales tax as a separate line on your customer's invoice. The Minnesota Department of Revenue's fact sheet for contractors covers this in detail.

When you owe use tax instead

If you buy materials without paying Minnesota sales tax, for example from an out-of-state supplier or online seller that does not collect it, you generally owe use tax on those materials. Use tax is the same rate as sales tax, and you report and pay it to the Minnesota Department of Revenue yourself. If you regularly owe use tax, you need a Minnesota tax ID to report it. This is an easy one to miss and a common finding in audits.

Do not forget local taxes

Minnesota's state sales tax rate is 6.875%, and many cities and counties, including Duluth, add a local sales tax on top. When materials are used on a job in an area with a local tax and you did not pay that local tax when you bought them, you may owe local use tax for that area. Rates and local taxes change, so check the Department of Revenue's rate lookup for each job location.

Exceptions worth knowing

• Selling materials without installing them. If you sell materials or equipment to a customer as a retail sale, you generally collect sales tax from the customer like any retailer.
• Items that do not become part of the real property. Some contracts include goods that stay movable after the job, such as certain appliances or furniture. Those can be treated as retail sales, where you collect tax from the customer. How the contract and invoice are written matters.
• Exempt entity projects. Working for a tax-exempt customer does not automatically make your materials tax-exempt. Some exempt entities, including many local governments, can have materials bought tax-free for their projects when the contract is set up correctly and you have the right exemption paperwork before you buy. Confirm how the project is structured before you bid.

Costly mistakes to avoid

1. 1Charging customers sales tax on a construction contract when you already paid tax on the materials. Your customer pays twice, and you may owe the state the tax you collected anyway.
2. 2Not budgeting tax into bids. If sales tax on materials is not in your estimate, it comes straight out of your margin.
3. 3Missing use tax on online and out-of-state purchases.
4. 4Ignoring local taxes when the job is in a different city or county from your office.
5. 5Buying tax-free for an exempt project without the paperwork. If the exemption does not hold up, the tax comes back to you.

Working in Florida too?

Florida follows the same basic idea: contractors who install materials into real property are generally the final consumer, so you pay tax when you buy and do not charge it to your customer. The details differ. Florida's state rate is 6%, most counties add a discretionary sales surtax based on where the materials are delivered or used, and that surtax generally applies only to the first $5,000 of a single item. Use tax applies to materials bought without Florida tax. See our page for Florida contractors for more.

How this fits into your numbers

Sales tax on materials is a job cost, and it should show up that way in your job costing and your bids. Getting it right is part of the tax planning we do for contractors in Duluth, across Minnesota, and beyond.