Tax laws are complicated and confusing, and tax laws for construction projects in New York are no exception. As a result, contractors often pay and charge sales tax where such taxes are not imposed and property owners end up paying more for the project than is necessary. It is therefore critical that the owner and contractor have a thorough understanding of the rules governing sales tax on construction projects in order to ensure that the owner is not overpaying for the work.
The general rule is that the sale of supplies and material and the labor performed on construction projects are taxable.1 Thus, absent an exception, a contractor pays sales tax on the purchase of material from a supplier, and subsequently charges sales tax on the material and labor sold to the customer (this is on top of the tax paid by the contractor to the supplier that is incorporated into the cost of the material charged by the contractor to the customer). Although these charges add appreciably to the cost of construction, there are exceptions to the general rule that allow the owner to avoid sales tax for certain charges. The most pervasive of these exceptions is one that applies to projects deemed capital improvements.
Capital Improvement Projects
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