How do contractors handle sales tax on materials versus labor in New York?
Contractors in New York always pay sales tax when purchasing materials at the supplier. That part is straightforward. The confusing part is what happens when you bill your customer.
Whether you charge the customer sales tax depends on the type of work you’re doing. The distinction comes down to capital improvements versus repair, maintenance, and installation.
A capital improvement permanently adds value to real property or extends its useful life. Building a new deck, installing a new HVAC system, or adding a room counts as capital improvement. For these jobs, the customer does not pay sales tax. You’ll need to collect a completed Form ST-124 from the customer to document the exemption. Keep this form on file because the state will ask for it during an audit.
Repair and maintenance work is different. Fixing a broken window, patching a roof leak, or servicing equipment counts as taxable work. For these jobs, you charge the customer sales tax on the total invoice including both materials and labor.
Here’s something many contractors miss. When you do taxable work, you may be entitled to a sales tax credit for the materials you already paid tax on at the supplier. Tax Bulletin TB-ST-130 covers this. Without the credit, those materials get taxed twice: once when you bought them and again when the customer pays. The credit prevents that double taxation.
Home and property service businesses deal with this constantly. Mixed jobs where you do both capital improvement work and repair work on the same project need to be separated on the invoice. The capital improvement portion stays tax-free while the repair portion gets taxed.
Many contractors get this wrong in both directions. Some never charge sales tax and end up owing the state for taxable jobs they should have collected on. Others charge sales tax on capital improvements when they shouldn’t, making their bids less competitive than they need to be.
Your bookkeeping needs to track job types and sales tax collected so you can file accurately and claim credits you’re entitled to. If you’re handling this yourself, working with someone who understands small business bookkeeping on Long Island can help you set up proper tracking from the start rather than sorting through a mess later.
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