Sales tax on materials
Sales tax on materials is the tax owed on construction materials, whose treatment varies by state and by project and is a common source of inconsistent bids.
Also written as material sales tax, sales and use tax.
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Reviewed by Eric Collin · President and Founder of Firmo Construction, 20+ years in preconstruction and bid evaluation
The rules genuinely differ by jurisdiction. In some states the contractor is the consumer and pays tax on its purchases; in others the work is taxed as a sale to the owner. Rates vary by locality, and use tax can apply to materials bought elsewhere and brought in.
Exemptions complicate it further. Public agencies, schools, hospitals, and certain nonprofits are exempt in many states, sometimes through a direct purchase arrangement in which the owner buys the materials to avoid the tax. Whether a given project qualifies is a question of fact, not of practice.
For comparison the failure mode is simple and expensive. One bidder includes tax, another excludes it as "tax exempt project assumed", and on a large material package the difference is several percent — enough to invert an apparent ranking on its own. This is worth checking on every package rather than sampling.
The safest instruction is to state the treatment in the invitation to bid rather than leaving each bidder to assume. An invitation that names the tax status removes an entire class of leveling adjustment before it can occur.
- Invitation to bid
An invitation to bid is the notice sent to selected contractors asking them to price a defined scope, stating what is being bid, on what terms, and by when.
- Bid leveling
Bid leveling is the process of adjusting subcontractor bids onto a common scope so their prices can be compared like for like.
- Exclusions
Exclusions are the items a bidder states are not included in its price.
- Prevailing wage
A prevailing wage is the minimum hourly rate and fringe benefits that must be paid to workers on certain public construction projects, set by government determination for each trade and locality.
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