Over the last few years, the recession has caused many construction companies to step out of their comfort zones just to stay competitive. For some, this means taking on larger projects or new types of work. For others, it means expanding into other states or even exploring international options.

If you do business in several states, it’s critical to understand how each state’s sales and use tax laws will affect your business. Please note: Multistate tax issues are complex — particularly in the construction industry — so a detailed explanation is well beyond the scope of this article. Our intention here is to help illustrate the importance of examining these issues before you bid on an out-of-state project.

Know your costs

As you know, accurate estimates are essential to a contractor’s success. One mistake can make the difference between a profitable job and a loser. Before you take on work in another state, it’s important to understand how that state’s tax laws differ from those in your home state.

Getting a handle on multistate tax issues will help you avoid underestimating your tax costs on a job. It may also help you identify opportunities to reduce your tax bill.

Avoid the traps

Sales and use tax laws and regulations can vary widely from state to state, and these differences can create traps for the unwary. In most states, contractors are treated as the ultimate consumers of building materials that are incorporated into a construction project. This means that the contractor pays sales or use tax on its materials purchases and treats those taxes as a cost of doing business that’s passed on to the customer.

In a handful of states, however, construction services are subject to sales tax. In those states, the contractor collects sales tax from its customer on the gross proceeds under the contract. Because the customer is treated as the ultimate consumer in these states, the contractor’s materials purchases are tax-exempt.

Many states also require contractors to collect sales tax from their customers under “retail sale plus installation” contracts. These are contracts under which materials are separately described, itemized and priced. The customer receives title to materials (and assumes the risk of loss) when they’re delivered to the job site.

Understand the differences

States also differ in their treatment of contracts with tax-exempt entities. All sales to the U.S. government are tax-exempt, while many states also exempt sales to certain state and local government agencies and certain not-for-profit organizations.

In some states, provided certain requirements are met, a contractor that purchases materials for a contract with a tax-exempt entity can take advantage of the customer’s exemption and avoid sales and use taxes altogether. In others, materials are tax-exempt only if the entity purchases them directly. In those states, you may be able to avoid taxes by having your customer supply the materials rather than purchasing them yourself.

Plan carefully

If you’re expanding the geographical reach of your business to other states, plan carefully to ensure that you estimate your costs accurately. Only by familiarizing yourself with the tax laws in these states can you determine whether you’ll need to collect sales and use taxes from your customer, pay the tax yourself and incorporate the cost into your bid, or take steps to qualify for an exemption.

As mentioned above, this article is meant to provide just a few examples of the risks and opportunities associated with multistate sales and use taxes. Your tax advisor can help you deal with the many complexities involved, as well as provide assistance with multistate issues associated with other taxes, such as income and franchise taxes.