3 Ways to Apply Sales Tax on Solar Projects - PVBid

3 Ways to Apply Sales Tax to Solar Projects - PVBidSolar installers and EPCs are construction contractors.  Yes, we have different specialties, but if you distill it down into existing categories, “construction contractors” generally fits the bill.  Did you know that each state handles sales tax for contractors somewhat differently?  Except in Alaska, Delaware, Montana, New Hampshire, or Oregon – all of which have no sales tax.  That leaves 45 states and Washington DC as places where sales tax applies.

As always, you absolutely must research and understand your local sales tax laws.  To help you along your way, I’ll touch on three different sales tax applications that you need to understand.  Really, it’s two different ways and then a significant subset of both.

What is sales tax?

Most have had this experience: you walk into a store, buy some object for $10 and end up paying more than $10.  You just paid a sales tax.  The store is obligated by the state and local municipality to collect a tax on that $10 item.  The store collects those taxes and remits them to the appropriate government body.

Contractor as the retailer

In some states, the contractor assumes the role of a retailer.  In those cases materials are purchased without paying a sales tax.  Upon sale, a sales tax is assessed. The contractor responsibly adds the sales tax to the charges for the customer and pays the appropriate government body.  Simple, right?  e

Keep in mind, you likely will have to pay sales tax on the total price of the materials.  The language in your contract can sometimes affect what constitutes the total price too.

Taxable amount: material cost + your markup.

Again, this depends heavily on where you are operating. Your research is required.  Each state defines taxable “materials” differently.

To complicate it more, at least one state applies the sales tax depending on the location of the delivery of materials.  If the modules are delivered to a site, then the local site’s sales tax applies. If the modules are delivered to the solar installer’s warehouse, then the sales tax local to the warehouse applies.  Geez.

Contractor as the consumer

Other states treat the contractor as a consumer: at the time of the first purchase the sales tax is collected.  These include Massachusetts, Maine, Nevada and Tennessee. In this case the contractor isn’t invoicing the end user.  Instead the tax amount is embedded in the cost of the solar PV system.  I might add, California is a beast of its own.

Taxable Amount: material cost

In theses states, you may also have to remit sales tax for the product constructed.  This brings up the debate “to markup tax or not to markup sales tax”. I’m not weighing in here, that’s up to you.  Ultimately, because your solar contract has already embedded the sales tax, you have the privilege to determine what is appropriate according to local laws.

Labor, the curve ball

Last I checked, 14 states have some sort of sales tax on labor.  The best way I’ve heard it stated: Some states tax specific services as stipulated in their own local laws. The extent of each state and what qualifies varies.  For instance, the “service” of new construction or residential remodeling is exempt from the labor tax in Texas while in New Jersey the construction labor is exempt if the resulting product qualifies for capital improvement on an existing structure.

Where does Solar fit in?

As you can see from all these different rules throughout the country, the installation of solar varies from state-to-state and from type (utility solar, commercial & industrial solar, or residential solar).  That’s why you will absolutely need to review your state’s rules as they relate to what you do.  At least now you have a good idea of the different structures so you can make sense of your local rules.

I’d love for you to take the opportunity to share notes.  In the comments section below, tell us the state you operate your business in and how that state applies sales tax.  Your estimates and bids should reflect that structure.  I know PVBid can do it.  Make sure you update your spreadsheets to do it right too.  That might be affecting your margins.

The legal part

I am not a Certified Professional Accountant (CPA).  I have written this article to help you gain awareness but it does not constitute any legal advice.  We strongly advise you to seek assistance from a CPA familiar with your location and the tax laws that relate.  Connor English and PVBid are in no way responsible for any decisions you make based on the information in this article.  However, we do hope it helped you understand concepts that might apply to you!