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Sales Tax Implications to Consider in the Construction Contractor Bidding Process – What Activities Are Being Performed Under This Contract?

Reed Brown, CMI
Reed Brown, CMI Director, State & Local Tax

This is part three of a four-part series that will provide insight into sales tax and the bidding process for construction contractors. Read part one here and part two here.

As we continue with a detailed breakout of our series, we will focus on understanding which activities are being performed under a contract.

As previously discussed, most states put construction contractors into one of two categories: 1) performing construction activities, or 2) performing sales activities. The distinction is determined on a state-by-state basis, but most states will look to whether the material or equipment becomes permanently attached to real property.

Under contracts in which tangible personal property is permanently affixed to real property, contractors are considered the ultimate consumer and are responsible for paying sales tax at the time of purchase. When tangible personal property is not permanently attached to real property, contractors are considered to be making the purchase for resale and are responsible for charging sales tax on the sale to the ultimate customer.

It is important to understand the factors each state considers when property becomes permanently attached to real property as well as the rules or tests used to differentiate between tangible personal property and real property. Many states consider whether the removal of the tangible personal property would jeopardize the integrity of the real property. If the removal would jeopardize the integrity of the real property, many states would conclude that the attachment is real property and thus it loses its characterization as tangible personal property.  To demonstrate how states differ in their approach to determining what constitutes real versus tangible property, we will provide a high level review of New Jersey’s and Pennsylvania’s rules.

New Jersey

New Jersey distinguishes real versus tangible property by referring to whether the installation of tangible personal property results in the increase in value or useful life of the real property involved in the transaction. Should this be the case, New Jersey would consider the installation of the property a capital improvement. As a capital improvement, the purchase of the material by the contractor would be taxable unless there was a valid exemption provided by the owner.  There are several unique characteristics regarding the taxation of capital improvements in New Jersey. The first is that New Jersey taxes labor associated with an exempt capital improvement, unless an ST-8 is obtained from the owner. The second unique characteristic is that the exemption of a tax exempt entity will pass through to the contractor and the contractor will be able to purchase all of its materials in connection with a capital improvement without paying sales tax.

Examples of exempt capital improvements include new heating and cooling systems, new hot water heaters, and new doors. New Jersey’s Sales and Use Tax Bulletin provides further detailed guidance and additional examples of what qualifies as a capital improvement.

The installation of tangible personal property that does not result in a capital improvement would be taxable to the customer, unless there was a valid exemption certificate provided by the owner. Labor to install involved in the sale of tangible personal property would also be considered taxable.


Pennsylvania does not provide specific guidelines or use a bright line test to determine which tangible personal property is considered permanently attached or affixed to real property.  Pennsylvania Regulations 1 provides examples of materials that are presumed to become permanently attached to real property upon installation. Some examples include condensers, heating and air conditioning, heating systems, and electrical systems. Items that are not enumerated in the regulations depend upon the character of the item, its ability to be installed and removed, and its effect on the real property and whether or not it maintains its original functionality after being installed. These factors allow Pennsylvania to determine whether the materials purchased constitute real property or tangible personal property.

Like New Jersey, Pennsylvania considers those sales that do not meet the qualifications of becoming permanently attached to real property to maintain tangible personal property characterization. Purchases of tangible personal property that are to be resold in their same form are considered purchases for resale. Sales tax would need to be charged to the ultimate customer unless a qualifying exemption certificate was presented.

While it can be time consuming, it is important to invest the time up front to understand the proper categorization of activities being performed under a construction contract. This will help identify tax responsibilities amongst the parties involved in the contract and will also help identify applicable exemptions, if any, for the sale of tangible personal property.

If you have any questions or would like to discuss this topic in further detail, please reach out to Reed Brown, Manager, Tax Strategies, at Email or contact any member of our State and Local Tax team or our Construction Industry Group.


Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

If your business is seeking accounting expertise and advice, please consider Kreischer Miller and contact us to have a conversation.

Contact the Author

Reed Brown, CMI

Reed Brown, CMI

Director, State & Local Tax

Construction Specialist, State and Local Tax Services Specialist

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