Contractors working in Idaho are subject to Idaho sales, use, and business income taxes, as well as income tax withholding.
A contractor is someone who builds, improves, repairs, or alters real property. The property may be commercial, residential, or for a government entity. Contractors include prime contractors, general contractors, subcontractors, and speculative builders. (Speculative builders build on property they own in anticipation of selling it later.)
Some examples of contractors include: bricklayers, carpet layers, drywall installers, painters, plumbers, electricians, roofers, garage door installers, HVAC contractors, mechanical contractors, landscapers, well drillers, fence builders, window installers, sheet metal contractors, pump installers, installers of plumbing fixtures and water lines, installers of built-in home appliances, road builders, land levelers, and those who perform residential repairs.
Real property refers to land and improvements, including physical items affixed to the land in such a way that they’d be sold along with the land. Fixtures can include items such as lighting or plumbing fixtures, furnaces, boilers, heating or air-conditioning units, refrigeration units, elevators, hoists, awnings, vaults, cabinets, counters, carpeting, garage doors, and water heaters. For example:
- A house, fence, large grain bins, and silos are improvements to the land on which they’re built.
- Light fixtures in a home are attached to the property and are sold along with the home, so they’re included in real property.
Store fixtures are items affixed to a building and used by retailers in conducting their business. This can include: display cases, trophy cases, clothing racks, shelving, modular displays, kiosks, wall cases, register stands, and check-out counters. If store fixtures only benefit the particular business occupying a building, they’re considered personal property. A store fixture is considered a real property improvement only if it’s affixed to the real estate and its removal would cause significant structural damage to the building itself, or if it’s affixed to the real estate and benefits the land or building regardless of the type of business conducted on the premises.
Income tax withholding requirements
Businesses whose officers or employees earn compensation in Idaho must have an Idaho income tax withholding account. Withholding on wages is required for nonresidents who earn over $1,000 in a calendar year, as well as for all Idaho residents. To apply for a withholding account, see our Idaho Business Registration (IBR) Information page. Taxable compensation includes salaries, wages, bonuses, commissions, excessive per diem, etc. Learn more in A Guide to Idaho Income Tax Withholding.
Contractors and sales/use tax: an overview
Idaho sales tax law says contractors are the consumers (end users) of all the goods they use. As a result, they must pay sales tax on all purchases, including all the equipment, tools, and supplies they use to build, improve, repair, or alter real property.
Contractors must also pay sales tax when they buy building materials and fixtures. In Idaho, this includes real property improvements they make to property owned by individuals, businesses, churches, educational institutions, and government entities. Contractors owe tax on the materials they use, even if they don’t resell the improved property.
If a contractor buys or receives equipment and materials on which no one paid sales or use tax, the contractor owes use tax on the purchase. (Use tax is calculated at the same rate as sales tax.) The tax is due as soon as the contractor has the right to use or store the property (or has the right to direct someone else to use or store the property).
Examples of tax owed on the purchase of materials
Example 1: A carpet layer buys carpet tax free and installs it in a new home at the direction of a home builder. The carpet layer can’t charge the home builder sales tax on the retail sales price of the carpet because the carpet layer is improving real property. Since the carpet layer didn’t pay sales tax, the carpet layer must pay a use tax to the state on the purchase price of the carpet.
Example 2: When a carpet seller agrees to sell carpet to a customer and hires a subcontractor to install it in the customer’s home, the seller can’t charge the customer sales tax on the retail sales price of the carpet because the seller is improving real property. The seller must pay a use tax to the state on the seller’s cost for the carpet.
Exemptions from sales/use tax
If a customer is exempt from paying sales tax, the exemption doesn’t carry over to the contractor. The contractor is still responsible for paying sales or use tax on the materials used for the job even if:
- The customer is a government entity exempt from Idaho sales/use tax
- The customer is in an industry granted a sales tax exemption by the Idaho Legislature
- The customer was granted direct pay authority by the Tax Commission (taxpayers with direct pay authority buy tangible personal property exempt from tax and, if tax is due, pay it directly to the state instead of the supplier). A direct pay authorization isn’t transferable.
- The customer didn’t pay sales/use tax on the purchase for any reason
The following exemptions allow contractors to buy materials without paying Idaho sales/use tax:
Out-of-state purchase where sales tax paid equals or exceeds Idaho’s rate:
If a contractor paid tax to another state at a rate equal to or greater than Idaho’s sales tax, Idaho tax isn’t owed on the materials purchased.
A special exemption applies to contractors working in states with no sales tax (e.g., Montana, Oregon, and Alaska). The exemption also applies to contractors working in states that exempt certain real property contracts even though the state has a sales tax. In both cases, contractors don’t have to pay tax on materials delivered to them in Idaho as long as those materials will be incorporated into real property on the job in a state with no sales tax on that job. To claim the exemption, contractors must complete Form ST-101 – Sales Tax Resale or Exemption Certificate and give it to the seller.
This exemption is for contractors who do work for other customers and doesn’t apply to homeowners working on their own property.
Items used in a production process:
Contractors who buy production equipment and parts for that equipment can buy the items without paying sales/use tax as long as the parts and equipment don’t become part of real property. (Tools and equipment used to install production equipment are taxable.)
Contractors who fabricate production machinery for a manufacturer may make tax-free purchases of the materials that become part of the production equipment. They must give the seller a completed Form ST-101.
Contractors who install equipment used in agricultural irrigation, such as pumps and pipes, can buy these materials tax exempt. They must give the seller a completed Form ST-101. However, contractors must pay tax on pumps installed in irrigation systems for non-agricultural applications (e.g., parks, businesses, subdivisions, etc.).
Enrolled member of an American Indian tribe:
A contractor who is an enrolled member of an Indian tribe with a job on the reservation may take delivery of materials on the reservation without owing sales or use tax. However, tax applies if the materials are delivered to an American Indian contractor off the reservation. A non-Indian contractor improving real property on an Indian reservation is usually subject to sales and use tax unless the project is owned by a tribe or a tribal member. Special rules apply to contractors improving real property owned by the tribe or a registered tribal member, where the real property is located on an Indian reservation. Contact the Idaho State Tax Commission’s Tax Research Section for more information on Indian-owned projects.
Contractors who are also retailers
A contractor installs or attaches materials to real property. A retailer sells goods, but doesn’t attach them to the real property.
Many contractors are also retailers. Plumbers, electricians, carpet layers, cabinet-makers, and mechanical contractors, for example, are usually both contractors and retailers. They are contractors when they install materials in the course of a residential or commercial service call or contract; but when they sell items or materials they don’t install, they are retailers and need to collect sales tax from their customers.
Contractors who are also retailers must ensure that the correct tax is paid. Since part of the materials will be subject to tax on cost (when acting as a contractor), and part will be subject to the collection of sales tax (when acting as a retailer), they must keep records that allow the tax to be properly accounted for.
Accounting for the tax
Contractors can follow any consistent procedure that properly accounts for the tax due.
If the majority of their business is in retailing, contractors may want to buy all materials without tax by giving the supplier a completed form ST-101. When they sell goods at retail, they collect sales tax. If materials are installed into real property, they owe use on the cost of the goods.
If the majority of their business involves contracting, contractors may want to pay tax on all materials as they’re purchased. Then, if they install the goods into real property, the sales tax has been paid, and no use tax is due. If they sell goods at retail and collect sales tax from the customer, the contractors can take an adjustment on their sales tax return; they would subtract the tax paid to the seller on the resold items from the tax owed the state. (They must include documents or a letter of explanation with the return to support the adjustment.)
Another commonly used method of record-keeping is maintaining a resale inventory purchased without paying sales tax. Contractors pay use tax when materials are taken from inventory, and they pay sales tax when buying materials for major contracting jobs.
Billing examples for contractors
The contractor as a retailer
A cabinetmaker who builds cabinets and delivers them to another contractor to install in a home is a retailer. (A retailer must get a seller’s permit to collect and pay sales tax.) As a retailer, the cabinetmaker must collect sales tax on the full retail sales price of the cabinets, including the labor to make them. The bill might read:
|Materials to build cabinets||$1,000|
|Labor to build cabinets||$2,500|
|Sales tax on $3,500||$210||(if the tax rate is 6%)|
The contractor as a contractor
A cabinetmaker agrees to build cabinets and install them in a home. The bid for the job includes the cost for labor and materials. The materials cost $1,000. A contractor doesn’t charge sales tax to the customer, so the bid should be high enough to cover any tax paid on materials without itemizing the sales tax on the bid. If the tax rate is 6%, the cabinetmaker must pay $60 sales tax to the material supplier (or, if the supplier doesn’t collect Idaho sales tax, the cabinetmaker must pay $60 use tax to the state). The customer’s bill should include a materials cost of $1,060. The bill might read:
(If sales tax is charged on the bill, the customer can refuse to pay it. If it’s charged in error and paid, the contractor must report and pay the sales tax collected to the state and still must pay tax on the materials.)
The contractor as both contractor and retailer
Contractors bidding on a job with mixed contract services and retail goods must separate these items on their invoice to the customer and charge tax on only the retail portion.
A cabinetmaker contracts to build kitchen cabinets and a freestanding china hutch for a homeowner. When installing the kitchen cabinets, the cabinetmaker is acting as a contractor and owes tax on material costs. However, when building the freestanding hutch (it’s not installed into real property), the cabinetmaker is acting as a retailer and must collect tax from the homeowner on the retail sales price of the hutch (including the labor to build it). The bill might read:
Sales/use tax for contractors in other situations
Working with subcontractors
If a contractor hires a subcontractor to furnish and install materials, the subcontractor is responsible for paying the tax on the materials purchased. If the contractor buys the materials and furnishes them to the subcontractor hired to install them, the contractor must pay the tax on the materials. If the contractor doesn’t do that, either the contractor or the subcontractor can be held liable for the tax.
Contractors who fabricate material for a job
The amount of use tax owed when contractors fabricate material for a job is based on the value of the material at the time it’s first handled for a specific project to improve real property. For example, if a contractor buys steel for a specific job and fabricates it for use on that job, use tax is owed only on the materials purchased.
However, if the contractor fabricates steel and puts it into a resale inventory for future use, use tax is owed on the full value of the fabricated steel when the contractor incorporates it into real property. That value is called the “fabricated value” and includes the cost of the materials plus the fabrication labor.
Contractors working at the Idaho National Laboratory (INL)
Subcontractors who improve real property at the INL must pay tax on purchases for these projects.
Contractors installing fiber optic and communications cable
Installation of fiber optic and communications cable by a contractor is presumed to be an improvement of real property. The contractor must pay tax on all materials used, even if the work is for entities that are exempt from sales tax. However, if the customer notified the contractor in advance that the cable is to be installed only temporarily — for a limited and specific time — the cable then is presumed to be tangible personal property. In such cases the contractor is acting as a retailer and must collect tax from the customer on the sales price of the cable and the labor to install it. A cable purchase also can be exempt from sales tax if the customer provides a valid exemption form ( Form ST-101).
Please contact us if you have questions about whether the cable you’re installing is considered tangible personal property or an improvement to real property.
Contractors applying a protective coating to tangible personal property
The labor charged by a supplier to apply a coating to new tangible personal property is taxable fabrication labor. And if the contractor hires someone to apply a protective coating after the original purchase of uncoated tangible personal property, the labor to apply this coating is also taxable as fabrication labor.
Contractors and crushed rock
A contractor who applies crushed rock or other related real property materials is improving real property. As a result, the contractor who buys this material must pay tax on the purchase price. If this material is provided by the project owner or a government agency (who hasn’t paid tax on the material), the contractor owes tax on the value of the rock or related real property material. The value of the rock is the “crushed value” – what a buyer would pay to a gravel pit owner for this type of product. If the contractor who applies the rock is also the crusher, the value of the rock is the raw material cost (generally the royalty fee).
When a rock crusher contracts to crush and stockpile rock owned by another, the rock crusher is not a contractor improving real property. Instead, the rock crusher is a retailer of taxable processing services. The rock crusher must get a seller’s permit number and charge sales tax on retail sale of crushing services (including mobilization fees). However, no tax applies if the customer, such as a state or federal government agency, is exempt from paying sales tax.
If the rock crusher is crushing and stockpiling rock for a customer who will resell it, the services aren’t taxable if the buyer provides a completed Form ST-101. The rock crusher may qualify for the production exemption on equipment, fuel, and certain supplies if the majority of the business is crushing rock that will be resold. This is true even if the crusher isn’t the owner of the rock.