When you have work done to your home or land, this work can result in a capital improvement, a repair, or a maintenance service. Individuals who work on real property for you are considered contractors. A contractor is required to pay sales tax on the cost of his materials. Whether or not you pay sales tax on his labor charges depends on what type of work is done. This is why a contractor’s bill should separately state charges for parts and charges for labor. If you are required to pay tax on labor charges and those charges are lumped together with charges for materials, you must pay sales tax on the entire bill.
The taxability of the labor charges billed by a contractor depends on whether the work performed is a capital improvement, a repair, or a maintenance service. A capital improvement occurs when items are permanently attached to real property, increasing the property’s value or useful life. Repairs restore the property to its original value, but do not prolong the property’s useful life. Maintenance services simply preserve the existing condition of the property.
In general, capital improvements are exempt from tax. However, certain landscaping services, carpet and other floor covering installations, and hard-wired alarm or security system installations became subject to tax as of October 1, 2006.
Labor charges are not taxable when the work performed results in an exempt capital improvement. Installing a new roof, paving a new driveway and constructing a new garage are examples of exempt capital improvements. When an exempt capital improvement is performed on your home, you should issue the contractor a Certificate of Exempt Capital Improvement, Form ST-8
. The sales tax exemption for capital improvements applies only to labor charges. If you do the work yourself, you are required to pay sales tax on the materials and supplies you purchase just like a contractor does.
Labor charges are taxable when the work performed is a taxable capital improvement, repair, maintenance, or installation service. Examples include planting shrubbery, fixing a leaky roof, patching a driveway pothole, or repainting your house.
The sales tax law specifically exempts from tax the charges for maintaining or repairing residential heating systems serving no more than three families, provided the families live independently of each other and do their own cooking on the premises.
Remember that a repairman who fixes your television set or washing machine is not a contractor. He is required to charge you sales tax on both his labor and the parts used for the repair.
Additional information on home improvements is contained in our publication S&U-2
, Sales Tax and Home Improvements. Publication S&U-2
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