Pennsylvania Sales and Use Tax for Construction Contractors

Construction contractors assume various roles throughout a project, while being responsible for countless details over the course of the project. One of these details that contractors need to be aware of is Pennsylvania’s sales and use tax. Each state has their own set of rules that contractors should familiarize themselves with when they are completing projects that are outside of the state they work in. It’s important that contractors know about sales and use tax and other obligations, so they stay compliant.

PA Sales and Use Tax

Construction contractors in Pennsylvania are required to pay 6% sales tax on all taxable services, equipment, materials, supplies and/or components used or installed to become part of real estate. The full list of items that fall under Pennsylvania’s code of permanent real estate and sales activities can be found in 61 Pa. Code Section 31.11 Definitions.

Pennsylvania sales tax does not apply to construction activities that are made under contract and involve the permanent attachment of tangible personal property to realty. These activities include the service of repairing real estate, even though personal property is not transferred by a contractor, along with the repairs they make.

Although contractors do not charge sales tax to their customers on construction activities, they must pay the sales tax for the material and supplies they buy, rent or consume to complete a project. Certain items, such as building machinery and equipment classified as generation equipment, storage equipment, conditioning equipment and distribution equipment, will be tax exempt when the construction contractor buys the items for a project related to a government agency or a tax-exempt organization.

Exemption Certifications for Contractors

Depending on what project a contractor is working on and purchasing building machinery and equipment for, they may qualify for an exemption certificate. Act 45 of 1988 created an exemption called “Building Machinery and Equipment” (BME) which set aside certain materials and items that are commonly used during a construction project with certain exempt entities and designates them exempt from sales tax. An exemption certificate is issued from the contractor to the supplier which will allow the contractor to purchase the equipment without paying the sales tax up front.

To qualify for a sales tax exemption certificate, the contractor must be purchasing the building machinery and equipment, as well as have the other party be eligible for the exemption. Eligible parties include:

A purely public charity
The federal government
The Commonwealth of PA
An instrumentality of the Commonwealth department, board, commission of the Commonwealth and public authorities
A political subdivision-county, city, borough, incorporated towns, townships, school district or vocational school district
A state university
Qualified business in a Keystone Opportunity Zone

In order for the contractor to claim the exemption, they need to submit a Sales Tax Exemption Certificate (Form REV-11220) to their supplier stating the reason for the exemption within 60 days of the purchase. The verbiage that the PA Department of Revenue suggests using is:

“Under Act 45, this property (or service) qualifies as exempt ‘building machinery and equipment’ that will be transferred pursuant to a construction contract to (fill in contract owner) holding Sales Tax Exemption # (fill in # if there is one).”

Sales & Use Tax Issues That Could Lead to an Audit for Contractors

Contractors should work with a tax professional to make sure that they are staying compliant so no tax issues arise that could lead to an audit. The most common issues that contractors have when it comes to Pennsylvania sales and use tax are:

Charging sales tax to customers on construction activities
Misclassifying the work as a construction activity or sales activity
Not paying use tax on materials bought or leased from a vendor in another state, such as an online retailer
Not applying for available credits or refunds for sales tax paid in another state for supplies and equipment
Not applying local sales and use tax rates for work and services in certain Pennsylvania counties (Allegheny and Philadelphia)
Purchasing sale activity items with a resale certificate and not paying use tax when consumed in a construction activity

The tax professionals at Brown Plus are experienced in assisting companies of all sizes within the construction industry and can provide the necessary support needed with sales and use tax. Please contact our team today if you have any questions!