Are you a contractor bidding on a job in a new state or city outside your home jurisdiction? Have you evaluated the state and local tax obligations—and opportunities—based on the project location? If the answer is no, your company’s chance to win the bid and stretch your profit margins could be negatively impacted.
Opportunities for Planning
Every state has its own sales tax rules for contractors, and it is imperative your business is familiar with the rules and regulations prior to preparing a bid. For example, Ohio has a unique “business fixture” law that treats tangible personal property affixed to realty as a taxable sale as opposed to a construction contract.
Most states have limited exemptions available to contractors when they conduct work for government entities, exempt entities, or certain industries. Examples include Pennsylvania’s “building machinery and equipment” exemption on projects with qualifying entities, and West Virginia’s broad industry-based exemption that applies to manufacturers, natural resource producers, and other specified industries. If a contractor fails to factor in the exemption, typically on specified materials, it could overbid the job and lose the project to a contractor with a better understanding of the tax implications.
For states that impose a personal property tax, West Virginia for example, it is important to not only comply with the tax but plan accordingly. Most states tax personal property in their state on a specified date, often January 1 or July 1, which can serve as a notice to allow time for tax planning.
Profit Margin Risks
Local taxes to consider include business income, gross receipts, and payroll. Planning for all your tax obligations and fees is vital to maximizing profits and ensuring bids are competitive. For example, many municipalities in West Virginia impose a business and occupation (B&O) tax on projects within their municipal limits. The B&O tax on contracting is often 2 percent of the gross receipts from the contract. Similarly, some localities in Pennsylvania impose a business privilege tax on contractors. If you do not account for local taxes in your bids, your bottom line will take the hit.
Contractors can have employees working in many states or jurisdictions; it is vital to understand the payroll tax implications from a compliance perspective. If state and local payroll tax rules and requirements are not addressed prior to breaking ground, you could find yourself on the hook for unexpected costs. You could end up reimbursing employees for state and local income taxes that should have been withheld. In a worst-case scenario, a jurisdiction audits the contractor who is found liable for tax, penalty, and interest with no opportunity to recover costs. In some jurisdictions, the state and local payroll withholding taxes exceed ten percent (10 percent) of wages paid. In today’s competitive market, businesses simply cannot afford unplanned expenses resulting from misunderstood or incomplete information.
Contractors need to evaluate each jurisdiction’s requirements for business licensing. Cities and/or counties may require a business license before operating in their jurisdictions. While the fee for a business license is typically nominal, fees can increase when receipts derived from the jurisdiction are a component of the fee calculation. Those fees eat into project margins and profits.
Given the complexity of state and local tax with its variety of rules that differ from jurisdiction to jurisdiction, and the competitive nature of contracting, having accurate information on those taxes is critical to preparing a contract bid.