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Bill would exempt contractors from paying sales tax on materials used for state projects; tax department cites base-alignment and administration issues
Summary
Representative Mike Berg and a private citizen testified for House Bill 1546, which would exempt contractors buying materials for state construction projects from sales tax to avoid reimbursement inefficiencies; the tax department said aligning local and state tax bases and administrative rules would require further work.
Representative Mike Berg and private-citizen witness Sean Johnson told the Finance and Taxation Committee that House Bill 1546 aims to eliminate an inefficiency in state construction procurement: contractors currently pay sales tax on materials and the state later reimburses that tax as part of contract pay applications, a cycle Johnson described as “money for nothing.”
Johnson provided an illustrative example tied to a hypothetical $95 million state project under study: he said roughly 40 percent of such a project could be materials, or about $38 million, which at a 5 percent sales-tax rate would equal $1.9 million in state sales tax that is collected and then reimbursed in the contractor’s pay applications. He said exempting contractor purchases on behalf of a state agency would avoid that duplication and free dollars for other uses.
Associated General Contractors of North Dakota testified in support and said the industry would engage on implementation. The department of taxation warned of legal and administrative complications, saying state and local tax bases must align and that the bill as drafted would require adjustments to existing code to preserve aligned tax bases and to avoid creating business compliance problems. Shannon Fleisher of the Tax Department said the department would research details and identify alignment issues.
Witnesses suggested an alternative: complete a mandatory study to examine feasibility, procedural changes needed in tax administration, and stakeholder steps before enacting an exemption. The committee heard no formal opposition during the hearing and took testimony from contractors and the tax department; no vote was recorded.
Details: Industry witnesses said models and administrative pathways exist (contractor sales/use tax permit and contractor certificates) that may provide a starting point, but the department urged further study to ensure businesses and local governments are not unintentionally affected.
