Iowa Department of Revenue explains how construction contracts, contractor classifications and materials are taxed

The Iowa Department of Revenue presenters at an Iowa SourceLink webinar laid out how construction contracts, contractor classifications, and building materials are treated for Iowa sales and use tax purposes, with examples for electrical work, carpeting, manufacturers, and grain bins.

"Construction contract is an agreement between a contractor and a supplier, wherein the contractor agrees to provide labor, materials, and supplies, and equipment to build a structure for the sponsor," Matt said, defining the term the department uses to identify exempt construction services. He and other presenters explained that services and labor connected with new construction, reconstruction, alteration or remodeling are generally not subject to sales tax when performed as part of a construction contract; instead, the contractor is treated as the consumer of materials and pays sales or use tax when purchasing those materials.

Why this matters: whether work is characterized as "new construction" or a taxable repair affects who pays sales tax (contractor as purchaser of materials versus the customer for taxable labor and materials) and can change bids and contract prices.

Key points and examples presented: - Contractor classifications: the department described five classifications (owner, contractor, retailer with showroom, retailer, repair person) and said taxpayers should register under the classification that fits their business and notify the department if that classification changes. The classification affects whether a business purchases materials tax-exempt for resale and when it must collect sales tax from customers. - Taxable vs. exempt services: enumerated taxable services (electrical/electronic repair and installation, plumbing and pipefitting, painting/papering/interior decorating, roof repair) are taxable when provided outside a construction contract but are exempt when performed on or connected with new construction, alteration, reconstruction, or remodeling. - Repairs vs. new construction: magnitude, timing and physical relationship determine treatment. A minor roof repair (replacing a few squares of shingles after wind damage) is a taxable repair; replacing an entire roof is more likely to be treated as construction and generally not taxed as a service to the owner. - Carpeting: the department said carpeting is treated as the sale of tangible personal property (TPP) rather than a building material; carpeting contractors typically purchase carpeting for resale and charge tax to the final consumer at installation unless the customer is tax-exempt. - Manufacturer rules: when a manufacturer—s goods are used in construction work, a fabricated-cost computation may apply; that fabricated cost includes materials, labor, and transport to/from the plant but excludes installation at the job site. - Excise tax on certain heavy machinery and equipment: the presenters noted certain self-propelled building equipment (trackbacks, pile drivers, motorized scaffolding), auxiliary attachments, and replacement parts may be subject to a 5% state excise tax rather than the regular state and local sales/use tax rates. - Grain bin exemption: the presenters said grain bins and materials used to construct or repair grain bins are exempt from sales tax and cited an effective date in their guidance (July 1, 2019) for that exemption.

The presenters cautioned that mixed contracts that include both construction work and sales of tangible personal property must be billed and documented correctly: contractors should purchase retail items tax-exempt for resale and charge sales tax on the tangible personal property sold to the customer while treating construction services according to construction rules.

The department repeatedly recommended contacting the department for binding determinations and referenced the contractors— guide and the Iowa administrative code listed on their slides for more detailed examples and rules.