Taxation of Labor Charges-Be alert to unique rules

Lately I’ve been working with companies that provide materials and installation services to customers throughout the U.S.  In some cases, the materials are sold to customers and then separate installation services are arranged.  In other cases, the materials are provided by my clients and installed with line-item invoicing done for billing.  In some cases the materials sold remain personal property and in other cases the property is incorporated to real property.  It’s a real mixed bag of situatios.  In most cases, the labor to install, hook up, or affix the property is separately stated.  In the vast majority of states, these separated stated labor costs are not taxable even if the property remains personalty after installation.

In about a 15 states, however, the rules on the taxation of these separately stated labor costs is far more complex.  Much more so than I had first suspected.  In some states, the separate stated labor is taxable as a matter or law.  It makes no differenc wether the properyt is personal or real after installation.  In other states, the labor is taxable unless the installation is related to a “capital improvement” of the building.  In these cases the term “capital improvement’ is defined.  If the requisite improvements don’t occur, the the labor is taxable as repair labor even if it relates to real property.  And finally, there are states that tax installation of personal property even when separatly stated and even if the property remains personal property after installation. 

Just because your state does not tax separately stated installation labor, don’t assume that other states will follow suite.  Where invoices separatly state materials and labor, its quite possible the materials will be taxable since the invoice looks like a retail sales invoice and not a contractor invoice.   These rules become even more complex when subcontractors perform the work on your behalf but your company “marks up” their labor and material charges and then bills the final customer.    Be alert to the complexity of these rules.  Get the help you may need to understand how the states tax services.  States like Washington, Texas, New Jersey, and New York have  very specific rules on when real property and personal property services are taxable.

Ned Lenhart
Interstate Tax Strategies