How a multi-state contractor took control of construction sales tax and protected profit margins

The Challenge: Growth Across States Exposed Sales and Use Tax Risk

A fast-growing, regional mechanical contractor was thriving, but rapid expansion introduced unexpected state and local tax (SALT) challenges tied to construction sales and use tax compliance. In North Carolina, tax treatment varied based on whether an installation was classified as a capital improvement or a repair, maintenance, and installation (RMI) service.

Relying on vendors to apply the correct tax treatment on purchases proved unreliable. Vendors frequently defaulted to charging sales tax on all materials, regardless of the actual taxability of the job. This led to consistent overpayments, as the contractor often paid sales and use tax unnecessarily just to avoid audit risk. These overpayments became a recurring business expense, steadily eroding profit margins.

The challenge was further complicated as the contractor began purchasing materials in bulk and working with vendors that supplied items used across both RMI and capital improvement projects. The same materials were often used on jobs in other states, making it difficult to know whether tax was being charged correctly.

Without a clear way to manage sales tax across projects and state lines, the contractor struggled to understand the true cost of each job. This made it harder to price bids accurately, protect margins, and plan for growth without worrying about unexpected tax costs showing up later.

The Turning Point: Taking Control of Multi-State Sales Tax Compliance

Frustrated with inconsistent vendor practices and mounting tax overpayments, the contractor turned to the Elliott Davis SALT team for help taking control of its multi-state tax compliance process and reducing reliance on vendors who misunderstood state-specific rules.

Working directly with the Departments of Revenue in each state where the contractor had nexus, the team evaluated jurisdiction specific requirements and identified practical strategies to standardize sales and use tax treatment.

• South Carolina: Secured a permit to bypass vendor-charged tax and self-assess sales and use tax, allowing the contractor to pay tax directly to the state, eliminate overpayments, and properly apply tax to taxable and exempt transactions.
• North Carolina: Where direct pay permits are not available to contractors, applied state-specific exemption documentation to determine the correct tax treatment based on how materials were ultimately used.

The Resolution: Improved Bid Accuracy and Cost Visibility Across Projects

The Elliott Davis team helped the contractor implement a simpler, more reliable approach to managing sales tax across states. Instead of relying on vendors to make critical tax decisions, the contractor could now apply the correct tax treatment internally.

With hands-on training around job classification and tax application, the contractor eliminated unnecessary sales tax overpayments and reduced the risk of errors that could increase audit or penalty exposure, directly protecting profit margins.

Proper documentation and consistent procedures gave the contractor confidence that taxes were being handled correctly on every job, even when materials were purchased in bulk or used across state lines, helping to prevent double taxation.

With greater control over sales tax, the contractor improved bid accuracy and strengthened visibility into project costs, creating a more reliable foundation for future growth. With Elliott Davis serving as an ongoing advisor, the contractor is well positioned to handle new tax scenarios and audit needs as they arise.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.