The top 5 state and local tax issues that could shake your construction business

Construction is a boots-on-the-ground business. But when your crews, equipment, and materials cross state lines, so do your tax responsibilities. These five state and local tax (SALT) issues can quietly build into major financial risks if not managed properly.

1. Nexus and Multi-State Tax Exposure

Concern:

Construction activity in multiple jurisdictions often creates a taxable presence, known as nexus, in more states than contractors may realize. This can trigger obligations across income/franchise, gross receipts, sales and use, property, and employment taxes.

Key Risks:

• Economic nexus thresholds can apply even without physical presence.
• Temporary job sites or remote workers may create nexus in states (and localities) where the contractor has no office.

Impact:

Failing to identify nexus can result in missed filings, penalties, and interest. It can also limit refund opportunities or create complications in a merger or acquisition. Noncompliance may even disqualify your business from project bids or public contracts.

Action:

Maintain detailed records of where services are performed and where employees and equipment are deployed. A multi-state nexus study can help clarify exposure and prevent costly surprises.

2. Sales and Use Tax on Materials and Equipment

Concern:

Sales tax compliance for construction materials is notoriously complex, especially when contractors assume blanket exemptions that don’t apply across all jurisdictions.

Key Risks:

• States differ on whether contractors are end users (taxed at purchase) or resellers (taxed at sale).
• Equipment rentals may be taxed based on where the equipment is used, not just where it’s rented.

Impact:

Improper compliance can result in double taxation, once at purchase and again in audit. On the flip side, failure to pay use tax can lead to significant liabilities. Refund opportunities are often missed due to poor documentation or misunderstanding of exemption rules.

Action:

Review taxability rules in each state and track construction materials and equipment movement across jurisdictions. Use contractor decision trees and procedural reviews to determine taxability. Reverse audits can uncover overpayments, while amended returns can correct prior errors.

3. Taxation of Services and Local Business Taxes

Concern:

Some jurisdictions tax services like design, fabrication, repairs, maintenance, or installation. Others impose local business or gross receipts taxes, often without clear guidance.

Key Risks:

• States such as Arizona, North Carolina, West Virginia and New York tax specific construction-related services.
• Localities may impose gross receipts or business license taxes, even for short-term work.

Impact:

Overlooking these rules can lead to under-collected sales tax or unpaid local taxes, both of which can result in audits. Contractors are often surprised to learn they’ve triggered obligations in multiple jurisdictions within a single state.

Action:

Analyze contract types (lump sum vs. time & materials) and service categories to determine tax treatment. In states with complex local tax structures, like Colorado, Louisiana, or Pennsylvania, a detailed nexus study and document management process can help track obligations city by city.

4. State and Local Income Tax Withholding for Mobile Workers

Concern:

Employees who cross state and some local lines, even for a day, may create income tax withholding responsibilities for the business.

Key Risks:

• The employer may have additional withholding responsibilities in nonresident jurisdictions.
• Some jurisdictions are beginning to audit this more aggressively; lack of compliance and employee communication can result in penalties and strained employee relations.

Impact:

Failure to withhold can result in state audits, tax liabilities, and penalties. It can also create financial frustration for employees at tax time and jeopardize project bids or license renewals.

Action:

Know where you have employees performing services and the rules in each jurisdiction.  Implement systems to track employee location and duration of work in each state. An employment tax nexus study, paired with software or procedural updates, helps maintain timely and accurate withholding practices.

5. Property and Excise Taxes on Construction Equipment

Concern:

Construction equipment that travels across state lines may be subject to personal property and excise taxes that vary by jurisdiction.

Key Risks:

• Some states assess tax based on days of use or location at year-end.
• Failure to report can lead to back taxes and penalties.

Impact:

Improper allocation of property tax can lead to duplicate assessments, lost incentives, and audit risk. For contractors with high-value equipment or temporary jobsite mobilizations, the financial implications are material.

Action:

Track equipment usage and explore state-specific incentive programs. A contractor decision tree can help determine which state has taxing rights. A comprehensive property tax review may reveal incentive programs or abatements.

We Can Help

State and local tax issues don’t have to derail your operations. Our dedicated SALT team understands the nuances of construction and can help you manage risk, recover overpayments, and maintain compliance.

Here’s how we support construction contractors:

• Staff Training: Empower your team to spot and solve SALT issues before they escalate.
• One-Off Guidance: Got a tricky tax question? We’re just a call away.
• Audit Assistance: We represent you and streamline the process.
• Reverse Sales Tax Audits: We help uncover and recover overpaid tax.
• Compliance Software Solutions: Tailored tools to simplify multi-state sales tax tracking and filing.
• Boutique-Level Support: Practical, right-sized service for your unique business challenges.

At Elliott Davis, our SALT team can help you understand your sales tax obligations and identify how construction-specific challenges impact your tax responsibilities. Contact us today to confirm that your business is compliant with state and local tax requirements in the states where you operate.

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.