The Challenge: Internal Errors, Incorrectly Taxed Labor, and Double Taxation of Construction Materials

A family-owned contractor began uncovering sales and use tax issues during an internal review after questions surfaced while preparing routine state filings. Rapid growth, combined with turnover in the finance function, had led to inconsistent handling of construction sales tax across projects—creating exposure the company had not previously recognized.

As the issues came into focus, the contractor identified multiple risk areas:

• Sales and use tax had been calculated inconsistently across job types
• Certain transactions were overstated while others were understated
• Material purchases were being taxed more than once
• Labor was incorrectly taxed for capital improvement projects
• Documentation did not consistently support how tax was applied

Without correction, these errors increased the contractor’s regulatory exposure, including interest, penalties, and the risk of a broader sales tax audit. Leadership needed a clear path to address historical filings before the situation escalated.

The Turning Point: Addressing Audit Exposure Through Remediation

Determined to get ahead of the issue, the contractor engaged the Elliott Davis State and Local Tax (SALT) team for a targeted review focused on construction sales tax cleanup. The goal was to identify overpayments, correct filings properly, and support those corrections with documentation designed to withstand state scrutiny.

The internal review revealed a core issue common in construction. Materials were often being taxed twice because project types were not consistently categorized, while labor was being treated as taxable due to incorrect project classification. In some cases, the contractor had paid tax simply to avoid conflict or delay, without confirming whether it was actually owed. As a result, the company had paid significantly more tax than required.

Correcting Historical Sales Tax Filings with Amended Returns

With the errors clearly identified, the Elliott Davis team focused on correcting historical sales tax filings rather than treating the issue as a one off adjustment.

The engagement included:

• A transaction level review of sales and use tax treatment
• Validation of taxability by project type, service type, and labor classification
• Preparation and filing of amended sales tax returns across all affected entities
• Documentation to support corrected positions if questioned by the state

This approach allowed the contractor to resolve errors directly, reduce exposure, and present clean, defensible filings to the Department of Revenue.

The Resolution: Prevented Overpayment, Reduced Exposure, and Improved Audit Readiness

The contractor saved more than $500,000 after amended filings eliminated overstated use tax and double taxation on construction materials.

Just as important, leadership gained peace of mind. With corrected returns on file, the company was able to provide Affidavits of Tax Paid to general contractors, confirming that sales and use tax obligations had been handled appropriately and strengthening their audit readiness should questions arise in the future.

The business also moved out of reaction mode. Updated processes gave the contractor better control over how tax is applied at the project level, improving bid accuracy and competitiveness while reducing the risk of repeat errors.

With ongoing SALT support in place, the contractor is positioned to maintain compliance as the business grows and project mix continues to change, allowing leaders to stay focused on operations and expansion rather than unresolved tax issues.

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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.