What’s the tax rate for my job? Why’s it so complicated?

I will do my best to explain some of the more basic elements of taxes as they pertain to construction projects.  I am not a Tax attorney, CPA, or MBA so please consider my work here to be a guideline and confer with qualified professionals whenever a specific problem arises.

State, County, and Cities collect sales taxes within their geographic boundaries according to legally defined guidelines.  Any commercial sale within those boundaries would be subject to the total of all applicable sales taxes – as seen on an ordinary sales receipt.

Use taxes

It didn’t take long for Cities to learn that if construction materials are purchased from out-of-town vendors, the City loses a significant revenue source.

What's the tax rate for my job? Why's it so complicated?

Many cities moved towards a “Use tax” system where the sales tax for all permanently installed materials is assessed at permitting.  The city then provides a tax certificate to the contractor which exempts the contractor (and their subcontractors) from paying the city tax wherever they actually buy their materials for this job.

From a practical standpoint, the city may elect to assess their sales tax based on 50% of the contract value of the job.  This is because it’s uncommon to get a material’s only total from every subcontractor making it very difficult to accurately calculate the actual material value. GC estimators should be very careful when creating their summary spreadsheet.  Use taxes will be calculated on project value commensurate with the material value.

Permits and bonds should be calculated AFTER the use taxes.  It would be well advised to consult with the permitting authorities as to what constitutes the “total project value”.  Permit fees are often priced by calculations on the total project value.  Be advised that every permitting agency relating to the project may have a unique take on this

Bonding fees

Bonds should be calculated last as they represent the total contract dollar value that the bonding agency will be responsible for.  Bonding fee is assessed on the total contract value – be very careful in calculating this as the math is not as simple as it seems. The bonding agent takes the final contract value against their rate. This means that their effective percentage is the sum of a geometric series where it converges .

So the accurate fee to four significant figures is actually

Bonding Fee = (Subtotal * %fee)/(1-%fee)

Add the bonding fee to the Subtotal for your final contract value otherwise the dollar amount of fee carried is less than you’ll be charged.  It’s worth mentioning that you’d need to carefully factor any overhead or profit on your bonding costs because they’re not carried anywhere else.  Most companies don’t apply markup to bonds but there’s no reason you can’t.

Tax license

Here lies a fairly big wrinkle.  Cities may not have a Tax License which allows them to collect their use taxes autonomously.  In such cases, the use taxes are collected by the State which later pays the City.  So at permit time – the GC is not required to pay the use taxes.

Adding another layer of complexity is the interplay of counties.  Counties are not licensed to collect their use taxes.  Most  but not all cities that are licensed to collect use taxes are also licensed to collect county use taxes.

So how do I know what to do?

State department of revenue offices generally publish a sales/use tax packet detailing the applicable rates and how the boundaries interact with their guidelines.  State taxes can include add-on percentages for special items like Bus/ transit systems, Stadiums, Museums, Housing Authorities,  Public safety improvements, the list can be extensive.

From an estimating standpoint the taxes will be either collected at the Permit stage, or they will be collected through individual sales in the supply chain.  The conscientious GC estimator publishes the subcontractor tax rate on their invitation to bid to ensure that Subcontractors carry the correct amount.  Be very cautious to get this right as bid-day tax corrections can consume a great deal of time.

Who does what?

Summarizing a bit, any taxes due at the permitting stage should be calculated in accordance with the collecting authority.  This is the GC estimator’s responsibility.  These taxes are paid in advance of material purchases so they must be excluded from subcontractor quotes.  The default condition should be to expect Subcontractors to carry any taxes that are not collected at the permitting stage.

Material suppliers that do not install anything may fall into a situation where they are not required to pay use taxes – the stipulations can be very complex.  Vendors who are well versed in the local tax law will often cite relevant tax code provisions if asked.  Trust but verify.

What's the tax rate for my job? Why's it so complicated?

Sure Bill knows his motor-driven bison well enough but his bookkeeping is awful.

 

What about tax exempt work?

It would be wonderful to report that all Government, Church, Charity, and Public School work is entirely tax-free.  Be very cautious in reviewing the specifications.  It’s possible for an entity to be exempt from State taxes without being exempt from City or County taxes.  Architects famously use legalese with so many switchbacks of logic it’s incredibly common for there to be RFI’s filed asking what they mean.  This is especially common in projects for Public Universities.  Get firm answers from the authorities that actually collect the taxes because they could be the agencies conducting audits on your firm later.

Scoping bids

Some GC’s are obsessive about tax rates.  Merely listing “taxes” in the inclusions is insufficient information for these firms.  They will doggedly require every bidder to list the precise percentage on every proposal.  Subcontractor’s with any experience in the market are aware that they must include their tax burden on their proposals.  Depending on the magnitude of the project they may default to a maximum percentage rather than the exact rate legally required.  Be very wary of subcontractor bids that exclude taxes entirely.  Unless they are labor only – such proposals should include a breakout of the material pricing for tax calculation purposes.  That of course assumes the project is not tax exempt.

 

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© Anton Takken 2014 all rights reserved

About Anton Takken

I chose to focus on estimating for a few reasons. Chief among them was that it's a position that's hard to fill in most companies. Job security and advancement is easier as a result. Unique to this job is a higher vantage point over the company and its place in the market. Bids are generally over in a few weeks which keeps things from getting boring. The reasons few of my colleagues pursue estimating comes down to a few misconceptions. The first is that it's the builders version of accounting - perceived as a lonely and quiet life among the charts and plans. The second is that it's not engaged in the construction process. Lots of the appeal of the construction industry is the sense that individual effort brought a plan into reality. The teamwork and camaraderie present among tradesman seems conspicuously absent at the estimators desk. Finally, I think the last reason is that it's daunting to be responsible for setting the price of something that's never been done. The good news for folks in estimating is that it's much more social than advertised. An estimator's phone is constantly ringing. Taking the opportunity to build relationships with the bidders creates a positive atmosphere and encourages everyone to do their best. It can be too much of a good thing which is why it's common to arrive at their voicemail when you're calling with a question. A strong rapport with the bidders can be invaluable. Subcontractors have much more exposure to what's going on in the market and they're often eager to share their knowledge. Learning from these experts is a priceless opportunity that's often overlooked. More on this in a bit. I decided to start this blog because I noticed that estimating has applications in many arenas. Over the last few years I've helped estimate in fields ranging from software development to blacksmithing! The more I thought about it, the more I realized that it's not about knowing what everything costs, it's about knowing how to figure that out. I believe the very first step to knowledge is to seek it, the second is to retain it, and the third is to pass it on. I hope to share some insights into how estimating is done and hopefully have some fun doing it. My experience is mostly commercial construction, but I'll try to make everything as generally applicable as I can. There are many aspects of business that all markets share yet it's remarkable that one of the most consistent is the failure to recognize that estimating is the very first step to a successful project. So if you're frustrated that work isn't profitable, or exasperated that there's never enough time to get the job done, this blog will be worth your time. Feel free to email me at: estimatorsplaybook@gmail.com View all posts by Anton Takken

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