Idaho State Tax Commission

Idaho State Tax Commission

Contractors Who Improve Real Property

Contractors working in Idaho are subject to Idaho sales, use, withholding, and business income taxes. Purchases or use of materials that are incorporated into real property are subject to Idaho sales and use tax. If a vendor doesn't collect sales tax on a purchase, use tax may apply. (Special rules apply to microchip manufacturing facilities and to agricultural irrigation installations.) Wages earned in Idaho above $1,000 per calendar year are subject to Idaho income tax withholding, even if the employee is a resident of another state.

Forms/publications

Types of improvements

Many types of contractors improve real property, each making changes or additions to land or buildings. Here are some types of improvements:

  • Floor coverings (carpet, tile, vinyl, and wood)
  • Heating and air conditioning installations and repairs
  • Plumbing fixtures and water lines, including water heaters and outdoor sprinkler systems
  • Wallpaper/painting
  • Windows and window coverings
  • Fencing
  • Residential built-in appliances, such as dishwashers and garbage disposal units

When to pay tax on purchases

All contractors are considered the consumers or users of building materials they buy and must pay a tax on the purchase price. The following scenarios are two examples of when a contractor owes tax on the purchase price of building materials:

Scenario 1: A carpet layer buys carpet tax free and installs it in a home under construction at the direction of a home builder. The carpet layer then can't charge the home builder sales tax on the retail sales price of the carpet material because the carpet layer is improving real property. Since the carpet layer didn't pay sales tax, the carpet layer must pay a use tax to the state on the purchase price of the carpet.

Scenario 2: When a carpet vendor agrees to sell carpet to a customer and hires a subcontractor to install the carpet in the customer's home, the vendor can't charge the customer sales tax on the retail sales price of the carpet because the vendor is improving real property. The vendor must pay a use tax to the state on the vendor's cost for the carpet.

Retail sales vs. improvements to real property

Idaho sales tax law distinguishes between retail sales and improvements to real property. A retail sale is taxable to the purchaser. Whether a homeowner buys carpet to install at home, or a contractor buys carpet to install in a customer's home, the buyer owes tax on the carpet price.

While retail sales are taxable, improvements to real estate, such as carpet installation, are not. A home builder or a homeowner can rightly refuse to pay sales tax on the price of materials in a real property improvement or can request a refund from the contractor or the state for a tax paid in error. However, even sales tax collected in error is the state's property, held in trust by the business that collected it. The sales tax collected can only be used as a refund to the customer or remain as property of the state.

How to pay tax on purchases

Contractors should pay their vendors the tax on the purchase price of the building materials, or when the vendor isn't registered in Idaho, pay a use tax directly to the Tax Commission.

Contractors who also have a retail business can buy materials for resale tax exempt and then pay a use tax to the state when they withdraw material from their retail inventory for an installation contract. Or they can pay a tax on all purchases and take a credit for the tax paid on the cost of materials they later sell at retail.

How to bill customers

All contractors who improve real property can bill home builders or other customers for materials, markup, labor, profit, and other costs of doing business (including sales taxes paid on purchases). The contractor should not charge sales tax to customers on real property contracts.

Using the correct billing method lowers the cost for the customer. The sales or use tax on a contractor's purchase price of building materials is lower than the sales tax on the marked-up retail sales price. Since a contractor wants to recover all costs in a billing, using the method described above can make the contract price more competitive.

Laws and rules

Contractors' obligations with other agencies

Check these websites to confirm you're in compliance with all Idaho agency requirements.

Idaho withholding requirements

Businesses whose officers or employees earn compensation in Idaho must have an income tax withholding account. Withholding on wages earned in Idaho is required for nonresidents, as well as for Idaho residents.

Taxable compensation includes salaries, wages, bonuses, commissions, excessive per diem, etc. See A Guide to Idaho Income Tax Withholding for more information. Nonresidents earning $1,000 or more per year may be required to pay Idaho income tax.

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Contractors working on federal projects

According to federal law, state income, sales, and use taxes apply to anyone working on a federal project. For more information, see the Buck Act listed below.

AN ACT OF CONGRESS COMMONLY KNOWN AS THE BUCK ACT H. R. 6687

AN ACT TO PERMIT THE STATES TO EXTEND THEIR SALES, USE, AND INCOME TAXES TO PERSONS RESIDING OR CARRYING ON BUSINESS, OR TO TRANSACTIONS OCCURRING, IN FEDERAL AREAS, AND FOR OTHER PURPOSES.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled:

Section 1.
  1. That no person shall be relieved from liability for payment of, collection of, or accounting for any sales or use tax levied by any State, or by any duly constituted taxing authority therein, having jurisdiction to levy such a tax, on the ground that the sale or use, with respect to which such tax is levied, occurred in whole or in part within a Federal area; and such State or taxing authority shall have full jurisdiction and power to levy and collect any such tax in any Federal area within such State to the same extent and with the same effect as though such area was not a Federal area.
  2. The provisions of subsection "a" shall be applicable only with respect to sales or purchases made, receipts from sale received, or storage or use occurring, after December 31, 1940.
Section 2.
  1. No person shall be relieved from liability for any income tax levied by any State, or by any duly constituted taxing authority therein, having jurisdiction to levy such a tax by reason of his residing within a Federal area or receiving income from transactions occurring or services performed in such area; and such State or taxing authority shall have full jurisdiction and power to levy and collect such tax in any Federal area within such State to the same extent and with the same effect as though such area was not a Federal area.
  2. The provisions of subsection "a" shall be applicable only with respect to income or receipts received after December 31, 1940.
Section 3.
  1. The provisions of sections 1 and 2 of this Act shall not be deemed to authorize the levy or collection of any tax on or from the United States or any instrumentality thereof, or the levy or collection of any tax with respect to sale, purchase, storage, or use of tangible personal property sold by the United States or any instrumentality thereof to any authorized purchaser.
  2. A person shall be deemed to be an authorized purchaser under this section only with respect to purchases which he is permitted to make from commissaries, ships stores, or voluntary unincorporated organizations of Army or Navy personnel, under regulations promulgated by the Secretary of War or the Secretary of the Navy.

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Last updated Aug. 26, 2014