Bathroom fixtures	Gutters and downspouts
Ceilings	Insulation
Central air conditioning (for space cooling)	Kitchen cabinets
Concrete	Lighting fixtures
Doors	Lumber, sheetrock
Electrical system	Plumbing
Flooring	Sewer/septic system
Furnaces, boilers, and heating systems (for space heating)	Windows

Construction Labor	Construction labor is not taxable. Construction labor: Permanently incorporates tangible personal property into real property Constructs a building or structure intended to be permanent
Fabrication Labor	Fabrication labor: Makes or creates tangible property Alters existing tangible property into a new or changed product Fabrication labor is taxable when the customer: Provides no materials Directly provides materials Indirectly provides materials
Installation Labor	Labor to set an item into position, or to connect, adjust, or program it for use. If the item being sold is taxable, charges to install it are also taxable.

For more information, see Labor – Installation, Fabrication, Construction, and Repair.

 

Materials-Only Contract

The sale of building materials without installation. This is a retail sale.

Present Use

Present use means the item benefits the building or structure and the function for which the space is intended to be used at the time the item is incorporated.

Examples of items that benefit the building or structure for its present use when the items are incorporated into the building or structure:

• Bowling alley lanes and ball returns
• Pneumatic tubing systems at a bank

Retailer

A business that sells building materials but does not install the items.

Retail Sale

The sale of building materials, supplies, equipment, or other tangible items that are not incorporated into real property by the seller or seller’s agent. See Guidelines for Contractors-Retailers.

Substantial Damage

Substantial damage means removal of the fixture or improvement will physically impair the present function of the building or structure. Substantial damage does not include minor cosmetics such as patching a hole in the wall.

Generally, substantial damage has to meet one of the following:

• Physical damage. The removal of the fixture or improvement causes impairment (destruction) to the building or structure, requiring reconstruction and reinstalling building materials and fixtures.
• Functional damage. The removal of the fixture or improvement reduces or removes the present usefulness and functionality of the building or structure, requiring the replacement of the improvement or fixture.

Tangible Personal Property

Tangible personal property means personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.

Tangible personal property includes, but is not limited to:

• Electricity
• Water
• Steam
• Prewritten computer software

Bleachers and Lockers

Bleachers and lockers, regardless of how they are incorporated, are tangible items. You must charge sales tax on the item and the labor to install the item.

For more information, see:

• Revenue Notice 18-04, Improvements to Real Property
• Labor – Installation, Fabrication, Construction, and Repair

Business Machinery and Equipment

Machinery and equipment that qualifies for a business exemption under Minnesota Statutes 297A.68 are tangible items. They are not considered real property.

You must charge sales tax on the following unless the customer provides a completed Form ST3, Certificate of Exemption:

• Machinery and equipment
• Labor charges to install and setup the machinery and equipment
• Any other charges necessary to complete the sale, including delivery charges

The customer is responsible for identifying the machinery and equipment that qualifies for a business exemption. If your customer provides you with a completed Form ST3, you may purchase those items exempt for resale. Previously, you had to enter into a purchasing agent agreement to purchase these items exempt for resale.

Appliances

Appliances that are not built-in and are free-standing are tangible personal property and are taxable. These types of appliances are set in place in an opening in between cupboards.

Examples include:

• Microwave
• Refrigerators
• Washing Machines

Built-In Appliances

Built-in appliances, such as dishwashers, that are designed to go under the counter are real property and are not taxable.

Retail Sales

The sale of building materials, supplies, equipment, or other tangible items that are not incorporated into real property are taxable retail sales.

If you make a taxable retail sale, you must charge sales tax on the total sales price, including any installation or delivery charges.

If you purchase items to resell, give your vendor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

Leased items are not real property because they are not intended to be permanent.

When is a lease not a lease?

A transaction is not a lease when the security agreement or deferred payment plan contracts require the transfer of title upon completion of the required payments.

A transaction is also not a lease when the contract requires transfer of title after completion of required payments and an option price payment. The option price must not exceed the greater of $100 or one percent of the total required payments.

In these situations, you will need to determine whether the items are real property.

Portable Toilets

The lease or rental of portable toilets with related maintenance, waste removal, and cleaning services is subject to sales tax. The entire contract price, even if the lease or rental price is separately stated from the services, are taxable. The related maintenance, waste removal, and cleaning services are taxable because they are necessary to complete the sale of the lease or rental of the portable toilet.

For more information, see Revenue Notice 18-05, Lease or Rental of Tangible Personal Property – Portable Toilets.

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Security System Installers

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If the item’s are for	Then
A construction contract	Pay sales tax at the time of purchase.
Resale	Give your vendor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

Examples

A carpet dealer sells carpeting with or without installation.

• Situation 1: A contractor orders carpet and contracts with the carpet dealer to install it into a new home. The sale is a construction contract because installing carpet is an improvement to real property. The carpet dealer must pay sales tax on all purchases of carpet, materials, supplies, and equipment used to install the carpet. The carpet dealer does not charge sales tax to the contractor.
• Situation 2: An individual orders carpet that he will install into his basement himself. This is a retail sale. The carpet dealer must charge the customer sales tax on the sales price of the carpet.

Don’t Know the Item’s Use

If you do not know the item’s use at the time of purchase, sales tax is handled based on if you are primarily a contractor or primarily a retailer. You are considered:

• Primarily a contractor if at least 50% of the business purchases are used for construction activity. See the Primarily a Contractor section of this page.
• Primarily a retailer if at least 50% of the business purchases are for retail sales. See the Primarily a Retailer section of this page.

Note: You should use the prior calendar year to calculate if you are primarily a contractor or a retailer.

Primarily a Contractor

You must pay sales tax on all purchases. If you sell any of these items at retail, subtract the cost of the materials you paid tax on when you file your Sales and Use Tax return.

Follow these guidelines. The guidelines assume sales tax was paid on all materials.

Type of Sale	How to Handle Sales Tax
Construction Contract	Do not itemize sales tax on the customer’s invoice. Report the total contract amount on the Gross Receipts line of your sales tax return
Retail Sale	Charge sales tax on the total sales price. Itemize sales tax on the customer’s invoice. Report on your sales tax return: The total sales as Gross Receipts. The difference between the sale price and the cost of materials as General Rate Sales. Do not include sales tax when calculating general rate sales. Keep receipts and invoices to show sales tax was paid on the materials.

 

Example

A contractor who installs and repairs roofs pays sales tax on all purchases of materials. A customer buys shingles for $100 with no installation. This is a retail sale.

The contractor charges the customer sales tax of $6.88. The state general rate sales tax of 6.875% on $100. Local taxes may also apply depending on where the sale takes place.

The contractor paid $70 plus $4.81 in sales tax when the shingles were purchased.

The contractor can credit the sales tax paid on the shingles when they report the sale on their Sales and Use Tax return as follows:

Gross Receipts              $100
General Rate Sales         $30
($100 sales price – $70 cost)

Primarily a Retailer

If you are primarily a retailer, do not pay sales tax on your purchases. Give your supplier a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

Charge and collect sales tax from your customer when you sell taxable items at retail.

If any items purchased exempt for resale are later used in a construction contract, you must report the cost of the items as use tax purchases when you file your return.

Follow these guidelines. The following assumes you purchased all materials exempt from sales tax.

Type of Sale	How to Handle Sales Tax
Construction Contract	Do not itemize sales tax on the customer’s invoice. On your sales tax return: Report the total contract amount as Gross Receipts. Report your cost for materials as Use Tax purchases.
Retail Sale	Charge sales tax on the total sales price. Itemize sales tax on the customer’s invoice. On your sales tax return, report the total sales price as Gross Receipts and General Rate Sales.

Example

An appliance dealer sells garbage disposal units. Most sales are retail sales. Occasionally, a customer wants the dealer to install a garbage disposal.

The sale and installation of the garbage disposal is a contract for the improvement of real property. The dealer charges the customer $139 for the installed unit.

The dealer must report their cost of the garbage disposal unit as use tax when filing their return.

Helpful Hints

General guidelines to help determine the material cost when billing retail sales or construction contracts.

• If you are primarily a retailer purchasing materials exempt for resale and have occasional construction contracts, write the material cost on the office copy of the construction contract (not customer copy). Use tax is easily calculated for each sales tax reporting period by adding the material cost figures off of the office copies.
• If the mark-up percentage used by a contractor-retailer is constant for all materials, you may use a percentage to determine the material cost.
• If inventory records are updated from sales invoices, record the correct material cost on the office copy of invoices for retail sales. If tax was paid tax on material purchases, this allows you to calculate tax owed on the markup.
• Contractor-retailer records should reflect the use of all items purchased. These records should support your Sales and Use Tax liability.

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Contracts with Exempt Organizations

When you contract with an exempt organization (churches, schools, government agencies), you will generally owe sales tax on purchases of materials and supplies.

An organization’s exempt status cannot be used to purchase materials for use in a lump-sum contract covering both labor and materials for the construction.

You may only buy materials tax exempt when the exempt organization designates you as its purchasing agent.

The written contract must clearly show all of the following:

• The appointment was made between the contractor and exempt organization
• The exempt organization:
  • Takes title to all materials and supplies at the point of delivery
  • Assumes the risk of loss for all materials and supplies
  • Is responsible for all defective materials and supplies including those incorporated into realty

These requirements apply to the general contractor and subcontractors who supply both materials and labor.

You must keep documentation to show that a purchasing agent relationship exists. For example:

• Aletter indicating the above information
• Copies of the written contract showing all the requirements listed above
• Evidence of the organizations exempt status

Claiming an Exemption with an Exempt Organization

To claim an exemption as an exempt organization’s purchasing agent:

1. Complete Form ST3, Certificate of Exemption.
2. On Form ST3, check the box stating you are a contractor and have a purchasing agent agreement with an exempt organization. List the exempt entity name and project description.
3. Select the Other exemption code and write in “Purchasing agent agreement with exempt organization.”
4. Give your vendor the completed Form ST3.

You must keep records identifying all materials and supplies purchased for the exempt project. The exemption only applies to building materials, equipment, and supplies that become part of the improvement to real property.

An exempt organization cannot appoint you as its purchasing agent to purchase or lease equipment you will use to complete the construction contract.

For more information, see Revenue Notice 17-10, Construction Contracts with Exempt Entities.

Contracts with Direct Pay Authorization

You may only buy materials and supplies exempt from sales tax when a company with Direct Pay Authorization designates you as their purchasing agent.

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Miscellaneous Construction Contracts

The following are miscellaneous topics related to construction contracts.

Contracts Outside Minnesota

Materials delivered to contractors in Minnesota for use in an out-of-state contract are subject to Minnesota sales tax.

If the materials are not subject to sales tax in the state or county where the contract work will be done, they are not subject to Minnesota sales tax. You must give your vendor a completed Form ST3, Certificate of Exemption.

If a vendor delivers materials directly to a construction site outside Minnesota, the materials are not subject to Minnesota sales tax.

For more information, see Items for Use Outside Minnesota.

State and Local Government Construction Contracts

State agencies or local governments cannot make final payments to a contractor or subcontractor until the Minnesota Department of Revenue has verified they complied with Minnesota Withholding Tax law. To do this the contractor and subcontractor must submit a Contractor Affidavit (IC134) to Minnesota Revenue to apply for a Certificate of Compliance.

For more information, see Construction Contracts with State or Local Government Agencies.

Surety Deposits for Non-Minnesota Construction Contractors

If you hire or contract with a non-Minnesota contractor to perform construction work in Minnesota, you must withhold 8% (.08) of their compensation as a Minnesota surety deposit.

Payments are subject to 8% withholding only if the work was performed in Minnesota and the value of the contract exceeds $50,000.

The cash surety is deposited with the Minnesota Department of Revenue. It is used as a guarantee that the contractor has fulfilled the requirements for withholding, sales and use, franchise, and income taxes.

For more information, see Surety Deposits for Non-Minnesota Construction Contractors.

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Taxable Purchases	Examples
General items	Computer hardware and software Furniture Hand tools (cordless drill, jig saw, hammers) Office equipment and supplies Safety equipment (hard hats, safety vests, dust masks)
Construction machinery and equipment	Bulldozers Excavators Forklifts Loaders
Advertising materials For more information, see Advertising.	Business cards Calendars Cups and mugs Pens
Taxable services	Detective and security services Laundry and cleaning services Lawn and garden care For more information, see Taxable Sales.

Delivery Charges

If the item being sold is taxable, charges by the seller to deliver it are also taxable. For more information, see Delivery Charges.

Building Cleaning and Maintenance

Building cleaning and maintenance services at businesses and residences are taxable. This includes final cleaning charges, including duct cleaning of a building after construction. Separate charges for the removal of construction debris or demolition waste are not taxable.

For more information, see Building Cleaning and Maintenance.

Purchasing Equipment Rentals

If you rent equipment without an operator and tax was not charged on the invoice, you owe use tax on the rental charge.

Use Tax

If you buy equipment, supplies, or other taxable items for your business and the seller does not charge Minnesota sales tax, you owe use tax on the cost of the items. If your business is located in an area with a local tax, you may also owe local use tax.

Some common situations where you may owe use tax include:

• You buy taxable items or services online without paying sales tax
• You withdraw an item from inventory to use (instead of selling it), donate, or give away
• You buy taxable items outside of Minnesota
• You buy taxable items in another Minnesota city or county with a lower (or no) local sales tax

For more information, see Use Tax for Businesses and Local Sales and Use Taxes.

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