The idea of building a wall along the Mexico-U.S. border has been in the news recently—but there’s been little discussion of the tax impact of such construction. Specifically, are there sales and use tax implications? The answers to that would depend on who would build the wall and who would pay for it.
Who Would Build the Wall?
To determine the sales and use tax implications on such a massive infrastructure project, it is necessary to first identify who would build the wall. Would the federal government itself build the wall, or would contractors do it? It’s an important question because the sales and use tax results could be different—the federal government generally does not pay sales and use tax on its purchases, but often construction contractors must.
States vary in how they treat construction contractors’ purchases for sales and use tax purposes. Most states treat construction contractors as consumers of materials and supplies used during construction. Such states require the contractor to pay sales and use tax when purchasing materials and supplies, but they do not require the contractor to collect and remit tax upon selling the finished product. In contrast, some states treat the contractor as purchasing the materials and supplies in a sale-for-resale transaction. This treatment enables the contractor to purchase the materials and supplies tax-free; however, it requires the contractor to collect and remit sales tax on the final sale.
Also, whether the construction contractor uses a lump-sum or itemized contract is important. States’ sales tax treatment varies here, too. A state might treat a construction contractor as a reseller of the items when the work is provided under an itemized contract but not for a lump-sum contract.
For example, consider the four states that border Mexico: Arizona, California, New Mexico, and Texas. If a contractor uses a lump-sum contract, then Arizona and New Mexico treat the contractor as a reseller, whereas California and Texas require the contractor to pay sales tax on the materials and supplies. However, if a contractor uses an itemized contract, then Texas will treat the contractor as a reseller.
Who Would Pay for It?
In general, states do not charge sales and use tax on purchases by the U.S. government and its instrumentalities. So, if the federal government were to pay for the wall, then the construction contractors would need to look to state sales and use tax laws to determine how to handle their purchases on behalf of the federal government.
If Mexico paid for the wall, things would get a bit more complex. Some states allow diplomats to purchase goods and services tax-free, but it seems unlikely that those statutes contemplated a multi-billion dollar construction project on U.S. soil funded by a foreign government.
Ultimately, with the controversy surrounding such a potential project, sales tax is likely the last thing on people’s minds. But in light of the money that could be involved, it’s interesting to consider nonetheless.
Continue the discussion on LinkedIn: What would be the appropriate sales tax treatment for building the wall?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
By Ryan J. Voorhees
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