This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies.
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
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to books@bna.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to research@bna.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)