Question by Traveler: Are contratcors purchasing capital improvement materials required to pay tax on those products?
Recently I ran into a friend I knew many years ago. He now owns a home improvement business and purchases windows wholesale in bulk to install in homes. Since he installs all the windows and all are a capital improvement. He told me that he pays 8% tax on the windows he purchases that he incorporates in the cost of each window because his customers do not pay tax on capital improvements.
I said that his customers are actually paying the tax because he incorporates into his fees. My question is should he be taxed if all his products are being used for capital improvements?
Best answer:
Answer by apathycat
In most states the answer is yes. Usually when a business buys something for resale, the business does not pay sales tax on the purchase, and does charges tax to customers when the items are sold.
Contractors completing leasehold improvements on the other hand are usually required to pay the tax when they purchase supplies, and then not charge tax (directly – they do include in the cost of the job) when they bill their customers.
Tax law does not have to make sense. It is what it is. I think the justification is that much of the cost billed back on those jobs is labor (which is usually a non-taxable service)
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Sounds like he is setting himself up for an audit, if he is charging tax he needs to pay that tax to the proper entities. As a contractor you pay for permits and you pay tax on materials if used along with payroll tax. Most contractors get into trouble because they don’t realize the taxes they are responsible for until it’s too late. He should talk to a good CPA and get the straight talk on it.
It really depends on weather he paid tax when he purchased from the manufacture and or the distributor. He probably did pay the tax especially if he does not have a resale card. A manufacture and or distributor must charge tax if they do not have a resale card on file, it is a tax violation for them to sell goods to a business/contractor and not charge tax if they do not have a resale card on file with that purchaser. Most manufactures and distributors will not take the chance because of possible IRS audit and the IRS will make the manufacture and or the distributor produce a copy of the resale card when audited.