Sales tax on invoices in Minnesota

Minnesota contractors pay sales or use tax on their materials and don’t charge sales tax on construction contracts. Several services the trades sell are taxable in their own right, though, including building cleaning and lawn care.

Minnesota Tax ID and a Sales and Use Tax account

Before you make any taxable sales in Minnesota, register for a Minnesota Tax ID Number and a Sales and Use Tax account. Registering for the account is your agreement to collect Minnesota sales tax and remit it to the state.

Construction contracts: tax on materials, none on the contract

Contractors and subcontractors, specialty contractors included, enter into construction contracts to furnish materials and labor that build, alter or improve real property. They pay Minnesota sales tax on the materials, supplies and equipment used to complete the contract when they buy them, or use tax if the supplier didn’t charge Minnesota sales tax.

The Department of Revenue says you’re improving real property when you repair, replace or incorporate items such as furnaces, garbage disposals, built-in dishwashers and stovetops, water heaters and central air conditioners, or when you work on plumbing or electrical wiring. Construction labor, which permanently incorporates property into real property or builds a structure intended to be permanent, isn’t taxable.

Retail sales, appliances and installation labor

• Items not incorporated into real property: selling them is a taxable retail sale, and tax applies to the total sales price, installation and delivery charges included.
• Appliances: free-standing appliances that aren’t built in are taxable. Built-in appliances a contractor installs that are designed to go under the counter, such as a dishwasher, are real property and aren’t taxable. Under Minnesota Rules 8130.1200, a dealer who replaces the refrigerators in a four-unit dwelling makes a retail sale, not a construction contract.
• Installation and fabrication labor: installation labor (setting an item into position, or connecting, adjusting or programming it) is taxable when the item sold is taxable, and fabrication labor is taxable whether or not the customer provides the materials.
• Incidental items on a lump-sum job: the rule doesn’t make a contractor on a fixed price or lump sum construction contract a retailer of personal property it transfers only incidentally, as part of the project, if that property is an insubstantial portion of the total contract price.

A contractor-retailer, which improves real property and also sells building materials and other items at retail, invoices two ways. On a construction contract it doesn’t itemize sales tax; on a retail sale it charges sales tax on the total sales price and itemizes it. In the Department’s example, a roofing contractor who sells a customer shingles with no installation has made a retail sale.

Churches, schools and government agencies

When you contract with an exempt organization, such as a church, school or government agency, you’ll generally still owe Minnesota sales tax on your materials and supplies, and its exempt status can’t be used to buy materials for a lump-sum contract covering labor and materials. You may buy materials exempt only as the organization’s designated purchasing agent, with the organization taking title at delivery, assuming the risk of loss and answering for defective materials.

Taxable services in Minnesota: the Department’s list

Some services are taxable, in categories the Department lists, among them building cleaning and maintenance, landscape maintenance services, delivery charges, detective, security and alarm services, and telecommunication services. The Department notes that each category may include some activities that aren’t taxable.

Building cleaning, pressure washing and duct cleaning

Minnesota taxes building cleaning and maintenance, inside and outside commercial and residential buildings, homes and apartments; the category doesn’t include repairs to buildings.

• Taxable: carpet, floor and window cleaning, janitorial services, office and restroom cleaning, gutter and chimney cleaning, swimming pool cleaning, pressure washing a building, and duct, furnace and ventilation system cleaning.
• Not taxable: painting and wallpapering, repairs to real property and to mechanical systems, sandblasting building exteriors, septic tank pumping, sewer and drain cleaning, and snowplowing.

The list names pressure washing a building; for other surfaces, such as driveways or decks, ask the Department of Revenue. A contract that includes taxable and nontaxable services is taxed on the full amount unless the nontaxable services are separately stated, so state a furnace repair separately from a furnace or duct cleaning on the same contract, or the whole contract is taxed.

Lawn care is taxable; landscape construction isn’t

Lawn, garden and tree services are taxable when anyone in the business provides them, even under a maintenance contract: aerating, dethatching, fertilizing, mowing and trimming, managing or killing weeds, insects, rodents or fungi, raking, spring and fall cleanup, and reseeding. Tree, bush and shrub trimming and removal are taxable too, even in storm or disaster cleanup, unless the removal is part of land clearing. Lawn services that are part of an initial landscaping project aren’t taxable.

A landscape construction contract isn’t taxable, and the landscaper pays sales or use tax on the plants, trees, shrubs, sod and other materials, supplies and equipment it uses. The Department’s examples include building a deck, grading, installing walkways, retaining walls or nightscape lighting, and planting trees, shrubs and perennials. Seasonal switch-outs of plants and mulch are a taxable gardening service.

Tax line on a Minnesota invoice

A seller either adds sales tax to the selling price and shows it separately on the receipt or invoice, or includes it in the price and marks the item “tax included” (or posts a sign saying tax is included).

When you invoice improvements to real property, repairs included, pass the tax you paid on as part of the materials cost, don’t itemize sales tax separately, and don’t charge sales tax on the construction contract. If you improperly charge sales tax on items that become real property and your customer requests a refund, the Department may assess you sales or use tax on the cost of the materials used in the contract.

Local taxes follow the customer

Some Minnesota cities and counties have local sales and use taxes, and every seller, wherever it’s located, collects them based on where the customer receives the taxable product or service. The Department’s Sales Tax Rate Calculator finds the combined state and local rate for an address, but not most special local taxes, which you add yourself; some of those are administered by a local government, not the Department.