Sales tax and contractor's excise tax on invoices in South Dakota

South Dakota taxes construction apart from other services. Construction services subject to the contractor’s excise tax aren’t subject to sales tax: the prime contractor owes a 2% excise tax on its gross receipts and pays sales or use tax on its materials. Most other services, from lawn care to furnace cleaning, carry sales tax.

Two licenses: sales tax and contractor’s excise tax

Any business with a physical presence in South Dakota must be licensed for sales tax collection, through the Department of Revenue’s online Tax License Application.

Anyone who contracts for construction services listed in Division C of the 1987 Standard Industrial Classification Manual, or whose services include building, installing or repairing a fixture to real property, must also hold a South Dakota contractor’s excise tax license. That covers repairing or remodeling existing real property as well as new construction.

Contractor’s excise tax: 2% of a prime contractor’s gross receipts

SDCL 10-46A-1 imposes a 2% excise tax on the gross receipts of all prime contractors engaged in realty improvement contracts. For projects that aren’t qualified utility projects, the Department’s Contractor’s Excise Tax Guide says what counts:

• The value of material the owner furnishes is part of your gross receipts.
• You can’t deduct what you pay subcontractors, or the cost of materials, labor or services you buy, interest, taxes or other expenses.
• Your gross receipts include the tax you collect from your customer.

Materials: you pay sales or use tax on all your purchases of products and services, including the materials you install and your equipment, tools and supplies. Use tax goes on your contractor’s excise tax return, at the rate where the product is used. A markup on materials you bill for a construction project isn’t subject to sales or use tax, and you can’t buy services for resale.

Subcontractors: if you do all or part of the work for a prime contractor, you don’t owe contractor’s excise tax once you receive the prime contractor’s exemption certificate for that project. Each certificate must list the specific project; a blanket certificate isn’t allowed. Without a certificate on file for a project, South Dakota treats you as a prime contractor, and you owe the excise tax. Certificates can’t be issued on qualified utility projects.

Nearly every other service carries sales tax

Under SDCL 10-45-4, any service is taxable unless it’s specifically exempt, at the same rate as sales of tangible personal property. Services to real property, such as carpet installation, surveying or staking, pest control, lawn care and security services, are subject to sales tax at the property location where the service is performed.

When one job mixes excise-taxable work and sales-taxable services, its primary purpose decides which tax applies. If the primary purpose isn’t clear, either itemize the services on the invoice, with sales tax on the sales-taxable services and excise tax on the rest, or charge excise tax on the whole contract when 25% or more of its dollar value is excise-taxable work, and sales tax on all of it when that share is less.

Your invoice: an excise tax line, not a sales tax line

• Realty improvement work: construction services taxed under chapter 10-46A or 10-46B aren’t subject to sales tax, so the bill carries no sales tax. SDCL 10-46A-12 lets you list the contractor’s excise tax and any use tax as a separate line item on all contracts and bills, for public and private customers alike. That line is part of your total bill and collectible from all of them.
• The bid factor: because the excise tax is owed on gross receipts that include the tax you collect, the Department says a bid factor of 2.041% may be used to work out the excise tax on a bid or bill, so you collect the full amount due. Use a straight 2% on the excise tax return.
• Sales-taxable services: South Dakota law allows you to add sales tax to the price, but you owe the tax whether or not you collect it. The tax isn’t part of your gross receipts if it’s itemized, or if your documentation shows it’s included in the price. Tax you collect beyond what’s due goes to the Department or back to your customer.

Municipal tax where the customer receives the work

Municipalities may impose a municipal sales or use tax, generally 1% to 2%, which the Department administers; one return covers both state and municipal tax. It applies when your customer buys or receives the product or service within a city that imposes it, and a city may impose or change it only on January 1 or July 1. House Bill 1245 (2026) lets cities add a temporary municipal capital outlay tax of up to 1% for approved capital projects. Under Senate Bill 96 (2026), counties may also adopt a sales tax of up to 0.5%, from January 2027 at the earliest.

As a contractor, you owe additional municipal tax on products you use or consume in a city whose rate is higher than the rate you paid when you bought them.

Lawn care, landscaping and cleaning: which tax applies

The Department’s Landscaping and Lawn Care Tax Fact sorts the work:

• Sales tax: lawn, garden and tree services performed apart from other contracts involving realty improvements, with state sales tax plus any municipal tax applying where the work is done. Its examples include aerating, dethatching, fertilizing, mowing and trimming, mulching, turning on and blowing out lawn sprinkler systems, installing decorative rock and weed control fabric, and planting, pruning or removing ornamental plants, trees and shrubs. Seeding a new lawn is taxable even when the top layer of soil is removed and new soil added and leveled.
• Contractor’s excise tax: land clearing, and installing, repairing or removing driveways, sidewalks, parking areas, patios, decks, gazebos, retaining walls, ponds or fountains. A job to install underground sprinklers is excise-taxable even if seed or sod is planted where the sprinklers go.

The Contractor’s Excise Tax Guide adds these examples:

• Cleaning, calibrating and adjusting real property, without repairing or replacing parts, is subject to sales tax; cleaning a construction site or cleaning up after construction work is subject to contractor’s excise tax.
• Cleaning a furnace and replacing a filter are subject to sales tax; replacing the furnace motor is subject to contractor’s excise tax.
• Cleaning sewer pipes with a roto-rooter is subject to sales tax on the total charge, and so is inspecting sewer pipes.

Watch-out: the scheduled rate increase

SDCL 10-45-2 sets a higher state rate, effective July 1, 2027. Under SDCL 10-45-2.2, no tax increase may be levied on materials incorporated in construction work under construction contracts bid or entered into on or before the effective date of the increase.