Government contracting

Government contractors, either as prime or subcontractors, perform construction, installation, and/or improvements to real property of, or for, the United States, its instrumentalities, or a county or city housing authority. This category does not apply to federal road construction (see public road construction). The activities include, but are not limited to:

  • Constructing, repairing, decorating, and improving new or existing buildings or other structures.
  • Installing and attaching tangible personal property to new or existing buildings or other structures.
  • Clearing land.
  • Moving earth.

Gross income from such construction is subject to the government contracting B&O tax. Construction activities performed to improve real property of, or for, the U.S. is not a retail sale. It is prohibited under the federal constitution to directly impose a tax on the federal government. Accordingly, the government contractor does not collect sales tax on charges for such work.

Activities such as the mere sale of tangible personal property or providing professional services to the federal government are not reported under this classification.

Government contractor is the consumer

A government contractor is the consumer of property incorporated in, installed in, or attached to the federal construction job. The contractor (prime or subcontractor) must pay sales or use tax on all materials which become a physical part of the project. This includes items manufactured or extracted by the contractor, and also includes property provided by the federal government.

A government contractor is also a consumer of machinery and equipment provided by the government. Use tax is due on the reasonable rental value of the equipment provided.

Subcontractor's charges to prime contractors on government contracting jobs are not subject to sales tax.