Use tax

Use tax closes the gap when sales tax isn’t charged. Common cases for contractors: buying materials or equipment from an out-of-state seller that didn’t collect your state’s tax, buying materials tax-free for resale and then using them on a job where you’re the consumer, and pulling items from inventory for your own use.

You report and pay use tax to your state, usually on your sales and use tax return. Without a seller’s permit, it may go on a separate return or your income tax return, depending on the state.

Contractors working in more than one state face another wrinkle. Materials bought in one state and installed in another may owe use tax where they’re used, sometimes with credit for tax already paid elsewhere.

Auditors look for use tax on equipment purchases, out-of-state orders and tax-free purchases that ended up on jobs. Keep invoices that show the tax paid, and check your state department of revenue’s guidance for contractors.