Iowa Contractors Guide

Contractor

A contractor includes a general contractor, subcontractor, or builder. The contractor can be an individual or a legal entity.

Construction Contract

A construction contract is an agreement between a contractor and a sponsor whereby the contractor agrees to provide labor, materials, supplies, and equipment to build a structure for the sponsor.

Types of Contracts

Types of contracts include, but are not limited to, lump sum contracts, cost plus contracts, time and material contracts, unit price contracts, guaranteed maximum or upset price contracts, construction management contracts, and turnkey contracts.

For a list of activities and items that typically fall within the scope of a construction contract or a contract for reconstruction, alteration, expansion, or remodeling, refer to Iowa Administrative Code rule 701–219.8.

Building Materials, Supplies, and Equipment

For more information on what qualifies as building materials, building supplies, and building equipment, refer to Iowa Administrative Code rules 701–219.1 and 219.3.

The sales price of a grain bin, including materials, supplies, or replacement parts used to construct or repair a grain bin, is exempt from sales or use tax under Iowa Code section 423.3(16A) and Iowa Administrative Code rule 701–214.20.

Carpeting

Carpeting is considered to be tangible personal property, not building materials. Therefore, sales of carpeting are retail sales subject to tax, unless purchased for resale. Contractors should purchase carpeting for resale and provide the seller with a sales tax exemption certificate (31-014). If contractors purchase carpet tax free for resale, they must charge their customers sales tax on the sales price of the carpet. Contractors must have sales and use tax permits to purchase carpet tax free for resale.

Carpet installation is exempt from sales tax. However, the bill must be itemized to show that sales tax is being charged on the sales price of the carpet only. If the installation charge is not separately itemized, the entire bill is subject to sales tax.

Floor Coverings Other Than Carpeting

Floor coverings other than carpeting are considered to be building materials if they are shaped to fit a particular room and are permanently attached to the floor. When this occurs, they are taxable in the same manner as building materials. Sales of linoleum and other types of floor coverings other than carpet that are not attached but simply laid on finished floors are subject to tax unless purchased for resale.

Landscaping Materials

For information on the taxability of landscaping materials, refer to Iowa Administrative Code rule 701–211.24.

Types of Taxpayers

The type of taxpayer does not determine the taxability of a particular job, but it is the basis for how the taxpayer organizes its sales and use tax reporting. Each taxpayer should determine which type it is depending on the nature of the taxpayer’s business. Some of the possible types include the following:

• Owner
• Contractor
• Contractor-retailer
• Retailer 
• Repair business
• Contractor-manufacturer

If the nature of your business changes, your sales and use tax reporting requirements may change as well.

Owner

Owners must pay sales tax on the sales price of all building materials, building supplies, and building equipment they purchase.

Contractor Responsibilities in General

Contractors are generally final consumers of building materials, supplies, and equipment, and must pay sales tax at the time of purchase. If the seller did not charge sales tax at the time of purchase, the contractor is responsible for paying use tax on the purchase price of the respective item. Building materials, supplies, and equipment delivered in Iowa are subject to tax. It does not matter if the materials, supplies, or equipment purchased are for use in projects performed in Iowa or outside of Iowa. 

Jobs for most nonprofit organizations, including churches, are not exempt. Some jobs with specific organizations and entities may be exempt from tax. Contracts with Designated Exempt Entities and Iowa Administrative Code rule 701—219.22 provide more information on this topic.

Contractor Tax Responsibilities by Situation

When a contractor performs new construction, reconstruction, alteration, expansion, or remodeling, the contractor must pay sales or use tax on the building materials and supplies at the time they are purchased and does not collect any tax from the customer. Also, the contractor does not charge sales tax on the sales price of the labor involved in completing the job.

In all other instances, such as repairs or installations that do not rise to the level of new construction, reconstruction, alteration, expansion, or remodeling, the contractor charges the customer sales tax on the sales price of the building materials and supplies used in completing the work. The contractor also charges the customer sales tax on the sales price of any taxable labor involved in completing the work. If the contractor itemizes the building materials and supplies on the invoice to the customer, the contractor should claim a credit for the sales or use tax, if any, that the contractor paid to its supplier on the sales price of the building materials and supplies used in that particular job. The amount of such credit should be claimed on the exemption line by entering the amount of the sales price that the contractor paid as an “other” exemption on the sales tax portion of the return. If the contractor accrued use tax because its supplier did not charge sales tax, the contractor should amend the tax return for the period when the use tax was originally paid.

Contractor-Retailer

A contractor-retailer is a business, generally with a store front, that makes frequent retail sales of building materials, supplies, and equipment to the public, including other contractors.

A contractor-retailer must obtain a sales and use tax permit. The contractor-retailer must charge sales tax on the sales price of building materials, supplies, and equipment sold at retail. 

The contractor-retailer must pay use tax on the purchase price paid to its supplier for any building materials, supplies, and equipment withdrawn from inventory for use by the contractor-retailer in new construction, reconstruction, alteration, expansion, or remodeling. If the contractor-retailer buys building materials or supplies not typically placed in inventory (such as wet concrete), it must pay sales tax to its supplier on the sales price of the building materials and supplies. The contractor-retailer does not pay sales or use tax on materials withdrawn from inventory for use in projects outside the State of Iowa.

If the contractor-retailer performs jobs that do not rise to the level of new construction, reconstruction, alteration, expansion, or remodeling (such as repairs and installations), it must charge sales tax on the sales price of the building materials, supplies, and taxable labor used in those jobs.

For examples illustrating how sales and use tax laws apply to contractor-retailers in various scenarios, refer to Iowa Administrative Code rule 701–219.4(5).

Retailer

A retailer has a storefront and must obtain a sales and use tax permit. Retailers must charge sales tax on the sales price of building materials, supplies, and equipment sold at retail. Retailers purchase their inventory for resale and do not pay sales tax to their suppliers. If retailers withdraw any items from their inventory for their own use, they must pay use tax on the cost of such items at the time they are withdrawn from inventory. If retailers purchase items for their own use that will not be placed in inventory, they must pay sales tax on the sales price of such items at the time of purchase.   

Repair Businesses

Repair businesses that perform primarily repair jobs should purchase building materials and supplies for resale and should not pay sales tax to their suppliers. Repair businesses should give their suppliers a valid Sales Tax Exemption Certificate (31-014). When performing jobs that do not qualify as new construction, reconstruction, alteration, expansion, or remodeling (such as repairs and installations), repair businesses must charge sales tax on the sales price of any building materials, supplies, and taxable labor  used in those jobs. 

Repair businesses should itemize the materials, supplies, and labor charges used in a particular job. If the labor charges are itemized, repair businesses must charge sales tax on the sales price of the labor charges only if a taxable service is involved in completing the particular project. If the invoice is not itemized, repair businesses must charge sales tax on the full amount of the non-itemized billing.

Manufacturers 

Manufacturers must charge sales tax on the sales price of building materials, supplies, and equipment sold at retail. Manufacturers who make retail sales are required to hold an Iowa sales and use tax permit. Manufacturers may use building materials, supplies, or equipment they manufactured in projects that qualify as new construction, reconstruction, alteration, expansion, or remodeling. In such cases, manufacturers must pay sales or use tax on the fabrication or production cost of the building materials, supplies, and equipment. Fabrication cost includes both direct and indirect expenses. This includes the cost of all materials, labor, power, transportation to the plant, and other plant expenses such as overhead, but it does not include installation on the job site.

Manufacturers performing projects that do not rise to the level of new construction, reconstruction, alteration, expansion, or remodeling (such as repairs or installations), must withdraw building materials or supplies they manufacture from inventory tax free. Manufacturers must charge their customers sales tax on the sales price of the building materials and supplies used in completing the project.  Manufacturers must also charge sales tax on the sales price of any taxable labor used in completing the project. Manufacturers should itemize the materials, supplies, and labor charges used in a particular job. If the labor charges are itemized, manufacturers must charge sales tax on the sales price of the labor charges only if a taxable service was performed. If the invoice is not itemized, manufacturers must charge sales tax on the full amount of the non-itemized billing.

When tangible personal property is used by a manufacturer in projects outside the State of Iowa, no Iowa sales or use tax is due.

Taxable services typically associated with the building trades include the following:

• Carpentry repair and installation
• Roof, shingle, and glass repair
• Electrical and electronic repair and installation
• Janitorial and building maintenance or cleaning
• Excavating and grading
• House and building moving
• Landscaping
• Machine operator services
• Oilers and lubricators
• Painting
• Papering and interior decorating
• Pipe fitting and plumbing
• Termite, bug, roach, and pest eradicators
• Tin and sheet metal repair
• Tree trimming and removal
• Welding
• Well drilling
• Wood preparation
• Wrecking /demolition

However, taxable labor charges are exempt when on or connected with new construction, reconstruction, alteration, expansion, or remodeling of buildings or other structures. Taxable labor charges remain subject to sales tax in all other instances, such as repairs and installations.

Services not subject to sales tax, if separately itemized, include the following:

• Brick laying
• Concrete finishing
• Siding installation
• Laying vinyl, wood, and other flooring
• Carpet installation
• Tiling
• General building contractor services, such as project management
• Architect services
• Engineer services

For additional information, refer to Iowa Sales and Use Tax: Taxable Services

Repairs and Installations

Taxable labor involved in any job that does not qualify as new construction, reconstruction, alteration, expansion, or remodeling, such as repairs and installations, is subject to sales tax. Examples of such scenarios involving taxable labor include:

• Repairing broken or defective glass. 
• Replacing broken, defective, or rotten window sashes. 
• Replacing damaged roof shingles. 
• Replacing or repairing defective or worn-out kitchen cabinet doors.
• Repairing broken or damaged garage doors or garage door openers. 
• Replacing broken faucets. 
• Replacing rotten planks on wooden decks.
• Installing new light fixtures.
• Repairing broken water heaters, furnaces, or central air conditioning units.
• Replacing or repairing the original wiring in buildings.

New Construction, Reconstruction, Alteration, Expansion, And Remodeling

Otherwise taxable labor is exempt from sales and use tax when on or connected with new construction, reconstruction, alteration, expansion, or remodeling. This exemption applies to buildings and other structures only. It does not apply to tangible personal property.

The contractor is responsible for paying sales tax to the supplier on the building materials and supplies used in the project. The contractor does not charge sales tax to the customer on the labor or the building materials and supplies.

Examples of new construction, reconstruction, alteration, expansion, and remodeling activities:

• The building of a garage or adding a garage to an existing building is considered new construction or expansion. 
• Adding a wooden redwood deck to an existing structure is considered new construction. 
• Replacing the entire roof on an existing structure is considered reconstruction. 
• Adding a new room to an existing building is considered new construction or expansion. 
• Adding a new room by building interior walls is considered alteration. 
• Replacing kitchen cabinets with some structural modification to the kitchen layout is considered remodeling. 
• Laying a new hardwood floor is considered remodeling. 
• Building a new wing to an existing building is considered an expansion. 
• Rearranging the interior physical structure of a building is considered remodeling or alteration. 
• Installing manufactured housing or a modular or mobile home on a foundation is considered new construction.

Deciding Whether A Project Involves Exempt Labor

• Purpose.  In order to be exempt, the service must be on or connected with new construction, reconstruction, alteration, expansion, or remodeling. Therefore, the reason for the service should be considered. For example, the service of excavating and grading land to clear it for construction of a building is exempt because it is on or connected with new construction. However, excavating and grading land unrelated to construction is taxable.
• Temporal relationship.  The time when the service is performed in relation to the construction activity should be considered. For example, if land is graded to seed a new lawn following construction, the service is exempt from tax. If, however, the lawn does not grow and the land is graded again the following year, the service is taxable because it is not on or connected with new construction.
• Physical relationship.  The physical location where the service is performed in relation to the construction activity should also be considered. If a building is constructed to house machinery, installation of the machinery is exempt. For example, piping services that join two pieces of equipment in separate buildings are exempt if the equipment in either building is installed while new construction, reconstruction, alteration, expansion, or remodeling to the structure is also taking place.
• Scope of work.  The scope of a job should be considered when deciding if the job is new construction, reconstruction, alteration, expansion, or remodeling. For example, replacing damaged or missing shingles on a roof is taxable repair, while rebuilding an entire roof is reconstruction and exempt.
• Is the item being replaced defective?  For example, if a building’s existing furnace is not defective, but the owner of the building has a new, more energy efficient furnace installed, the service is reconstruction or remodeling. However, if the building’s furnace is defective, the replacement of the furnace is a repair.

Mixed Projects

In some instances, a contractor may agree to complete repairs or installations in addition to new construction, reconstruction, alteration, expansion, or remodeling. If this happens, the contractor must itemize the bill and charge the customer sales tax on the sales price of the building materials, building supplies, and labor used in the repair.

Example:
A homeowner hires a contractor to add a new room to the existing home. This project qualifies as new construction or expansion, and the contractor must not charge the homeowner sales tax on the sales price of the building materials, building supplies, and labor. However, the contractor also agrees to replace a broken window. This is a repair, and the contractor must charge the homeowner sales tax on the sales price of the building materials, building supplies, and the labor charge involved in the repair.

These charges are not subject to Iowa sales or use tax if they are separately contracted for or, if no written contract exists, are separately itemized on the billing from the contractor to the customer.

The exemption for labor charges on or connected with new construction, reconstruction, alteration, expansion, or remodeling does not apply to gambling boats. Gambling boats are tangible personal property, not real property.

Manufactured Homes

Taxable:

• A use tax of 5% is imposed on 20% of the installed purchase price
• Use tax paid to the manufactured home retailer at the time of sale
• Purchaser must provide the retailer with all the information necessary to submit an application for title
• The retailer is required to remit the use tax to the county treasurer of the county in which the home is located and also carry out the title application process

Exempt if:

• Tax has already been paid

Example:
When resold, the new owner does not pay the 5% use tax again.

Installed purchase price

“Installed purchase price” is the amount charged, valued in money (even if it isn’t actually paid in money) by building contractors to convert manufactured housing from tangible personal property to realty. This includes, but is not limited to, amounts charged for installing a foundation and electrical and plumbing hookups. It does not include any amount charged for landscaping in connection with the conversion.

Modular Homes

Taxable:

• 6% sales or use tax, plus any applicable local option tax, on 60% of the purchase price

The circumstances of the sale determine who pays the tax.

• A dealer who is not a contractor, subcontractor, or installer may purchase modular homes for resale tax free from a wholesaler or manufacturer. Tax is collected when the home is sold.
• A dealer who is also a contractor may purchase modular homes tax free for inventory. The dealer will owe tax on the cost of the home when it is withdrawn from inventory for use in a construction contract.
• A contractor must pay the tax to the supplier when purchasing a home for use in a construction contract.
• A manufacturer that acts as its own dealer will collect the tax on its sales to customers, unless the customer will be reselling the home.
• A manufacturer who installs a modular home for an Iowa customer at a construction site in Iowa owes tax on the fabricated costs.

Sectionalized Housing and Panelized Construction

Sectionalized housing and panelized construction are considered prefabricated structures but not manufactured or modular homes. Sales tax is due as with other construction projects.

Contracts for the Sale of Machinery and Equipment with Installation

Machinery and equipment installed in a building or other structure are not building materials or building supplies and do not become a part of the real property after installation. Such machinery and equipment must be purchased for resale by providing the supplier with a valid Sales Tax Exemption Certificate (31-014). Contractors who sell machinery or equipment must charge sales tax on the sales price of the machinery and equipment. The contractor must either itemize sales tax separately or state that sales tax is included in the contract price. The contractor must have a sales and use tax permit.

Mixed Contracts

When a construction contract or a contract for reconstruction, alteration, expansion, or remodeling is mingled with a machinery and equipment sales contract (a mixed contract), the two parts should be separated for sales tax purposes. In these situations, the contractor is the consumer of the building materials and supplies and is also a retailer of the machinery and equipment and of the labor to install the machinery and equipment. The contractor is required to pay sales tax on the building materials and supplies and to charge its customer sales tax on the sales price of the machinery and equipment and the installation labor, if it involves a non-exempt taxable service.

Example:
Company A contracts with Company B to build a new building and install all of the machinery and equipment. Company B pays its suppliers sales tax on all building materials and supplies used in constructing the building. Company B also purchases refrigeration units that will remain tangible personal property after installation. Company B buys these units tax free for resale since they will be resold to Company A; Company B will then charge Company A sales tax on the sales price of the units.

Distinguishing Machinery and Equipment from Real Property

"Machinery and equipment" includes property that:

• Is tangible personal property when it is purchased and remains tangible personal property after installation
• Does not bear the weight of the structure
• Can be moved without causing damage or injury to itself or to the structure
• Does not in any manner constitute an integral part of a structure

For a list of property that under normal conditions remains tangible personal property after installation, refer to Iowa Administrative Code rule 701—219.11.

Tangible Personal Property that Becomes a Structure

Items that are manufactured as tangible personal property can become a structure. The determination is factual and made on an item-by-item basis.

Criteria used to decide if an item becomes a structure:

• Degree of architectural and engineering skills necessary to design and construct the structure
• Overall scope of the business and the contractual obligations of the person designing and building the structure
• Amount and variety of materials needed to complete the structure, including the identity of materials prior to assembly and the complexity of assembly
• Size and weight of the structure
• Permanency or degree of annexation of the structure to other real property that would affect its mobility
• Cost of building, moving, or dismantling the structure

Example:
A farm silo, which is a prefabricated glass-lined structure, is intended to be permanently installed. The silo is 70 feet high and 20 feet around, weighs 30 tons, and is affixed to a concrete foundation weighing 60 tons that is set into the ground for the specific purpose of supporting the silo. The assembly kit includes 105 steel sheets and 7,000 bolts. The silo can be removed without material injury to the realty or to the unit itself at a cost of $70,000. In view of its massive size, the firm and permanent manner in which it is erected on a substantial foundation, its purpose and function, the expense and size of the task, and the difficulty of removal, it is considered a structure and not machinery or equipment.

Equipment Tax

The following construction machinery and equipment are subject to a 5% excise tax instead of sales or use tax and local option sales tax: self-propelled building equipment, pile drivers, motorized scaffolding, or attachments customarily drawn or attached to them, including auxiliary attachments which improve their performance, safety, operation, or efficiency and including replacement parts. These must be used directly and primarily by contractors, subcontractors, and builders for new construction, reconstruction, alterations, expansion, or remodeling of real property or structures. Refer to Iowa Code chapter 423D for more information.

When these items are directly and primarily used by contractors or owners for new construction, reconstruction, alteration, expansion, or remodeling, the rental payments are exempt from sales and use tax. Rental charges for the following are exempt when directly and primarily used in new construction, reconstruction, alteration, expansion, or remodeling. This list is illustrative, not exhaustive.

• Self-propelled building equipment (does not include vehicles subject to registration)
• Self-constructed cranes
• Pile drivers
• Structural concrete forms
• Regular and motorized scaffolding
• Generators
• Attachments customarily drawn or attached to the above
• Auxiliary attachments which improve the performance, safety, operation, or efficiency of the equipment and replacement parts
• Tools, including hand tools
• Compressors
• Drill presses
• Forms other than structural concrete forms
• Lathes

Portable Toilet Rental and Servicing 

When a contractor rents a portable toilet for use on a construction site, the sales price for the rental of the portable toilet is taxable. Because portable toilets are not building materials, building supplies, or building equipment and do not improve the performance, safety, operation, or efficiency of the machinery or equipment used in construction, their rental is subject to tax. 

When a portable toilet rental company also sells waste removal services and itemizes that service separately on an invoice, the waste removal service is not subject to tax because sewage sludge is excluded from the definition of “solid waste,” the removal of which is otherwise taxable under Iowa Code section 423.2(7). However, if the rental company does not separately itemize the waste removal service and the portable toilet rental in a contract to provide such products and services, the entire sales price is taxable as a bundled transaction under Iowa Code section 423.2(8). 

Tax Liability of Subcontractors

A subcontractor providing building materials, building supplies, building equipment, and labor on the actual new construction, reconstruction, alteration, expansion, or remodeling of a building or other structure has the same tax responsibilities as the contractor. The contractor is not responsible for the tax liabilities of a subcontractor.

Sales Tax and Use Tax

For general information about Iowa sales tax and use tax responsibilities, see the Department’s Sales and Use Tax Guide. 

A business making taxable sales must have a sales and use tax permit. For more information, see Permit Requirements

Local Option Sales Tax

In addition to the 6% state sales tax, local jurisdictions may impose a local option sales tax (LOST). The rate is 1%. If a sale is subject to use tax, no local option tax is imposed.

View LOST Frequently Asked Questions. The list of local option tax jurisdictions is updated in June and December.

All businesses should keep records for at least three years. Business records of contractor-retailers must clearly show whether inventory items taken out of stock were retail sales or used in construction contracts or in contracts for reconstruction, alteration, expansion, or remodeling.