Figuring out how Kentucky sales and use tax applies to construction contractors can be a challenge, whether from the perspective of a construction contractor or from one selling to or purchasing from a construction contractor. 

The first step is to understand what a construction contractor is. A construction contractor is a general contractor or a subcontractor engaged in the building trades. 103 KAR 26:070 § 2. Building trades include: carpentry, bricklaying, wall to wall carpeting, cement work, steel work, plastering, sheet metal work (including aluminum siding), roofing, tile and terrazzo work, cabinet work, electrical work, plumbing, central heating and air conditioning, painting, interior decorating, and storm window and permanent awning work. 103 KAR 26:070 § 2.

Sales and Use Tax Generally Applies to Construction Materials that Contractors Purchase.

One guiding principle of Kentucky sales tax is to avoid pyramiding of the tax. See George v. Scent, 346 S.W.2d 784 (Ky. 1961). This means that sales and use tax should generally apply to the sale of the item to the ultimate consumer thereof. So, when a wholesaler sells an item to a retailer, that sale is exempt as a sale for resale, and the retailer’s sale of the item to a consumer is subject to sales tax, unless otherwise exempt. See 103 KAR 31:111. Likewise, a sale of an item that will be incorporated or fabricated into another item for sale is generally exempt. See KRS 139.470(9)(a). A subsequent sale of that fabricated item in a sale not for resale would be subject to tax, unless otherwise exempt.

In contrast, Kentucky sales and use tax generally applies to sales of construction materials that will be incorporated into real property, the sale of which is not subject to sales tax. 103 KAR 26:070 § 1. More specifically, sales and use tax applies to sales to contractors, subcontractors, builders or owners of building materials, fixtures and supplies to be incorporated or fabricated by the process of erecting, remodeling, or repairing any structure or improvement to real estate, including, e.g., buildings, roads, sewers, dams, railroads, and fences. 103 KAR 26:070 §§ 1&2. Sometimes issues can arise as to what constitutes real property versus tangible personal property. Sales tax applies regardless of the type of construction contract, i.e., contracts for erecting, remodeling, or repairing a building or other structure on land, for which a construction contractor is purchasing materials and includes lump sum, cost plus, and time-and-materials contracts. 103 KAR 26:070 §§ 1&2.

So, what are construction materials and fixtures? Construction materials are all tangible personal property, other than fixtures, that enter into and become a permanent part of a structure. 103 KAR 26:070 § 2. Examples of materials are: bricks, builders hardware, cement, gravel, sand, macadam, asphalt, lumber, electrical wiring, wall board and coping, roofing, guttering, aluminum siding, storm doors and windows, and cabinets. Id. A fixture is a thing that is an accessory to a building and does not lose its identity as an accessory but which becomes a permanent part of the realty. Id. Examples of fixtures are: lighting fixtures, plumbing fixtures, hot water heaters, furnaces, boilers, central heating units, elevators, hoists, burglar and fire alarm fixtures, central air conditioning and built-in refrigeration units, built-in oven-ranges and dishwashers, and cabinets. Id. Notice how these examples of materials and fixtures match up with items that building tradespeople use.

In effect, construction contractors are considered to be the consumers of materials, fixtures, and supplies used in building real property so that sales tax applies to sales of such to them. 103 KAR 26:070. On May 31, 2019, the Kentucky Department of Revenue provided its position in response to inquiries prompted by 2019 legislation (available at,gov), “According to the provisions of Kentucky Regulation 103 KAR 26:070, all sales to contractors, subcontractors, or builders of tangible personal property to be incorporated or fabricated into any structure or improvement to real property are subject to sales tax. This same treatment applies to sales of landscaping, janitorial or other taxable services to contractors. The liability for the sales tax associated with the purchase of the property or services is on the contractor as the consumer.” In this regard, construction contractors are like services enterprises. See 103 KAR 26:010.

Contractors Do Not Charge Sales Tax to their Customers on Construction Contracts.

It is important to remember that, similar to service enterprises rendering services not subject to sales tax, sales tax does not apply to sales of real property or the erection, remodeling, or repair of real property. See KRS 139.200. In 2018, the General Assembly extended the sales tax to many services including installation of tangible personal property, effective July 1, 2018. KRS 139.010(15)(a). However, as the Department notes (available at,gov), “Nothing in the new law changes the current tax treatment of construction contractor services or labor.”

Contractors May Also Be Retailers of Tangible Personal Property or Services.

A contractor may also be a retailer, i.e., a contractor-retailer, making sales of tangible personal property that it has fabricated or purchased for resale; in which case, it collects and remits sales tax like any other retailer. 103 KAR 26:070 § 5. For example, the sale and installation of machinery, appliances or equipment that do not become part of real property. In the home construction business, examples of appliances include refrigerators, oven-ranges and dishwashers that are not built-in, laundry appliances, window unit air conditioners, and space heaters. 103 KAR 26:070 § 2. Indeed, a taxpayer may operate as a manufacturer (manufacturing building materials), contractor (installing building materials), and retailer (selling building materials to contractors, builders, and owners).

Not surprisingly, the imposition of sales tax on landscaping services also caused some confusion. Landscaping providers must charge sales tax on landscaping services [KRS 139.200]; however, they do not charge sales tax when acting as a construction contractor or subcontractor by erecting, remodeling, or repairing any structure or improvement to real estate, e.g., a pond, patio, retaining wall, stone fence, or irrigation system. So, just like any other contractor-retailer, a landscaping provider would charge sales tax on landscaping services (e.g., when acting as a subcontractor of a landscaping service such as planting bushes or trees) but not on construction contracts (e.g., when acting as a subcontractor such as providing site preparation).

When a taxpayer engages in business as a contractor-retailer, the taxpayer should endeavor to keep records that clearly delineate its different lines of business. Consideration may also be given to operating such businesses in separate entities for clarity of sales tax treatment.

Post-Wayfair, Construction Companies Operating in Multiple States Face Challenges.

The Kentucky tax regulation concerning construction contractors requires suppliers selling construction materials, fixtures, and supplies to contractors to collect Kentucky sales tax on such sales from contractors. 103 KAR 26:070 § 5. And, since South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018) overturned the “physical presence” nexus test, out-of-state suppliers in addition to in-state suppliers can be anticipated to charge and collect Kentucky sales tax on sales made by suppliers in Kentucky or shipped to Kentucky by out-of-state suppliers.

So, when a contractor purchases materials, fixtures, and supplies on which Kentucky sales tax is paid to fulfill a construction contract outside of Kentucky or on which another state’s sales tax is paid to fulfill a construction contract inside Kentucky, there is a potential for the contractor to overpay sales tax. Fortunately, Kentucky provides a credit for sales tax paid to other states. See KRS 139.570. Nevertheless, traps exist….

Morton Buildings, Inc. v. Revenue Cabinet, No. 2002-CA-001787-MR (Ky. App. July 25, 2003) (unpublished) provides a cautionary tale. In that case, it was “determined that [the taxpayer] was subject to Kentucky’s use tax on raw materials purchased and used to make building components [manufactured in factories in Illinois and Ohio] that [were] eventually assembled into prefabricated buildings in Kentucky.” In that case it appears that both Ohio and Kentucky were attempting to each impose their respective sales taxes.

Because states and localities outside of Kentucky impose different sales tax rates, depending on the construction contract, it may be worthwhile to plan for sales tax efficient sourcing of construction materials, fixtures, and supplies (e.g., vendor ships construction materials to an out-of-state job site).

Complexities Exist in Construction Contracts with Tax-Exempts.

Construction contracts with tax-exempt entities such as qualified charities and governments can present opportunities and risks. This is because these tax-exempt entities may make purchases without sales and use tax. See, e.g., KRS 139.470(1)&(9); KRS 139.495.

A construction contractor must pay sales and use tax on materials purchased and used in fulfillment of a construction contract with a tax-exempt organization. 103 KAR 26:070 § 5; Pete Koenig Company v. Dep’t of Revenue, 655 S.W.2d 496 (Ky. App. 1983). However, a construction contractor’s purchases of materials used in constructing real property for a tax-exempt entity may be exempt from sales tax when the contractor is acting as the tax-exempt entity’s agent. Mountain Constr. Co. v. Revenue Cabinet, No. 90-CA-0086-S (Ky. App. 1990) (unpublished). “If a nonprofit entity wishes to take advantage of its exempt status by making purchases directly, [the Department of Revenue] recommends that the exempt entity initially advertise separate competitive bids for materials and labor and any materials purchased by the exempt entity should be delivered to the exempt entity's job site. In addition, the exempt entity must prepare and submit its own purchase order for materials and payment must be made directly by the exempt entity to the vendor.” Dep’t of Revenue, Kentucky Sales Tax Facts, Vol. 5, No. 1 (Dec. 1, 2003). So, it can be done.

The more familiar one becomes with the application of sales and use tax to construction contractors, the more obvious, i.e., black and white, the tax treatment of most purchases and sales to and from construction contractors becomes. Nonetheless, as it seems with many tax issues, more time seems spent in the gray.