Sales Tax Exemptions for Public Projects

Normally when we bid a construction project, we don't address in the bid documents the payment of sales tax. We do, however, indicate that the contractor is required to follow all Federal, State, and Local laws. Because of this, I would assume that on most projects, a contractor would be paying any required sales tax on the materials purchased for that project. But in Illinois a local government is exempt from paying sales tax. So recently there has been some discussion in our area about allowing contractors on our projects the use of our tax exemption status to make purchases for that project without having to pay the sales tax. The idea would be that if a contractor has to pay sales tax, this cost would just be passed along to our municipality. And if we allow the use of our exemption, perhaps we could save this cost.

To accomplish this, we've been reviewing some language to put in our specifications. But a few of us have also been discussing the question of control of the use of the city's tax exempt number. If we just give out a copy of our certificate or our number, how do we know for sure how it is being used? What ramped up this concern is that a couple weeks ago, a contractor called me to request a copy of our certificate. I asked them why they needed it because I was not aware of any projects in which they were under contract with us. The person indicated it was for a project they were working on for our city. So I asked which project, and she said she would have to get back to me with that information. Of course, I never heard back from her. I started wondering, would contractors purposely try to obtain these numbers and then use them on non-exempt projects? Once a contractor has a copy of that certificate, how would a vendor know for sure if the purchase was really for a project contracted by that tax exempt entity or if perhaps the material was going elsewhere? 

I tried calling a vendor of construction materials to ask how they controlled this and how they made sure the material really was designated for a tax-exempt entity. They really did not seem to know. All they told me was they required the contractor to fill out a form with the number. So it appeared the vendor really had no control in place to ensure the number was properly used. This led me to wonder how it is done in other states. And what I found out was a great help although I did find out there is quite a variation on sales tax implementation throughout the U.S.

  • Some states do not charge sales tax at all
  • In some states, local government is not exempt from sales tax
  • And in most of the remaining states, the use of a tax exempt number for a construction project is regulated by a form that is provided to tax-exempt entities. This form allows local governments to designate their number, the contractor, the specific project for which the number will be used, and in many cases a start and end date.

I really liked the idea of a form we could issue with each project – this would avoid having to issue a copy of our certificate and would limit the use of the number to a specific time period. I called our state to make sure a form would be acceptable and was told yes, we could give out a form with our number instead of giving contractors a copy of our actual certificate.

Anyway, below is a very rough summary of my findings. You can find your state and see how it is handled there.

Disclaimer: Please note this is not a legal or official opinion or statement. You should not rely on the information I have provided, and you will need to investigate the accuracy of my research on your own. This also does not address any sales tax that must be charged by the contractor to the local government.