Is Labor Taxable in New Jersey? Sales Tax on Contractor Labor

Capital improvement or repair: the call that sets the tax

The bulletin defines a capital improvement as "an installation of tangible personal property that increases the capital value or useful life of the real property," and adds that what you install must be permanently attached. Its exempt examples include new construction, a new roof, siding or gutters, a new central air conditioner, heating system or hot water heater, new kitchen cabinets, new bathroom fixtures, a new tiled bath, rewiring, a new deck or fence, a paved driveway, and the first coat of paint on a newly built house.

A repair "maintains the existing value" of the property and restores it to working condition. Examples include fixing faulty plumbing or outlets, repairing gutters, pointing bricks, replacing torn screens and fixing a leaky roof. Maintenance, which preserves the existing condition, includes mowing, trimming trees, repainting and power washing a house. Both carry tax on the labor.

Size can change the answer. Replacing a few loose tiles or part of a leaking roof is a repair. Replacing every tile, or the whole roof, with upgraded or improved materials is an exempt capital improvement. A gut renovation of a bathroom (new tub, new wall tile, new toilet and vanity) is an improvement. The plumber who comes back a year later to clear and reseal the same tub drain is doing a repair, and that labor is taxed.

When the call is close, the instructions on Form ST-8 say the job's treatment for federal income tax purposes may be used as a guide, and that anyone in doubt should describe the work to the Division of Taxation in detail.

Source: Tax Topic Bulletin S&U-3 and Form ST-8 instructions.

Form ST-8: no certificate, no exemption

The exemption for a capital improvement is not automatic. The form itself says "a registered New Jersey contractor must collect the tax on the amount charged for labor and services under the contract unless the owner gives them a fully completed Certificate of Exempt Capital Improvement." A new roof with no ST-8 in your file is, on paper, a taxable job.

How the form works:

• The owner of the property issues it, not you. The owner does not need to be registered with the state.
• You keep it. It is never sent to the Division of Taxation. Keep it at least four years from the last sale it covers.
• It covers labor only. The form says it "may not be issued for the purchase of materials," and it cannot be issued for a taxable capital improvement such as flooring or planting.
• Fully completed means the owner's name and address, type of business ("Individual" for a homeowner), the reason for the exemption, a New Jersey tax ID or federal employer number (a homeowner gives a driver's license number), and a signature on a paper copy.

Get it in time. A contractor who accepts a fully completed certificate within 90 days after the sale is relieved of liability, even if the owner claimed the exemption wrongly. In an audit, a missing or incomplete certificate leaves you at least 120 days after the Division asks to produce one.

Source: Form ST-8, Certificate of Exempt Capital Improvement and Tax Topic Bulletin S&U-3.

Materials: you are the end user, so the tax stops with you

New Jersey treats a contractor as the final consumer of the materials and supplies used to build, improve, alter or repair someone else's property. You pay sales tax to the supplier at the counter, and the bulletin says contractors may not give a resale certificate for construction materials, supplies or equipment that go into real property. Subcontractors pay the same way.

That means a customer should never see "sales tax on materials." On an exempt capital improvement there is no tax on the bill at all, whether you itemize or quote one price. On a taxable job (a repair, maintenance, an installation service or a taxable improvement), the rule for itemizing is narrow. The only amount you may leave out of the taxed total is "the separately stated pass-through of the actual cost of materials," which may include the tax you paid. The rest of the bill is treated as labor. If you do not split materials from labor on a taxable job, the whole bill is taxed.

The landscapers' publication spells out the consequence: contractors are not resellers and "cannot mark up the materials," so any markup belongs in the labor part of the bill, along with overhead.

A worked example. A central air repair costs the customer $480. The parts cost you $130 plus $8.61 tax, $138.61 in all. List the parts at $138.61 and the remaining $341.39 is taxed: $22.62. Write it as one line and tax falls on $480: $31.80. Bill the parts at $180 instead of cost and the extra $41.39 is labor, taxed like the rest.

Materials bought out of state with no tax, or at a lower rate, owe New Jersey use tax on the cost; the bulletin's example is lumber taxed at 4% elsewhere, leaving 2.625% due here. Equipment you buy or rent is taxable even on a job for an exempt customer.

Source: Tax Topic Bulletin S&U-3 and Publication ANJ-4, Landscapers & New Jersey Sales Tax.

Flooring, alarms, signs and planting: improvements that are taxed anyway

Since October 1, 2006, a short list of improvements has been taxable even though it adds value to the property: planting shrubs, trees, hedges and plants; seeding, sodding or plugging a new lawn; clearing and filling land for that work, including tree and stump removal; installing hard-wired security, burglar or fire alarm systems; and installing carpeting and other flooring. Permanently affixed sign installation joined the list on October 1, 2022. The labor on these jobs is taxed, and the owner may not give you an ST-8 for them.

The list changes how a big job is billed. A kitchen remodel with new cabinets and fixtures is exempt, but the bulletin taxes flooring installation "regardless of whether" it results in a capital improvement. Put a new floor on its own line so its labor can be taxed while the rest of the job is not, and ask your accountant how to treat tile that is part of a new tiled bath.

Subcontracting has a twist here. Normally a subcontractor doing taxable repair or maintenance work does not charge the prime contractor tax on labor; the prime collects it from the owner. On a taxable capital improvement, the subcontractor collects the tax from whoever hired them, contractor or owner.

Source: Tax Topic Bulletin S&U-3 and Form ST-8 instructions.

Heating and air conditioning: new systems, repairs and the home heating exemption

Installing a central heating, air conditioning or refrigeration system that is permanently attached is an exempt capital improvement, with the owner's ST-8. After that, the rules split by system.

• Residential heat is exempt. Maintaining, servicing or repairing a residential heating system that serves no more than three families, living independently and doing their own cooking, is not taxed: no tax on parts or labor, and no exemption certificate needed. Maintenance contracts on qualifying residential heating systems are exempt too.
• Other heating systems are taxed. Labor on a central heating system in any other building, such as a store or a six-unit apartment house, is taxable. You pay tax on the parts and do not charge it to the customer.
• Air conditioning repairs are taxed. Labor for repairing, maintaining or servicing central air and refrigeration is taxable, even when the original installation was exempt. You pay the tax on the parts.
• Window units stay personal property. Selling and installing a window air conditioner or a movable refrigerated case is taxable on both the unit and the installation, and repairs to them are taxable on parts and labor.

So a furnace repair in a two-family house carries no tax, while the same repair in a six-unit building, or a central air repair in either, carries tax on labor.

Source: Publication ANJ-8, Air Conditioning, Heating, Refrigeration & New Jersey Sales Tax and Tax Topic Bulletin S&U-3.

Repairs to vehicles and equipment: parts and labor both taxed

Someone who repairs things that are not part of a building (a car, a refrigerator, a washing machine, a window air conditioner, a television) is not a contractor under these rules. The bulletin's example is a television repair person, who "must collect Sales Tax from the customer on the charges for both labor and the parts used for the repair," and who may buy the parts tax free on a resale certificate (Form ST-3).

The Division's general sales tax guide lists appliance repairs, automobile repair labor and parts, and computer repair as taxable, and automobile inspection service as exempt. Auto shops also collect a $1.50 fee on each new tire sold, including tires sold as part of a repair or maintenance service, and the fee in general must be stated separately on the bill.

Source: Tax Topic Bulletin S&U-3 and Tax Topic Bulletin S&U-4, New Jersey Sales Tax Guide.

Cleaning, lawn care, landscaping and pest control

Cleaners and pest control companies work on buildings without altering them, so New Jersey does not treat them as contractors. They charge tax "on the total amount of the bill" and may give a resale certificate for certain materials and supplies used on the job. The Division's services list marks cleaning services (janitorial), window washing, carpet cleaning, pest control treatment, snow removal and lawn mowing as taxable. A pest control inspection and residential chimney sweeping are exempt.

Landscapers are contractors, and their work splits three ways:

• Maintenance is taxed. Mowing, pruning, weed and insect control, fertilizing, aerating and mulching, including a fixed-price contract for regular lawn care.
• Planting is taxed. Trees, shrubs and plants, new sod, seeding or plugging a new lawn, and clearing land for that work.
• Hardscape is exempt with an ST-8. A paver patio, walkway or retaining wall, a new fence, an underground sprinkler system, low-voltage lighting and drainage.

Two examples. A weekly mowing contract billed at $220 a month carries $14.58 in tax. A job planting three arborvitae billed as one $900 price is taxed on all $900, $59.63. If the plants cost you $420 including the tax you paid and you list them at that cost, tax falls on the remaining $480: $31.80.

Source: Publication ANJ-4, Landscapers & New Jersey Sales Tax, Tax Topic Bulletin S&U-3 and Tax Topic Bulletin S&U-4.

Government, nonprofit and Urban Enterprise Zone customers

Work on property owned by an exempt customer is exempt on both labor and materials, whether it is an improvement, a repair, maintenance or an installation. Exempt customers are New Jersey and its agencies and local governments, the United States, nonprofit organizations the Division has granted exempt status (churches, charities, volunteer fire and ambulance companies), and qualified housing sponsors. Other states' governments do not qualify.

The paperwork runs both ways. From the customer you get a copy of its Exempt Organization Certificate (Form ST-5), or a signed purchase order or contract from a New Jersey or federal agency, or a Housing Sponsor Letter of Exemption. To your supplier you give a Contractor's Exempt Purchase Certificate (Form ST-13) and buy the materials tax free. Tools and equipment you buy or rent stay taxable.

A qualified business in an Urban Enterprise Zone gets a similar break through Form UZ-4, which it gives you for your suppliers; you must contract with it directly. Since January 1, 2022, only the first $100,000 a calendar year of taxable purchases by all contractors working on that business's property is exempt.

Source: Tax Topic Bulletin S&U-3 and NJ Division of Taxation: Urban Enterprise Zone.

Which rate applies

The rate is 6.625% across the state, and use tax is charged at the same rate. The Division's general sales tax guide lists no county or city sales tax that applies to construction or repair labor, so the rate on your invoice does not change from town to town.

Two reduced rates exist, and neither is built for labor. Certified sellers in Urban Enterprise Zones may charge half the state rate, currently 3.3125%, on qualifying sales of goods ordered in person at their place of business in the zone. Salem County has a half rate on in-person sales of goods, and it excludes services such as maintenance and repairs. Confirm with the Division before you charge a reduced rate on any job.

Tax is reported on the accrual method: a sale counts in the period you make it, whether or not the customer has paid. Registered businesses file a quarterly return (ST-50), due by the 20th of the following month.

Source: NJ Division of Taxation: Sales and Use Tax, Urban Enterprise Zone, Tax Topic Bulletin S&U-4 and Tax Topic Bulletin S&U-3.