Kentucky sales tax for contractors: what you pay, what you collect, and the 2023 changes

The core rule: you are the consumer of your materials

In Kentucky, a contractor improving real property is treated as the final consumer of the materials that go into the job. That means you pay 6% sales tax when you buy shingles, lumber, concrete, fixtures, and so on, and you do not charge sales tax to the homeowner on the finished work. The tax is simply a cost of materials, and it belongs inside your price the same way the materials do.

The common mistake: adding a “sales tax” line to a remodeling invoice. You are not a retailer on that job, and collecting tax you are not registered to remit creates a liability, not a cushion.

Construction labor is not a taxable service

Kentucky taxes a long list of services now, and the list grew sharply on January 1, 2023 (House Bill 8 added more than 30 categories). The Department of Revenue has been explicit that those changes did not make construction contractor services or construction labor taxable. Improving or repairing real property remains outside the sales tax base. Roofing, framing, concrete, drywall, painting, tile, remodeling: no tax on your labor.

Where contractors do have to collect

• Retail sales with installation. If you sell tangible personal property at retail and install it, and the item stays tangible personal property rather than becoming part of the real estate (appliances are the classic example), the sale is taxable and the installation labor that goes with it is generally taxable too. Selling and installing a built-in that becomes part of the house is a different situation; when in doubt, ask the Department of Revenue in writing.
• Repair of tangible personal property.Repairing a thing (an appliance, equipment) is different from repairing a building. The Department's guidance treats repair labor as non-retail when the materials used are a small share (under roughly 10%) of the total charge; when parts dominate, it looks like a retail sale.
• Taxable service categories you might also offer. Some side lines common among contractors are taxable services in Kentucky, including landscaping and lawn care, janitorial services, and certain other categories added in 2018 and 2023. If you mow or do cleanouts alongside construction work, that revenue is taxable even though your construction labor is not. Keep the lines separate on the invoice.

Buying materials for resale vs. for use

Because you are the consumer of materials on construction jobs, you should not hand the lumber yard a resale certificate for materials that go into real property. Using a resale certificate to dodge tax on job materials shifts the liability to you, with penalties, when it surfaces in an audit. Keep a resale certificate only for the retail-with-install situations above.

Materials bought out of state

If you buy materials online or from an out-of-state supplier that does not charge Kentucky tax, you owe use tax at the same 6% on those purchases. It is reported on your Kentucky return. Suppliers that sell heavily into Kentucky usually collect it now, but check the invoice.

A worked example

You replace a deck. Lumber, fasteners, and stain cost $2,800 before tax; you pay $168 in sales tax at the counter, so materials are $2,968 delivered. Your labor is $3,200, overhead and profit bring the price to $7,900. The invoice to the homeowner says $7,900 and has no tax line. The $168 is inside the materials number. If you had also sold and installed a freestanding outdoor kitchen appliance as a separate item, that line would carry 6% tax and you would remit it.

Registration and paperwork

• If you only do construction on real property, you generally do not need a sales tax permit, because you collect nothing.
• If you have any taxable retail or taxable service revenue, register for a sales and use tax account with the Department of Revenue through the Kentucky Online Gateway and file on the schedule they assign.
• Keep materials receipts. They prove you paid the tax, and they are your deduction.

This guide describes the general rules and is not tax advice. Mixed jobs and unusual items can go either way; the Department of Revenue answers written questions, and an hour with a Kentucky CPA who handles contractors is cheap insurance before your first big year.