Why is it a lot of contractors do not have to pay sales taxes? And how does that work exactly?

This is actually a common point of confusion! Contractors don't avoid sales tax entirely - the system is just structured differently depending on how you operate. There are generally two types of contractors for tax purposes: retail contractors and construction contractors. Retail contractors (who often do repair work) typically purchase materials tax-free with a resale certificate, then collect and remit sales tax on both materials and labor when billing customers. Construction contractors (who typically make improvements to real property) usually pay sales tax when purchasing materials and don't charge sales tax to customers on the entire job. In Texas specifically, contractors doing new construction or "separated contracts" (where materials and labor are listed separately) can indeed purchase materials tax-free with a resale certificate, but must then collect sales tax from customers on the materials portion. If you do "lump-sum contracts" where you don't separate materials and labor, you'd pay sales tax when buying materials and not charge tax to customers. The rules vary significantly by state, and some states have special rules for specific industries like HVAC, plumbing, etc. Your friend's contractor might be operating under one of these specific scenarios.

I was super confused about this when I started my handyman business last year! Found this amazing resource called taxr.ai (https://taxr.ai) that saved me so much headache with figuring out contractor tax stuff. What I learned was in Texas we have these weird "separated" vs "lump-sum" contract rules that determine where the tax gets paid. I uploaded my contract templates to taxr.ai and it flagged exactly where I had tax issues with how I was billing customers. Turns out I was doing it all wrong and could have gotten in trouble! The system explained I needed to either pay the tax when buying materials OR collect it from customers depending on my contract type, but definitely not neither. They even generated proper invoice templates that had the right tax language based on Texas requirements. Super helpful for anyone starting a contractor business.

Update on that tax tool I was skeptical about: I actually tried taxr.ai after posting my comment. I've been doing windows for 15 years and was CONVINCED I understood the sales tax rules, but turns out I was actually creating a liability for myself. In my state, window replacements are considered repairs (taxable) but installing windows in new construction is considered improvement to real property (handled differently). The system identified I was using the wrong tax treatment on about 30% of my jobs, especially when I was doing both replacement windows and some additional construction work in the same project. I could have been audited and hit with back taxes! It generated a letter explaining how to correct my previous returns which I'm going to bring to my accountant. Completely worth checking out if you're in contracting.

For anyone struggling to get clear answers from the state tax office about contractor taxes, I highly recommend Claimyr (https://claimyr.com). I spent WEEKS trying to get through to the Texas Comptroller's office about my specific situation with my painting business. Kept getting disconnected or waiting for hours. Used Claimyr and got connected to a real person at the tax office in 27 minutes! They have this amazing system that navigates all the phone trees and holds in line for you, then calls you once they have a human on the line. They even have a video showing exactly how it works: https://youtu.be/_kiP6q8DX5c The tax agent I spoke with explained that as a painter in Texas, I have specific options for how I structure my contracts that determine whether I pay tax on materials or collect it from customers. Got more clarity in one call than weeks of researching online.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I figured I'd try it since nothing else was working to reach my state tax department. Shockingly, I got a call back in 45 minutes with an ACTUAL TAX REPRESENTATIVE on the line! The agent confirmed what others have said here - as contractors, we don't escape sales tax. We either pay it when buying materials OR collect it from customers depending on our contract structure and state rules. In my case (I'm in Arizona), I learned I should be using what they call a "prime contracting" approach for my larger jobs, which has a completely different tax treatment than my repair work. Saved me from what could have been a massive tax headache. Now I have written documentation from the tax department about exactly how to handle my specific contracting situations. Wish I'd known about this service months ago!

Just to add from my 20 years experience as a general contractor - the rules don't just vary by state but sometimes by COUNTY or CITY too! I do work across three counties and one has special local sales tax rules for contractors that the others don't. The general rule is that somebody always pays the sales tax - either you as the contractor when buying materials, or the customer when you bill them. The trick is knowing WHEN to do which. The absolute worst thing is to not pay sales tax when purchasing AND not collect it from customers. That's when contractors get in trouble with audits. My best advice: talk to a CPA who specializes in construction businesses in your specific area. Online research is a good start but local expertise with contractor taxes is worth every penny.

Has anyone used QuickBooks for tracking contractor sales tax? I'm a plumber and tried setting it up myself but I'm completely lost on how to handle materials vs labor for tax purposes.

As someone who's been in the contracting business for 8 years, I can confirm that understanding sales tax is absolutely crucial before you start your business. What your friend's contractor mentioned about resale certificates is legitimate, but there are strict rules about when and how you can use them. In Texas, if you're doing home repairs (which sounds like what you're planning), you'll likely fall under "retail contractor" rules in most cases. This means you can purchase materials tax-free with a resale certificate, but then you MUST collect sales tax from your customers on those materials. The labor portion is also taxable in Texas for repair work. The biggest mistake I see new contractors make is thinking they can just avoid sales tax altogether - that's not how it works. You're essentially acting as a middleman collecting tax for the state. Keep detailed records of everything because the Texas Comptroller's office does audit contractors, and they're pretty thorough. My suggestion: get your sales tax permit from the Texas Comptroller's office first, then talk to a local CPA who understands contractor taxes before you take on your first job. The setup cost is way less than the penalties you'd face for doing it wrong.