Contractor's Tax In Mississippi

Overview of Contractor’s Tax and Sales and Use Tax

Miss. Code Ann. § 27-65-21(1)(a) imposes a tax equal to 3.5% of the total contract price or the total compensation received (provided such exceeds $10,000.00) upon every person engaging, in the State of Mississippi, in any of the following activities: constructing, building, erecting, repairing, grading, excavating, drilling, exploring, testing or adding to any building, highway, street, sidewalk, bridge, culvert, sewer, irrigation or water system, drainage or dredging system, levee or levee system or any part thereof, railway, reservoir, dam, power plant, electrical system, air conditioning system, heating system, transmission line, pipeline, tower, dock, storage tank, wharf, excavation, grading, water well, any other improvement or structure or any part thereof.  For purposes of the foregoing discussion, these activities will be referred to as construction activities and this tax will be referred to as the contractor’s tax.

This contractor’s tax in Mississippi is levied against the prime contractor and is the responsibility of the prime contractor.  However, if work performed under a construction contract is sublet by the prime contractor and the prime contractor fails to pay the contractor’s tax, each subcontractor is liable for the amount of tax which accrues on account of the work performed by such subcontractor.  See Miss. Code Ann. § 27-65-21(3).

The contractor’s tax in Mississippi is subject to a number of exclusions, which are as follows:

(1)        The contractor’s tax does not apply to compensation received for the performance of construction activities in connection with a residence or dwelling place for human beings.  See Miss. Code Ann. § 27-65-21(1)(b)(i).  Residence or dwelling place for human beings does not include apartment buildings, condominiums, hotels, motels, hospitals, nursing or retirement homes, tourist cottages or other commercial establishments.

(2)        The contractor’s tax is not imposed against the total contract price attributable to design or engineering services if the total construction contract price exceeds $100,000,000.00.  See Miss. Code Ann. § 27-65-21(1)(b)(ii).

(3)        Finally, the contractor’s tax does not apply to compensation received to restore or replace a utility distribution or transmission system that has been damaged due to an ice storm, hurricane, flood, tornado, wind, earthquake or other natural disaster if such restoration, repair or replacement is being performed by the entity providing such utility service.  See Miss. Code Ann. § 27-65-21(1)(b)(iii).

On every person engaging or continuing within the State of Mississippi the business of selling any tangible personal property, Miss. Code Ann. § 27-65-17(1)(a) imposes a sales tax of 7% of the gross proceeds of all retail sales.  Mississippi imposes a use tax of 7% on the use, storage or consumption of tangible personal property in Mississippi.  The sales and use tax are subject to certain exceptions, none of which are worth noting for purposes of this memorandum.

Prepayment of Contractor’s Tax and Bonding

On any construction contract that exceeds $75,000.00, the contractor’s tax (and any use tax) must either be paid before any work is begun, or the contractor must execute and file with the Mississippi State Tax Commission (the “Commission”) a bond with a surety company authorized to do business in Mississippi.  See Miss. Code Ann. § 27-65-21(3).

Under Miss. Code Ann. § 27-65-21(3), the Commission will accept one of two types of bonds, either a job bond or a blanket bond.  A job bond guarantees payment of the contractor’s tax (and any other tax due) resulting from the performance of a specified job or activity.  A blanket bond is a guarantee of payment of the contractor’s tax (and any other tax due) resulting from the performance of all jobs or activities.

Persons or firms without a permanent place of business in Mississippi are required to pay the contractor’s tax (and any use tax) or post a bond on taxable contracts before any work is begun regardless of whether the contract exceeds $75,000.00.  See Miss. Admin. Code § 35.IV.10.01.203. and Miss. Admin. Code § 35.IV.10.01.600.

Component Building Materials and Material Purchase Certificate

Pursuant to Miss. Code Ann. § 27-65-21(3), any person liable for the contractor’s tax may apply to the Commission for a Material Purchase Certificate (“MPC”).  The MPC allows the contractor to purchase materials and services in Mississippi that become component parts with no Mississippi sales tax due.  The MPC also allows subcontractors, working under a construction contract, to make purchases of materials and services that become component parts without paying sales tax.  See Miss. Admin. Code § 35.IV.10.01.500. 

Under Miss. Admin. Code § 35.IV.10.01.205, component materials are considered all materials that become an integral part of the structure being erected.  For personal property to be considered real property, it must be permanently attached to the underlying real property, that is, it must lose its identity as personal property and meet one or more of the following criteria: (1) the property or equipment must be attached to building walls, floors and/or a ceiling in such a way as to require design or structural alterations to the real property to which it is being attached; (2) the property cannot be removed intact or its removal would result in the alteration or destruction of the structure or property; or (3) the property must become an independent structure, itself (real property).

The MPC exemption provided for in Miss. Code Ann. § 27-65-21(3) is an exception to the general retail sales tax rate that imposes a sales tax rate of 7% on sales of tangible personal property and the provision of certain services.  See Miss. Code Ann. § 27-65-17 and § 27-65-23.  By making purchases using the MPC, one level of tax is imposed through contractor’s tax at a rate of 3.5%.  However, the MPC exemption only applies to component parts that are purchased in Mississippi or purchased in another state and shipped to Mississippi.  Thus, component parts purchased in another state and picked up in that state remain subject to the sales tax imposed by such state and the Mississippi contractor’s tax.  A contractor in this situation must either gross up the construction contract for the amount of the sales tax paid in the other jurisdiction or, to remain competitive, not pass on the other state’s tax as a part of the contact.