Maryland Taxes that Real Property Contractors Should Know About
Real property contractors play a pivotal role in the construction industry, serving as the backbone of residential, commercial and infrastructure projects. They are hired to perform construction, repair or remodeling work on a property, serving many different sectors and having a wide range of responsibilities. These responsibilities may include road construction, landscaping, or constructing or demolishing buildings.
As essential workers within the construction industry, real property contractors must navigate a complex landscape of regulations related to licenses, registration requirements and taxes. It’s important that real property contractors in Maryland know about the state’s sales and use tax, motor fuel tax and other tax obligations while working on projects in and out of the Old Line State.
Maryland Sales and Use Tax
Per the Comptroller of Maryland, real property contractors in Maryland must pay 6% sales tax on building materials and supplies. Any items purchased out-of-state (whether by mail, internet, telephone or directly) are taxable if they are delivered into Maryland for use in the state. Examples of taxable out-of-state purchases that might be made by real property contractors include construction materials, tools and equipment. Sales and use tax does not apply to personal property (movable items that people own) that is purchased outside of Maryland if it is intended exclusively for use in another state; only the Maryland sales tax must be paid on those items.
While vehicles and other types of equipment are considered personal property, they may be subject to different tax rules, depending on how they are operated. Renting a vehicle or other equipment with an operator is taxable, if the customer controls how the equipment is used. If the owner of the equipment is also the operator, then no tax is owed.
Although contractors are responsible for paying tax at the time of purchase for building materials used in a real property project, they may be able to purchase materials tax free with a valid resale certificate. If contractors intend to resell the materials as personal property, a resale certificate can be a tax exemption benefit.
Resale Certificate – Real property contractors may want to take advantage of resale certificates, which allow the purchaser to purchase products tax-free and then collect the tax at the point of sale. Products that may be covered by a resale certificate include tangible personal property (personal property that can be felt, touched and physically relocated), such as materials and supplies, as well as intangible property, such as taxable services. A contractor who regularly sells tangible personal property must be licensed to collect sales and use tax in order to use a resale certificate.
Exemption Certificate – Another type of certificate that real property contractors may want to consider is exemption certificates. These certificates are issued to qualifying nonprofit religious, educational, first responder and other charitable organizations to purchase tax-free materials that will be used to construct, improve, alter or repair their land and/or structures.
Motor Fuel Tax
Besides sales and use taxes, real property contractors need to understand how motor fuel taxes can affect their day to day on construction vehicles along with any refunds they might be able to claim. Motor fuel taxes are taxes implemented on certain types of liquid fuels, including gasoline and diesel. The Motor Fuel Tax Unit of the Field Enforcement Bureau (FEB) monitors the distribution, use and tax compliance work regarding motor fuels in Maryland. Currently, Maryland’s gas tax is set at 46.10 cents per gallon.
Real property contractors should note that dyed diesel fuel used in off-road construction equipment is exempt from motor fuel tax, but it is still subject to the 6% sales tax. A refund may be filed for a percentage of tax paid on fuel for certain types of vehicles:
| Type of Vehicle | Maximum Percentage Refund for Motor Fuel Tax Paid |
| Well-drilling vehicles | 80% |
| Farm equipment registered as a vehicle for highway use, that is designed or adapted solely and used exclusively for bulk spreading of agriculture liming materials, chemicals or fertilizers | 55% |
| Concrete mixing or concrete pump vehicles | 35% |
| Solid waste compacting vehicles | 15% |
| Motor fuel delivery vehicles | 10% |
Maryland also offers a separate fuel tax rate for “special fuel” – a product that is not gasoline and is usable as fuel in an internal combustion engine. Contractors who utilize special fuel may obtain authorization to acquire special fuel in bulk without paying the motor fuel tax.
Other Tax Obligations for Real Property Contractors
In addition to sales and use tax and motor fuel tax, real property contractors should also keep income tax in mind, as there are several types of required Forms, depending on the contractor’s company type. Companies with employees on payroll must withhold income taxes from their wages. The Forms required for each type of entity are as follows:
- Sole proprietors who are Maryland residents must file personal income tax (Form 502) and will need to make quarterly estimated tax payments on any income that is not subject to withholding.
- Nonresident sole proprietors must file Maryland nonresident income tax (Form 505) and must also make quarterly estimated payments.
- C corporations must file a corporation income tax return (Form 500) and attach a copy of federal Form 1120. Public traded corporations and corporate groups are subject to special reporting requirements such as beneficial ownership information (BOI) reporting.
- S corporations and partnerships must file a pass-through entity income tax return (Form 510).
- Limited liability companies (LLCs) must also file Form 510, unless they are classified as disregarded entities (businesses where taxes owed are paid as part of the owner’s income tax return) under federal law.
Contractors must file their employer withholding, motor fuel tax and sales and use tax returns even when no tax is due. It’s important that real property contractors stay up to date on tax regulations that may affect their industry or reach out to accounting professionals if they need assistance. Please contact a Brown Plus advisor if there are any additional questions on Maryland tax regulations for property contractors that you may have.