South Dakota Contractor Sales Tax Rules

The Dual-Tax Framework That Catches New Contractors

South Dakota's construction tax system isn't a single tax — it's two separate taxes that apply to different parts of the same project. Getting either one wrong erodes your profit margin. Getting both wrong can trigger an audit.

Tax 1: The 2% Contractor's Excise Tax — levied on the prime contractor's gross receipts from the entire contract. Gross receipts include labor, materials, overhead, profit, and even the excise tax itself if passed to the customer. This is administered under SDCL Chapter 10-46A.

Tax 2: The 4.5% state sales/use tax on materials — contractors are the legal consumers of construction materials in South Dakota. Under ARSD 64:07:01:14, you pay sales tax at the point of purchase. If your supplier doesn't collect South Dakota tax (out-of-state purchases), you owe 4.5% use tax directly to the Department of Revenue.

These two taxes stack. On a project where you buy $100,000 in materials and the total contract is $300,000, you'd owe $4,500 in sales tax on materials (4.5%) plus $6,000 in excise tax on gross receipts (2%). That's $10,500 in state-level taxes before municipal taxes enter the picture.

Is Labor Taxed in South Dakota?

This is one of the most common questions, and the answer is more nuanced than a simple yes or no.

Labor is not subject to sales tax. South Dakota doesn't impose its 4.5% sales tax on construction labor charges separately. But labor is included in the gross receipts base for the 2% contractor's excise tax. So while there's no "labor tax" line item, the labor component of your contract does generate excise tax liability.

For practical bidding purposes: every dollar of labor on a construction contract creates a 2% excise tax obligation, and materials create both the 4.5% sales tax and the 2% excise tax (since materials are part of gross receipts).

Municipal Gross Receipts Tax (MGRT)

On top of the 4.5% state sales tax, South Dakota cities impose their own Municipal Gross Receipts Tax on applicable transactions. This typically adds 1–2% depending on the municipality.

The MGRT applies to materials purchases within city limits. So your effective materials tax rate in a city with a 2% MGRT is 6.5% (4.5% state + 2% municipal). Combined with the 2% excise tax on the full contract, a contractor's total tax burden on a project can approach 8–9% of the contract value — a significant chunk that needs to be in your bid.

The exact MGRT rate varies by city, and it can change. Check the Department of Revenue's municipal tax rate table for the specific city where materials are purchased and where the project is located.

Out-of-State Material Purchases and Use Tax

Buying materials from out-of-state suppliers who don't collect South Dakota sales tax doesn't save you the tax — it just changes who you pay it to. Instead of paying sales tax to the supplier, you owe 4.5% use tax directly to the Department of Revenue.

Use tax is reported on the same return as your excise tax and sales tax. The common mistake is forgetting to report it, especially for online purchases or materials bought from suppliers in neighboring states (Minnesota, Nebraska, Wyoming, North Dakota, Iowa, Montana) who don't have South Dakota collection obligations.

The Department of Revenue audits construction businesses regularly. Out-of-state material purchases without corresponding use tax payments are one of the first things auditors look for — they cross-reference your reported gross receipts against your material cost estimates to identify potential underreporting.

Owner-Furnished Materials

When a property owner buys their own materials and provides them to the contractor, the tax treatment creates a trap that many contractors don't anticipate.

The prime contractor must include the fair market value of owner-furnished materials in their taxable gross receipts for excise tax purposes. So even though you didn't buy the materials, their value increases your excise tax bill.

Additionally, the contractor is responsible for verifying that sales or use tax was paid on those owner-furnished materials. If the owner purchased materials without paying South Dakota tax (perhaps buying from an online retailer that didn't collect it), the contractor becomes liable for the unpaid use tax.

The safest approach: require proof of tax-paid purchase for any owner-furnished materials, and build the excise tax impact on their value into your contract price.

Filing and Record-Keeping

The Department of Revenue assigns the applicable filing schedule and deadlines. For each designated monthly CET reporting period, payment is due by the 20th for a paper filing or by the 25th for an electronic filing; confirm the schedules for sales and use tax with the department.

Critical records to maintain:

• Every Prime Contractor's Exemption Certificate (Form 1346) issued to subcontractors
• Material purchase receipts showing tax paid (or use tax owed)
• Contract values for excise tax calculation
• Owner-furnished material valuations
• Municipal tax rate documentation for each project location

Clean documentation is your primary audit defense. The dual-tax structure means auditors can approach from multiple angles — comparing reported gross receipts against bank deposits, material costs against use tax filings, and subcontractor payments against exemption certificates.

For the complete picture of how tax registration fits into the contractor setup process — including the CET license application, the bid factor calculation for accurately passing excise tax to customers, and the registration sequence relative to entity formation and municipal licensing — see the South Dakota General Contractor License Guide.

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