Sales Tax Challenges Facing Architecture and Engineering Firms

Just because your firm provides professional services, don’t assume that sales tax is someone else’s issue. In many states, that assumption only holds true—until it doesn’t.

Sales tax is more than just a retail issue. As an AE firm, you engage in multistate projects, mixed-contract arrangements, and equipment procurement that may inadvertently create sales tax exposure for you or your clients. Sales tax can be a hidden exposure, and noncompliance can lead to costly audits, pricing errors, or compliance risks.

One of the most common areas where sales tax exposure arises for professional services firms is the treatment of project-related costs.

Procurement of Equipment and Fixtures

Distinguishing between procurement, the direct purchasing for client projects, and reimbursables, expenses passed through to clients, is essential for accurate billing, cash flow, compliance, and sales/use tax treatment.

Firms often procure equipment, fixtures, or materials for client projects. Sales tax treatment depends on whether items are resold as tangible personal property (TPP) or incorporated into real property.

Reimbursables are generally nontaxable if the expense is a pass-through to a client (e.g., travel, subconsultant fees, out-of-pocket expenses) and are not part of a taxable service.

Even when firms believe they have procurement and reimbursables under control, state-specific tax rules can quickly complicate compliance.

States – Center Stage

Unlike traditional sales taxes, many states impose gross receipts taxes, business taxes, or both on professional services, and the rules vary across state lines. Understanding how states classify your services can materially affect pricing, contracts, and audit risk.

There are several key state taxes affecting AE firms, including New Mexico’s Gross Receipts Tax (GRT), Hawaii’s General Excise Tax (GET), Washington’s Business and Occupation (B&O) Tax, Washington’s Retail Sales Tax, South Dakota’s sales tax, and Texas rules on land surveying. Understanding how these taxes apply in practice requires a closer look at how individual states treat AE services.

New Mexico – Gross Receipts Tax (GRT)

• AE services are generally taxable.

Hawaii – General Excise Tax (GET)

• GET is a tax on business activities, including A&E services.
• GET is imposed on the seller but can and is often passed on to clients.

Washington – Business & Occupation (B&O) Tax & Retail Sales Tax

• AE services can fall under several classifications.
• Special rules apply for construction-related services and government contracts.

South Dakota – Sales Tax

• Architecture, engineering, and surveying services are taxable unless the project is out-of-state.

Texas – Real Property Services

• Land surveying is considered a taxable real property service.

Sales tax is not a one-size-fits-all—states like New Mexico, Hawaii, and South Dakota tax AE services broadly, while others like Washington and Texas target specific services.

Next Steps

To reduce risk and stay compliant, firms should track nexus, use exemptions appropriately, and keep documentation. Additionally, firms should clearly differentiate between procurement and reimbursables. As states continue to expand their sales tax base, stay informed and monitor state-specific rules and upcoming changes.

Get ahead of evolving state tax rules by attending SN’s upcoming webinar, Beyond Income Tax: Sales & Gross Receipts Tax for AE Firms, where we’ll break down what AE leaders need to know to safeguard profitability and support sustainable growth.