Venturing into a new state?

As your construction company grows, you may be presented with opportunities that are outside your normal state of operations. While it may be a good idea to bid on an out-of-state project, you’ll want to consider a number of different factors before making the final decision to pursue an out-of-state venture. Please continue reading as Brandon Cook, CPA, and lead tax partner for our Construction Services Group, highlights some of the main factors to consider.

Tax issues

Tax laws differ from state to state. Most states levy sales taxes on building materials purchased in the state and use taxes on materials brought in from outside the state.

Some states, however, may levy a flat tax on all commercial construction rather than charging sales and use taxes. Others could require out-of-state contractors to obtain use tax permits if they do more than one project in the state. Additionally, you most likely will be required to file an income tax return in that states related to the contract(s) being performed in their locality. Before taking a job in another state, ask your CPA for help in understanding the state and local tax laws.

Insurance matters

The first thing you should know about insurance is whether your policy covers you when working in other states. Check with your carrier to see what limitations your general and workers’ compensation coverage may have — and how much it will cost to change them, if necessary.

Check, too, to be sure you’ll be paying workers’ compensation premiums only once. In some cases, contractors must pay premiums in their home states as well as the states in which they do business. Neighboring states often have reciprocal agreements to prevent such double payments.

Licensing rules

In most states, out-of-state contractors must be licensed or registered to do business in that state. Licensing requirements vary, with some states requiring examinations as well as proof of insurance and evidence of financial solvency. In states that don’t require a license, contractors often must register with appropriate state offices.

In either case, state rules regarding the timing of licensure and registration will vary. Furthermore, in some states, only licensed contractors may bid on jobs; in others, unlicensed contractors can bid, but projects may be awarded only to licensed construction companies. Know the rules before you venture too far afield.

Bonding requirements

Most states require out-of-state contractors to post bonds before they do business in the state. The type and amount of bonds required fluctuate vastly, depending on the type of license sought and the amount of work anticipated.

In some states, all contractors must post bonds or cash. In others, only specific types of contractors or only those working on public projects must provide bonds.

Labor relations

You can save yourself a great deal of trouble by learning about the labor relations and union issues in the states you’re thinking of expanding into. If you’re considering a public project, you’ll probably be subject to prevailing wage laws, meaning you must pay whatever rate is common for similar work in other areas of the state.

Regardless of the type of jobs you’re interested in, determine up front whether there’s a strong union presence in the area. If so, be ready to deal with union issues whether you have a labor contract or not.

Contract language

If you’re going to work in more than one state, a one-size-fits-all contract won’t do you much good. State laws governing construction are even more complicated and more divergent than their licensing and bonding requirements.

For example, the pay-if-paid construction contract clause is a contentious issue for many out-of-state contractors. Courts are often divided on whether such clauses are enforceable when contracts are governed by the laws of another state. Try to avoid this clause or, if you must include one, work with your attorney to ensure it’s applicable wherever you’re working.

In summary, working across state lines may seem like a relatively easy way to expand your market, but it can be risky. For the best outcomes, make sure you understand every potential risk. Your financial and legal advisors can help you determine just how deep the waters are before you jump. Please contact Brandon at bcook@greenwaltcpas.com or 317-260-4437 if you would like any additional information on this topic.