The South Dakota contractor’s excise tax is a flat 2% tax on the gross receipts a contractor earns from realty improvement work performed anywhere in the state. It replaces the state sales tax that would otherwise apply to construction services and covers the full contract price, labor and materials together. Every prime contractor and subcontractor doing this kind of work needs a contractor’s excise tax license from the South Dakota Department of Revenue before starting a project.
What Work the Tax Covers
The tax reaches any work that produces a permanent addition or fixture to land or a building. Framing, plumbing, electrical wiring, roofing, masonry, excavation, and foundation work all qualify. So does a residential garage addition, and so does a new commercial warehouse. Repairs to permanent building systems count too. Central air conditioning equipment, sprinkler systems, and elevators are treated as realty improvements, so fixing or replacing them triggers the excise tax.
Not every repair job does. Household appliances like refrigerators, dishwashers, and dryers aren’t permanent fixtures, so repairing them falls under the regular state sales tax rather than the excise tax. The fixture-versus-appliance line matters. If the item is essential to the structure and permanently attached, it’s a realty improvement. If it’s a standalone appliance that happens to sit in a building, it isn’t.
There’s also a category rule. Any contractor listed under Construction (Division C) of the 1987 Standard Industrial Classification Manual owes the tax on gross receipts regardless of whether a specific job creates a fixture. Contractors whose work falls outside Division C owe the excise tax only when the job results in a fixture to real property.
Who Doesn’t Owe the Tax
Several categories fall outside Chapter 10-46A:
- Work performed for the United States, the State of South Dakota and its subdivisions, or any public or municipal corporation in the state.
- Floor laying and related floor work under SIC industry number 1752.
- Locksmiths and locksmith shops within SIC industry number 7699.
- A business that isn’t primarily in the construction trade and uses its own regular employees to repair or improve property it owns. That business isn’t a prime contractor and owes no excise tax on the self-performed work.
One boundary worth flagging: contracts involving certain regulated utilities, municipal telephone companies, and rural water systems are still taxed at 2%, but under a parallel chapter (10-46B) rather than 10-46A. The reporting rules differ slightly, and those receipts have to be tracked and reported separately on the excise tax forms.
How to Calculate What You Owe
The rate is 2% of gross receipts, and “gross receipts” is defined broadly with no deductions. It means everything the contractor receives in money, credits, property, or anything else of value for performing realty improvement work. You cannot subtract the cost of materials, labor, subcontractors, interest, or any other expense.
Owner-furnished materials get pulled in too. If the property owner buys lumber, fixtures, or other materials and hands them to the contractor for use on the project, the greater of their cost or fair market value counts as part of the contractor’s taxable gross receipts. This is one of the most common sources of underpayment, so account for it on every job where the owner supplies anything.
Prime Contractors, Subcontractors, and Exemption Certificates
When a prime contractor hires a subcontractor, the prime is responsible for the 2% tax on the entire contract price, including the subcontractor’s portion. To avoid double taxation, the prime contractor issues an exemption certificate showing a valid contractor’s excise tax license number. The subcontractor keeps the certificate on file and excludes those receipts from its own return.
The certificate system has real consequences on both sides. A subcontractor who fails to retain the certificate and a record of the project designation is treated as a prime contractor and owes the tax directly. Anyone who issues a certificate without actually being a prime contractor becomes liable for the tax the recipient would have owed, plus a 10% penalty on that amount. Government entities cannot issue these certificates at all.
Getting a Contractor’s Excise Tax License
Every contractor with receipts subject to the excise tax must apply for a license with the South Dakota Department of Revenue before beginning work. The application is available on the department’s website. It asks for the name under which you do business, the location of your place of business, and other information the secretary of revenue may require. In practice that includes your Federal Employer Identification Number (or Social Security Number for sole proprietors), your entity type, the date you started or plan to start work in the state, and a mailing address.
Contractors also have to post their excise tax license number with the building permit for each realty improvement project.
When and How to File
Returns are due on or before the 20th of the month following each reporting period. If you file and pay electronically through South Dakota’s EPath system, the return is still due by the 20th, but payment can go through as late as the 25th. The default reporting period is monthly, though the secretary of revenue may assign a different period based on the volume of your tax activity.
EPath walks you through entering gross receipts and calculating the tax, and it generates a confirmation number as proof of filing. Paper returns and checks can go to the Department of Revenue in Pierre; include your business name and license number so the payment is credited correctly.
Municipal Excise Tax on Top of the 2%
South Dakota municipalities can impose their own excise tax on contractor’s gross receipts at up to 0.5%, on top of the state’s 2%. Not every city levies it. Contractors bidding jobs across multiple municipalities should check with the local government before pricing the work, because a project inside a taxing municipality costs 2.5% in excise taxes rather than 2%, which can move the margin on a large contract.
Sales Tax on the Materials You Buy
A point that catches many contractors: you are the consumer of the materials and supplies you buy for contract work. You pay state sales or use tax on those materials when you buy them from suppliers. You cannot purchase construction materials “for resale” and claim a sales tax exemption, because your contract with the property owner is a service contract for a realty improvement, not a sale of tangible personal property. The excise tax covers the service; the sales tax covers the materials you consume performing it. This applies to all contractors and subcontractors regardless of contract type, and South Dakota-licensed suppliers are required to collect the sales or use tax on those sales.
If a contractor separately furnishes equipment that isn’t essential to the structure and isn’t permanently attached, that piece is treated as a sale of tangible personal property and is subject to sales or use tax instead of the excise tax.
Penalties and Criminal Exposure
If a return isn’t received within 30 days of its due date, the Department of Revenue assesses a penalty of 10% of the tax liability, with a $10 minimum even when no tax is owed. Interest runs at 1% per month on unpaid tax, with a $5 minimum for the first month. If the department determines the late payment was intentional, the interest rate rises to 1.5% per month. For a taxpayer who can show the delinquency came from a genuine mistake about the law rather than an attempt to dodge the tax, the secretary may cap total interest at 24%.
Criminal exposure escalates quickly. Failing to pay the tax within 60 days of the due date is a Class 1 misdemeanor. So is failing to file a return within 60 days. Committing either violation twice within any 12-month period elevates the charge to a Class 6 felony. Working without a license is a Class 1 misdemeanor on its own, and continuing to work without a license after the secretary of revenue has sent written notice becomes a Class 6 felony. Filing a fraudulent return is also a Class 6 felony. Corporate officers, LLC managers, and partners who control tax filing responsibilities can be held personally liable.