Marking Up Materials: The Arithmetic, the Disclosure Rules, and Which States Tax Your Labor

Devon Davila · 2026-10-26

Three things decide what you clear on materials. The arithmetic: markup and margin are different numbers, and most forum threads mix them. The law: nothing caps your markup on a fixed-price job, but cost-plus and time-and-materials contracts have disclosure rules in some states. And the tax: in most states you are the final consumer of what you install and pay sales tax at the supply house, with no tax charged to the customer, but in a handful of states the labor is taxable too, and in a few the materials charge you pass to the customer is taxable at your marked-up price. Get the first wrong and you under-price. Get the third wrong and the state takes the difference out of your margin.

Quick answer: Markup is profit over cost; margin is profit over price; a 25% markup is a 20% margin, and pricing to a markup when you budgeted a margin under-prices every job. No state caps what a contractor charges for materials in a fixed-price residential contract. Two states regulate cost-plus and time-and-materials pricing: Pennsylvania caps the final cost at 110% of the estimate without a signed change order, and Virginia requires the contract to state the total cost as fixed, cost-plus with a cap, or time-and-materials. The only dated public benchmark is the NAHB's 2025 study: single-family builders averaged a 20.7% gross margin and 8.7% net margin in 2023. The trap is sales tax. In California, Florida, Nevada, Illinois, Georgia, North Carolina and Arizona (repair work) the contractor is the consumer of materials and pays tax at purchase; the customer is not charged tax, so a markup on a tax-paid cost is simply price. But labor itself is taxable in Washington (the whole contract), Texas (commercial repair and remodeling), New York and New Jersey (repairs and maintenance, not capital improvements), North Carolina (repair, maintenance and installation services) and Connecticut (six residential services and most commercial work). A contractor who bids those jobs without the tax is paying it out of the markup.

Markup is not margin

Markup is what you add to cost: (price − cost) ÷ cost. Margin is what you keep of price: (price − cost) ÷ price. They describe the same dollars from opposite ends, and they are never the same percentage.

To price for a target margin, divide by one minus the margin: $1,000 of materials at a 30 % margin is $1,000 ÷ 0.70 = $1,429, which is a 42.9 % markup. A contractor who budgets a 30 % margin and marks up 30 % earns 23 %.

The only dated benchmark. The National Association of Home Builders' Cost of Doing Business Study, 2025 edition (fiscal 2023 data), released April 9, 2025: "The average gross profit margin increased from 18.2% in 2020 to 20.7% in 2023." "The average net profit margin rose from 7.0% to 8.7% during this period." Those are single-family builders, blended across labor, materials and subcontractors, and they are the closest thing to a sourced number that exists. Service-trade figures on ranking pages are not traceable to any survey.

Markup on costMargin on price$1,000 of materials sells for
10 %9.1 %$1,100
20 %16.7 %$1,200
25 %20 %$1,250
33.3 %25 %$1,333
50 %33.3 %$1,500
100 %50 %$2,000

Errata: what the ranking pages get wrong

ClaimReality
"Standard markup on materials is 10 %" and, on the next page, "35 %"No primary source states a trade-wide markup. NAHB's builder gross margin of 20.7 % (2023) is the only dated public figure.
"Markup and margin are interchangeable"25 % markup = 20 % margin. See section 1.
"It's illegal to mark up materials" / "you can only charge cost plus 10 %"No statute in the twenty home-improvement-contract jurisdictions we surveyed caps markup in a fixed-price contract. Pennsylvania and Virginia regulate how cost-plus and time-and-materials prices are stated and capped (section 3).
"Charge the customer sales tax on the materials line"In California, Florida, Nevada, Illinois, Georgia, North Carolina and Arizona repair work, the contractor is the consumer and pays tax at purchase; "Should not charge tax to the customer" (Florida DOR). Charging tax you do not remit is a tax violation.
"Labor is never taxable"Washington taxes the whole custom-construction price. Texas taxes nonresidential repair and remodeling. New York and New Jersey tax repair and maintenance services. North Carolina taxes repair, maintenance and installation services. Connecticut taxes six residential services and most work on commercial property.
"Itemize materials to save the customer tax"In New Jersey an itemized bill on a taxable job deducts only "the separately stated pass-through of the actual cost of materials"; the markup is taxed as service. In Texas a separated contract makes the materials charge, at your marked-up figure, taxable to the customer.

What the law says about markup

Fixed-price contracts. No state in our twenty-jurisdiction survey of home-improvement-contract statutes limits what a contractor may charge for materials in a fixed-price residential contract. The price is the price; the customer agreed to it. The statutes that exist govern what the contract must disclose (see the companion reference on contract requirements).

Cost-plus and time-and-materials. Two states we verified constrain these:

  • Pennsylvania. The Home Improvement Consumer Protection Act requires the contract to state the total price, or for time-and-materials work an estimate, and the final cost may not exceed 110 percent of that estimate without a signed written change order (73 P.S. §517.7, verified 2026-10-25).
  • Virginia. The contract must state "the total cost" as a fixed price, cost-plus with a cap, or time-and-materials, and "the amounts and schedule for progress payments" (18VAC50-22-260(B)(9), verified 2026-10-25).

What cost-plus means for tax. Illinois's audit manual defines it: "Cost Plus - A contract which itemizes the cost of tangible personal property, which may include tax, labor, overhead and other costs, plus a certain fee or percentage in addition to cost. Cost-plus a fee contract is generally regarded as a separated contract." A separated contract changes who is seen as buying the materials in several states (section 4), which is the reason to decide the contract form before the bid, not after.

The sales-tax trap, state by state

Two questions decide it: who pays tax on the materials, and is the labor or the contract price taxable to the customer. Each row quotes the state revenue department.

Reading the table. In the consumer states (California materials, Florida, Nevada, Illinois, Georgia, North Carolina on capital improvements, Arizona repairs) the tax is a cost you paid at the counter. It belongs inside your materials cost before markup, and the customer's invoice carries no tax line. In the labor-tax states, the customer's invoice carries tax on the service or the whole price, and a bid that omits it is a bid that absorbs it. In the separated-contract states (Texas by election, New Jersey and New York on taxable jobs) the materials line you show the customer is taxed at your price, markup included.

StateMaterialsLabor / contract priceVerified
CaliforniaYou are the consumer of "materials" and pay tax when you buy them: "Construction contractors are consumers of materials which they furnish and install in the performance of construction contracts." You are the retailer of "fixtures" (built-ins, central A/C, water heaters and the like) and charge the customer tax on the fixture: "Construction contractors are retailers of fixtures … and tax applies to their sales of the fixtures." (Reg. 1521)Installation labor not taxable; fabrication labor built into a fixture is part of its taxable price2026-10-26
TexasLump-sum contract: you pay tax on materials, charge the customer none. Separated contract: you buy materials tax-free for resale and collect tax from the customer on the materials charge, at your price (Comptroller pub. 94-116)"Labor to repair, remodel, or restore residential real property is not taxable." But "The total amount charged for remodeling, repairing, or restoring nonresidential real property is taxable."2026-10-26
Florida"the contractor is the final consumer of materials and supplies and: • Must pay sales tax to suppliers on all purchases … • Should not charge tax to the customer." Hard-wired appliances and fixtures (central A/C, furnaces, water heaters, built-in cabinets): "Should not charge the customer tax on materials or labor." Freestanding appliances: "The contractor should charge the customer tax on the appliance and labor." (GT-800067)Not taxable on real property contracts2026-10-26
ArizonaRepair, maintenance, replacement and alteration (under 25 % of the home's tax value): "MRRA contractors are required to pay retail TPT on their materials (whether at the point of sale or after)." New construction and large alterations are taxed on gross receipts under prime contractingMRRA gross receipts "are specifically excluded from the prime contracting classification"2026-10-26
Nevada"Construction contractors are considered the consumers of any material purchased to fulfill a construction contract in Nevada. This means that a contractor is required to pay the sales tax when they purchase the material"Not taxable; items that do not become real property are retail sales2026-10-26
New YorkYou pay tax on materialsRepair and maintenance to real property is taxable to the customer. A capital improvement is not, with Form ST-124, if it "substantially adds to the value of the real property, or appreciably prolongs the useful life," "becomes part of the real property or is permanently affixed," and "is intended to become a permanent installation." Installing a water heater or cabinets: capital improvement. "Repairing a broken step, replacing a thermostat, or painting existing cabinets are taxable repairs."2026-10-26
New Jersey"A contractor always pays Sales Tax on materials and supplies at the time of purchase"Repair, maintenance, installation and "taxable capital improvement" charges are taxable to the customer; exempt capital improvements need Form ST-8. If you itemize a taxable job, "the only amount deductible … is the separately stated pass-through of the actual cost of materials." Your markup is taxed as service. (S&U-3, rev. 5/25)2026-10-26
Illinois"Construction contractors are deemed end users of tangible personal property purchased for incorporation into real property. As end users … contractors incur Use Tax liability for such purchases based upon the cost price"No tax collected from the customer2026-10-26
Georgia"A contractor is deemed to be the consumer of all tangible personal property used or consumed in performing such contract and shall pay the tax thereon at the time of purchase."On sales of tangible personal property: "Repair and installation labor are exempt when separately stated on an invoice. If not separately stated, labor charges are taxable."2026-10-26
North Carolina"The real property contractor is the consumer of the item that the real property contractor purchases, installs, or applies for others to fulfill a real property contract."Repair, maintenance and installation services to real property are taxable unless part of a capital improvement documented with Form E-589CI2026-10-26
WashingtonYou buy incorporated materials for resale with a reseller permit, paying no taxThe whole job is taxable: "Gross receipts from prime contracting on a custom construction job are taxable under the Retailing B&O tax classification and are subject to retail sales tax"; collect "retail sales tax from the landowner on the gross contract price (without deduction of costs incurred)"2026-10-26
ConnecticutContractors "Pay sales and use tax on materials, supplies, and equipment used in their construction contracts""Generally, services to existing commercial, industrial, and income-producing property are taxable. Some services to residential property are also taxable": since 1991, "paving, painting or staining, wallpapering, roofing, siding and exterior sheet metal work." New construction exempt2026-10-26

Pricing materials correctly

  1. Start from landed cost. Supplier price plus the sales tax you paid plus delivery. In consumer states the tax is part of cost.
  2. Decide margin, then compute markup. Target margin ÷ (1 − margin). A 30 % margin needs a 42.9 % markup.
  3. Decide the contract form before the bid. Fixed price, cost-plus, or time-and-materials. In Pennsylvania a T&M estimate is capped at 110 %; in Virginia a cost-plus contract must state its cap; in Texas and New Jersey the form changes who is taxed on the materials line.
  4. Add the state's tax to the customer's price where the state taxes the job. Washington: the whole price. Texas: nonresidential labor. New York, New Jersey, North Carolina: repairs and maintenance. Connecticut: the listed residential services and most commercial work.
  5. Do not show a tax line you are not remitting. In consumer states, the invoice shows price, not tax.

A materials line that reads "Materials: $1,429" on a $1,000 landed cost is a 30 % margin. A line that reads "Materials: $1,000 + 8 % tax" in a consumer state is a tax violation and a 0 % margin.

Method and limits

Tax rules are quoted from each state revenue department's own regulation, publication or web guidance on the dates shown. Eleven states are covered; the other thirty-nine have their own rules and several (Hawaii, New Mexico, South Dakota among them) tax services broadly. Local sales taxes, exemptions for exempt customers, and the treatment of subcontractor billing are not covered. The markup section states arithmetic and one dated survey; it does not recommend a figure. The twenty-jurisdiction statement that no statute caps fixed-price markup rests on the home-improvement-contract statutes surveyed for the companion references, read 2026-10-24 and 25.

Last verified 2026-10-26. Not legal or tax advice.

Is it legal to mark up materials?

Yes, in a fixed-price contract, in every state we surveyed. The customer agreed to a price. Disclosure rules apply to cost-plus and time-and-materials contracts in some states.

Do I have to tell the customer my markup?

Not in a fixed-price contract. In a cost-plus contract, the "plus" is the disclosed term, and Virginia requires the cap to be stated.

Should I charge sales tax on materials?

In California (materials), Florida, Nevada, Illinois, Georgia, North Carolina and Arizona repairs: no, you paid it at purchase and the customer is not charged. In Texas: only under a separated contract. In New Jersey and New York: on taxable (repair and maintenance) jobs, the materials line is taxable. In Washington: the whole contract is.

What about the water heater or furnace I sell and install?

California calls these "fixtures" and makes you the retailer: tax applies to your sale of the fixture to the customer. Florida treats hard-wired and permanently installed units as real property: pay tax when you buy, charge none. The same unit is taxed differently across a state line.

Is my markup taxable?

Where the materials line to the customer is taxable (Texas separated contracts, New Jersey and New York taxable jobs, Washington), yes, at the price you charge. Where you are the consumer, the markup is not tax; it is price.

What margin should I target?

That is a business decision, not a legal one. The only dated public benchmark is NAHB's 20.7 % gross and 8.7 % net for single-family builders in 2023.

Sources

  1. NAHB, Cost of Doing Business Study 2025 edition press release (2025-04-09)
  2. Pennsylvania Act 132 of 2008 §7
  3. Pennsylvania Act 132 of 2008 Virginia 18VAC50-22-260
  4. California CDTFA Regulation 1521
  5. Texas Comptroller, Real Property Repair and Remodeling (94-116)
  6. Florida DOR, GT-800067
  7. Arizona DOR, MRRA Contracting
  8. Nevada Department of Taxation, Construction Contractors
  9. New York Tax Department, TB-ST-104 Capital Improvements
  10. New Jersey Division of Taxation, S&U-3 Contractors and New Jersey Taxes (rev. 5/25)
  11. Illinois DOR, Sales Tax Audit Manual ch. 13 (Construction Contractors)
  12. Georgia DOR, Contractor FAQs
  13. North Carolina DOR, Real Property Contracts
  14. Washington DOR, Construction guide, Custom construction
  15. Connecticut DRS, IP 2018(2) Building Contractors' Guide
  16. Connecticut DRS, IP 2018(2) Building Contractors' Guide SN 92(23)

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