Sales & Use Tax Pitfalls in Utility Construction Projects

Utility and energy projects bring together several factors that make accurate tax determination inherently difficult:

• Multi-state and multi-jurisdictional activity
• Long project timelines where tax rules may change mid-build
• Complex procurement structures involving EPC contractors, subcontractors, and direct purchases
• High-dollar capital spend—where even small tax variances translate into meaningful financial impact

Together, these dynamics make sales and use tax less of a filing issue and more of a lifecycle challenge—one that requires coordination across procurement, tax, accounts payable, and project management.

Common (and Costly) Sales & Use Tax Pitfalls

Tax Inaccuracies Within Construction Contracts

Utility projects involve a mix of materials, equipment, and services—each with different tax treatments. Misclassifying these elements, particularly within bundled contractor invoices, can result in overpayment or under-accrual of tax. In many cases, tax is embedded in contractor billing, with limited transparency into how it was calculated.

Contractor vs. Owner Tax Responsibility Confusion

Different contract types such as Engineering, Procurement, and Construction (EPC) and Owner Furnished Contractor Installed (OFCI) can blur responsibility for tax. Without clear alignment, organizations may lose visibility into how contractors and subcontractors are applying tax, leading to inconsistent treatment and potential exposure.

Missed Exemptions and Incentives

Many utility and energy projects qualify for specific exemptions, including those related to manufacturing, energy production, renewable investment, or pollution control. These exemptions are often underutilized due to lack of coordination during procurement or insufficient documentation during the build process—resulting in significant tax inaccuracies.

Jurisdictional Sourcing Errors

Determining the correct taxing jurisdiction can be challenging when materials are shipped across state lines or delivered to multiple job sites. Misalignment between billing addresses, ship-to locations, temporary storage warehouses and construction yards, and actual usage can result in incorrect tax rates or jurisdictional reporting errors.

Limited Documentation and Audit Trail

Without a structured approach to documenting exemption certificate issuance reasoning, tax decision logic, and supporting documentation, organizations may struggle to defend positions during audit or substantiate refund claims. This often limits the ability to recover overpaid tax—even when opportunities exist.

Where Organizations Fall Short

These challenges rarely stem from a single issue. More often, they are the result of how tax is positioned within the broader project lifecycle. In many organizations, tax is introduced too late—after procurement decisions have been made and contracts are already in place. By that point, opportunities to structure transactions more efficiently or apply exemptions correctly may already be lost.

At the same time, procurement, accounts payable, and tax teams often operate independently, each making decisions that impact tax outcomes without a shared framework or visibility into the full picture. Combined with a reliance on ERP or tax engine defaults and manual processes to manage high-value transactions, this creates a reactive approach to tax—one where issues are addressed after transactions occur, when risk is harder to unwind.

The Opportunity: Improving Outcomes Upstream

When sales and use tax is addressed earlier in the lifecycle, the impact extends well beyond compliance. Organizations that take a more proactive approach are able to influence how transactions are structured, how vendors apply tax, and how internal teams manage tax expenses—leading to more consistent and predictable outcomes.

With the right visibility and coordination in place, organizations can:

• Identify and apply exemptions at the time of purchase
• Define tax responsibility clearly within contracts
• Establish consistent tax treatment across vendors
• Improve the accuracy of transaction tax decisions during the build

How Leading Organizations Are Addressing the Challenge

Organizations that manage this complexity effectively are taking a more coordinated approach that combines process, data, and technology. Rather than relying solely on downstream review, they are embedding tax considerations into procurement and project workflows, ensuring that tax treatment is aligned with how transactions are structured from the outset.

They are also placing greater emphasis on data visibility—using transaction-level insights to monitor how tax is applied across vendors and jurisdictions. This allows inconsistencies to be identified and corrected early, rather than discovered during audit or recovery efforts. Over time, this approach creates a more controlled and audit-ready environment, where tax outcomes are driven by defined logic and supported by documentation.

How DMA Supports Utility and Energy Projects

DMA works with energy and utility organizations at every stage of capital-intensive projects to help improve tax outcomes and reduce risk. Our approach combines deep technical knowledge with data-driven analysis to uncover issues that are often difficult to identify through traditional month-end review methods.

We support organizations in several key areas:

• Exemption identification and application: Ensuring eligible exemptions are applied correctly across jurisdictions and reflected in both vendor billing and internal processes
• Vendor and contractor tax analysis: Reviewing how tax is applied across EPCs, OFCI and general contractors, and suppliers to identify inconsistencies and overpayments
• Recovery of overpaid tax: Preparing and supporting refund claims where tax has been incorrectly applied
• Use tax accrual improvement: Enhancing the logic and processes used to determine and apply use tax during the build
• Audit support and documentation: Providing the documentation and support needed to defend tax positions with confidence

By bringing together recovery, compliance, and automation capabilities, DMA helps organizations move from a reactive posture to a more controlled and proactive approach to sales and use tax.