"Is South Dakota's 2% Contractor's Excise Tax Already Inside My New Home's Contract Price?"

The first bid for the home you want to build on a lot outside Sioux Falls comes back at $500,000. Near the bottom there is a line that reads "contractor's excise tax, 2.041%." The second bid, from a builder across the county, lands at $498,000 with no tax line anywhere on it. You know South Dakota charges 2 percent, so the first builder looks like he is rounding up and the second looks like he forgot. Both of them are following the Department of Revenue's instructions, and the number that matters to your mortgage is in plain view on both pages.

South Dakota's contractor's excise tax is the builder's tax, charged at 2 percent of everything the builder receives on your contract, and it is already inside the contract price whether or not the bid shows it as a line. The lender sizes your construction loan on that contract price, so there is no separate excise tax to save for at closing.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, including South Dakota, NMLS #483943, through C2 Financial Corporation.

The 2 percent is the builder's tax, and it is charged on the whole contract

South Dakota charges this tax to the builder. SDCL 10-46A-1 sets it at 2 percent of the gross receipts of every prime contractor working on realty improvement contracts, which means contracts to build or improve a home. The prime contractor is the builder who signs the contract with you, and the Department of Revenue's contractor's excise tax page lists the same 2 percent rate.

Gross receipts means everything the builder takes in on your job. The Department's Contractor's Excise Tax Guide (July 2026) defines it as the full amount received for construction services or realty improvements in South Dakota. That covers the materials, the labor, the builder's profit, and any sales tax, use tax or excise tax he collected from you. Use tax is the sales tax South Dakota collects when something was bought without sales tax being charged, which often happens with out-of-state orders. Those taxes stay inside gross receipts even when the contract lists them on their own line.

Your builder's subcontractors do not owe the same tax a second time, because the prime contractor hands each of them an exemption certificate, so the tax on your new home is owed once, by your builder, on your contract total.

This tax is separate from the real estate transfer fee, which the statute puts on the seller and which the South Dakota mortgage page covers. The excise tax is the contractor's own liability under the law, so the state never bills any of it to you.

Your South Dakota bid says 2.041 percent because the tax is owed on the tax

Gross receipts include the tax the builder collects from you. So a builder who adds a flat 2 percent on top of his price ends up short when he files his return, because the state figures 2 percent of the bigger number. The Department of Revenue solved that by publishing a bid factor. The guide says a bid factor of 2.041 percent may be used to calculate the excise tax when preparing a bid or a bill, so the contractor collects the full amount due. A straight 2 percent is then used on the return.

In practice, 2.041 percent of the price before tax works out to 2 percent of the total after the tax is added, and the builder who shows that line is showing you how he got to his total. The builder with no tax line has folded the same 2 percent into his lump sum, and the guide allows either presentation. You'll want to compare the two contract totals, because the tax line on the first bid costs you nothing extra. The second builder's total includes the same tax without the line that says so.

The number your construction loan is sized against

A construction-to-permanent loan closes once, before the build starts, and the lender releases money to the builder in draws as the work gets finished. How a construction-to-permanent mortgage works covers the land, the plans, the draws and the conversion to a permanent mortgage. Every step starts from the builder's contract price.

The excise tax is part of that contract price, so it is built into the draws too. The builder gets paid as each stage is finished and pays the tax to the state on his own return. You never write a separate check for it, and it does not appear on your Closing Disclosure. Your closing costs are the ordinary ones: recording fees, title, settlement charges, and the prepaid taxes and insurance that fund the escrow account. Closing costs, explained line by line covers each of them.

On a build, the appraiser values the finished home from the plans and the budget, and that value needs to support your contract price with the tax inside it. Newly built homes sold in South Dakota carry the same tax in their prices, so the recent sales an appraiser compares yours against carry it too. How an appraisal is ordered and read covers the rest of that process.

Supplying your own materials, and doing part of the work yourself

A lot of clients want to buy their own cabinets, flooring or fixtures, for the selection or to keep that spending out of the builder's margin. In South Dakota, that spending is still taxed through the builder.

The guide tells the prime contractor to count the value of materials you furnish as part of his gross receipts, so the $20,000 of cabinets you bought at the showroom still get taxed at 2 percent. The builder owes that tax, and he may bill you for it. If you cannot show that sales tax or use tax was already paid on those materials, the builder owes use tax on them as well. So please keep the itemized receipts or invoices for everything you buy for the home, showing the sales tax paid, and give your builder copies.

For the financing, those materials are outside the contract, so the construction loan does not fund them. They come out of your own account, on top of the down payment and closing costs, and on a custom build they add up quickly, so it is worth planning for them before you pick out finishes.

Acting as your own general contractor changes who owes what, and the Department's tax fact for owners who are their own contractor lays it out. If you are building the home only for your own use, with no plan to sell it or rent it out, you do not need an excise tax license and you owe no tax on your own work. Every contractor you hire still owes the 2 percent on what you pay them, including any materials you hand them. Some clients trade their own labor for a credit against what they owe the builder, which the fact sheet calls sweat equity. The builder cannot subtract that credit from his gross receipts, so his tax stays the same even though you are paying him less in cash. For that work the state treats you like one of his subcontractors, and he should hand you an exemption certificate for it, which means you owe no excise tax on the labor you put in.

Buying a spec home or a model from a South Dakota builder

Some clients are buying a finished home the builder put up on his own lot, and the same tax is already inside that price too. The Department's guidance says that when a contractor or speculative builder sells a building within four years of finishing it, contractor's excise tax is due on the selling price. That tax is the builder's, built into the listing price, and there is nothing for you to add on top. On a spec purchase, it helps to compare the builder's lender against an outside quote, because the builder's incentive is often worth thousands and you can only judge it against a second loan quote.

Steps before you sign a South Dakota builder's contract

1. You'll want to ask each builder to confirm in writing that the contractor's excise tax is included in the contract total, because you do not want that number growing later. A sentence in the contract or a short email from the builder is enough.
2. Then you'll compare the two totals. A bid with a 2.041 percent line and a bid with no line at all both already include the same tax, and the lender sizes the construction loan on the total.
3. It helps to write down everything you plan to supply yourself, like cabinets, appliances or flooring, because each of those is cash from your own account outside the loan, and the builder's 2 percent applies to it too.
4. You'll want the permanent mortgage priced before you sign, because once you sign you are committed to the contract price, and it is much easier to adjust the plans before that than after.
5. After you move in, you'll want to file for the owner-occupied classification, which is how South Dakota applies its lower school levy to your home. You certify it with your county Director of Equalization, and when to certify a South Dakota home as owner-occupied has the dates.

Two things worth settling early

Treating the tax as a closing cost. It is not a line on your Closing Disclosure, so a cash-to-close estimate that sets aside 2 percent for it is holding money you will not need there. That money can go toward the down payment, your reserves, or the materials you plan to buy yourself.

Reading a 2.041 percent line as padding. The Department of Revenue published that factor, and a builder who uses it is collecting exactly the tax he owes.

An illustration, so the shape is clear

Numbers below are made up to show the mechanism, and they are not a quote, a projection, or anyone's real contract. The tax rate and the bid factor are the Department of Revenue's; everything else is invented and rounded.

Say a South Dakota builder prices the work, the materials and his profit on your home at $490,000 before tax.

Work, materials and profit                  $490,000
Bid factor, 2.041% of $490,000               $10,000
                                           ----------
Contract price                              $500,000

Excise tax the builder pays the state,
  2% of $500,000                             $10,000

The builder collected $10,000 from you inside the price and owes $10,000 to the state. The construction loan is sized against the $500,000. If you add $20,000 of cabinets you bought yourself, that $20,000 comes from your own account, outside the loan, and so does the $400 of tax the builder owes on it if he bills it to you.

Your next step on a South Dakota build

If you are building in South Dakota, start with the number the loan will be built on, which is the contract total with the tax already in it. Run your numbers and you will see rates priced for your own scenario, your debt ratio, and closing costs built on South Dakota's own rules. No credit pull, no account, nobody calls you. Then choose the rate option that works best for you. That selection can change as the build moves along, and it is the first step before the application opens.

Once you want the letter a builder will take seriously, get pre-approved for a South Dakota mortgage and I'll review your income, debts, credit and available funds from the documents you provide.

Nothing here is a loan approval, a denial, a commitment to lend, or legal or tax advice. The contractor's excise tax is administered by the South Dakota Department of Revenue, the rules above are current as of the July 2026 guide cited, and your builder's tax position is between the builder and the Department.

Common questions

Who pays the contractor's excise tax in South Dakota when I build a home?

The builder. SDCL 10-46A-1 puts the tax on the gross receipts of every prime contractor working on realty improvement contracts, which means contracts to build or improve a home, at 2 percent. The prime contractor is the builder who holds the contract with you. He prices the tax into the contract and pays it to the state on his own return, so you do not pay it separately, and his subcontractors do not owe it again.

Is South Dakota's contractor's excise tax a closing cost on a construction loan?

No. It is inside the builder's contract price, which is the number the construction loan is sized against and the number the lender pays out in draws. It does not appear on your Closing Disclosure, because the state assigns it to the contractor. Your closing costs on a South Dakota build are the ordinary ones: recording fees, title, settlement charges, and prepaid taxes and insurance for the escrow account.

Why does my South Dakota builder's bid show 2.041 percent instead of 2 percent?

Because the tax is charged on gross receipts, and the Department of Revenue's guide says gross receipts include the excise tax the builder collects from you, even when it is listed separately. A flat 2 percent added on top would leave the builder short on his return. The Department publishes a bid factor of 2.041 percent for bids and bills, which works out to 2 percent of the total once the tax is included.

Do I owe excise tax on materials I buy myself for my South Dakota build?

The builder owes it, and the builder may bill you for it. The Department of Revenue's guide tells the prime contractor to count owner-furnished materials in his gross receipts for the 2 percent tax. If you cannot show that sales tax or use tax was already paid on those materials, the builder owes use tax on them too, so it helps to keep the itemized receipts. For your financing, those materials are outside the construction loan, so they come from your own cash on top of the down payment and closing costs.

Do I pay contractor's excise tax if I act as my own general contractor in South Dakota?

Not on your own work. The Department of Revenue's tax fact for owners who act as their own contractor covers this. A project owner building only for their own use, with no plan to sell or lease, needs no excise tax license and owes no tax on their own labor. Every contractor you hire still owes it on what you pay them, including materials you furnish. The loan side has its own rule. FHA, for one, requires a contract with a licensed general contractor under Handbook 4000.1, section II.A.8.j, and other programs and lenders set their own builder requirements, so please ask me or your lender before you plan on an owner-build. How a construction-to-permanent mortgage works has more on that.