Planning to work out of state? Here are some tips to avoid surprises when you perform a construction or design contract outside your home state.
1. Become authorized to do business. Whether you want to do business in another state as an existing construction or design firm or create a new entity to do business in the other state, you need to get a certificate of authority from the state agency that regulates business entities—usually the secretary of state or the department of commerce.
One reason for registering in each state where you do business is that many states prohibit an unauthorized “foreign” entity from using their courts to enforce contracts or the state’s mechanics lien laws. Also, some states, such as Wyoming, give resident contractors a percentage preference in bidding certain projects, which is one factor to consider in organizing a business in the market state.
2. Get licensed. Every state regulates the practice of architecture and engineering, but not all states regulate construction services. For example, Utah requires general contractors and various trade contractors to be licensed by the state, while Colorado, Idaho and Wyoming defer to local jurisdictions on licensing. Idaho requires construction managers to be licensed by the state.
Why get a license? Many states, such as Utah, have laws prohibiting unlicensed contractors from suing to obtain payment for their work. Licensing agencies can impose fines or prohibit unlicensed contractors from practicing in the state and even criminal penalties are possible.
3. Check on taxes. If you are a Montana contractor paying wages to employees for services performed in Idaho, do you have to withhold Idaho income tax from their wages? Idaho law says you do—even if the employees are Montana residents—if they earn more than $1,000 in a calendar year, and requires you to have an Idaho withholding account.
Montana probably requires you to withhold Montana income taxes, too, but will likely reduce the taxes by the amount of Idaho taxes. A similar setup may apply to use taxes. The work-site state or city may impose a use tax on vehicles, equipment (rented or owned), and tools you import into the state and use on the project, but will likely give you credit for sales taxes paid in your home state. Check with your accountant or tax adviser.
4. Protect your payment rights. Before you begin work or supply materials, learn the state’s requirements for asserting mechanics lien and payment bond rights. Those requirements can vary greatly in details but generally include deadlines for giving notice, recording liens and filing lawsuits to enforce lien and bond rights.
In some states, including Utah and Wyoming, notice must be given within a certain number of days of beginning to provide labor and materials (“preliminary” notice); and the manner of giving notice can be quite particular. Deadlines for filing liens are usually short—typically 90 to 180 days—and limitation periods for filing lien and bond lawsuits are typically no longer than a year. With such important rights at stake, it is prudent to consult a local construction lawyer or reputable lien filing service early.
5. Learn what contract clauses are enforceable. Contract clauses on such subjects as indemnity, retention, contingent payment, venue (where a claim can be brought) and choice of law may be prohibited or affected by legislation or case law. Indemnity against one’s own negligence is often unenforceable.
Laws may limit the percentage of retention owners and generals may hold (5% in Utah). Some states have invalidated pay-if-paid clauses; some states uphold them if they are clear, or a state may require a general contractor to disclose financial information about the owner. State law may void a clause requiring a local contractor to litigate its claims in another state or to apply the law of another state.
These are guides to enhance your profits and reduce your risks of working in a new market. For specific legal issues, seek competent legal advice.
Clark Fetzer practices with the Salt Lake City law firm of Fetzer Simonsen Booth & Jenkins. For nearly 30 years, he has focused his practice on construction and surety law. He can be reached at email@example.com. Website: www.mountainwestlaw.com