California businesses are required to pay an array of state and federal taxes to remain compliant with their tax obligations. The California Board of Equalization is charged with administering and enforcing the collection of certain taxes such as the sales and use tax. As such, the agency provides business owners with guidance as to their lawful tax obligations. Recently, the agency updated its Publication 9 –Construction and Building Contractors providing guidance regarding the tax obligations of building construction contractors, subcontractors, and other contractors.
The following is a brief introduction to the terms and concepts presented in the guide. Small business owners can consult the original publication for additional details and clarification. Construction companies and building contractors with additional questions should consult with an experienced California tax professional. The Tax Law Offices of David W. Klasing can provide trusted guidance regarding an array of California and Federal tax obligations for business owners. To schedule a reduced-rate consultation call 800-681-1295 or contact us online today.
California Contractors Must Obtain Certain Licenses & Permits
Under California state tax law, most construction contractors are required to secure a seller’s permit. Exceptions to this general rule include United States contractors, general contractors who work exclusively with subcontractors, and individuals who install materials under only lump-sum contracts. However, even those contractors who are not required to obtain a seller’s permit may need to obtain a Consumer Use Tax Account through the BOE.
A seller’s permit can be obtain by registering with the state BOE. As a practical matter, most construction and building contractors will require such a permit to make lawful sales of tangible personal property. Furthermore, the seller’s permit will authorize its holder to provide resale certificates. Proper use of a resale certificate can permit a contractor to buy items intended for resale without the payment of tax.
In California, A Contractor’s Tax Obligation Can Turn on Consumer/Retailer Status and Contract Type
The proper and appropriate application of sales and use tax to tangible property is dependent upon whether the tangible good is considered “materials” or “fixtures” under California law. Furthermore, the contract type also affects the obligation faced by the contractor by impacting whether the contractor is viewed as a consumer or retailer of purchased materials.
For instance, under a lump sum contract, a contractor is always considered to be the consumer of the installed or furnished materials. As such, the cost of the materials is imposed on the contractor. That is either use tax will apply to the use of the materials by the contracting party or sales tax will apply to the sale of the materials to the contractor. By contrast, under a time and materials contract the contractor is generally considered a consumer, but a number of exceptions applies to this rule where the contractor will be considered a retailer rather than a consumer. These situations include:
- The contractor bills the customer for sales tax on the basis of marked-up pricing for materials used in the construction. This is a time and material plus cost contract.
- The contract explicitly states that the contractor must transfer title to the materials before installation and the material sale price is distinct from installation fees.
Furthermore, for sales in California, sales tax is applied to the gross receipts from the sales of materials. However, if the sale of materials occurs prior to the materials being brought into the state, the customer is responsible for the use tax and the contractor is obligated to collect it and turn it over to the BOE. Different tax handling applies to fixtures.
Tax Guidance for California Contractors and Construction Firms
The foregoing is merely a brief introduction into a complex area of tax law that is nevertheless essential for California construction companies and contractors. Understanding these rules and maintaining compliance can help businesses and contractors avoid facing enforcement measures from California BOE. To schedule a reduced–rate sales and use tax consultation for your construction or contracting company call the Tax Law Offices of David W. Klasing at 800-681-1295 today or contact us online.
