Call Now (800) 681-1295
Close

Can a Construction Contractor Write Off Tax on the Resale of Purchased Material in California?

Table of Contents

    With the housing crunch occurring throughout California, many contractors are busier than ever trying to construct new homes and apartment buildings to keep up with the sprawling demand. Construction contractors need to be sure to keep up with tax reporting to the IRS as well as to state agencies like California Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA). Because they often pay workers as independent contractors and buy large amounts of materials from different sources, there can be some especially tricky tax issues for those in this profession. In one recent case that caught the attention of our skilled Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing, the California Office of Tax Appeals ruled on whether or not contractors are permitted to write off sales taxes if they intend to use some of the materials they use for construction activities and to resell the rest.

    Background of The Case

    The case involved the actions of a California construction contractor called the Martinez Steel Corporation (Martinez). The company purchased steel materials in the amount of $18,374,604 under resale certificates with no tax or tax reimbursement paid or reported at the time of purchase. Martinez did, however, report and pay tax on $15,534,190 of steel materials that were withdrawn from inventory, of which the company used $15,516,870 for installation purposes in its construction projects, and resold $17,320. After an audit, Martinez received a tax bill from the CDTFA for $400,402 in back sales tax and interest that the CDTFA said was owed on the remaining $2,840,414 of steel material in inventory.

    Martinez appealed this bill on the grounds that they should be taxed based on the fact that they were engaged in the business of selling these materials rather than furnishing and installing them in the performance of their construction contracts. This would permit them to write off the purchase of these materials and not have to pay the sales tax. In support of this argument, Martinez claimed that their original intent when purchasing the materials was to resell them, and pointed to the fact that they resold $17,320 of this batch of materials as well as $1,392,413 worth of the same materials during the eight preceding quarters and $98,780 worth of the materials in the two quarters following the liability period.

    The appeal of the $400,402 tax bill was handled through the California Office of Tax Appeal and heard by an Administrative Law Judge (ALJ). ALJs are somewhat different than a regular judge as they go through a separate process of licensing and qualification. These trials and pre-trial procedures are also much different than a typical trial in a criminal or civil court. As such, it is vital to make sure when you are dealing with the CDTFA or another state agency that you hire an attorney with experience specific to these types of cases, like those on the team at the Tax Law Offices of David W. Klasing.

    The Administrative Law Judge’s Ruling

    In the Martinez matter, the ALJ ruled in favor of the CDTFA, confirming that the company was, in fact, subject to tax at the time of purchase. In the words of the court, “During the audit period, appellant consumed $15,516,870 of steel materials and resold $17,320 of steel materials at retail, which is 0.1 percent of total materials pulled from inventory during the liability period. The fact that appellant consumed 99.9 percent of the materials it purchased and resold only 0.1 percent of the materials establishes that it was not engaged in the business of reselling the materials. Therefore, CDTFA’s determination is reasonable and rational, and the burden of proof shifts to the taxpayer to establish that a result differing from CDTFA’s determination is warranted.” In this case, the ALJ ruled that the burden of the taxpayer to prove the result was not warranted and was not met in this instance. The ruling stated that Martinez’s argument that the company had intended to sell the materials was not borne out by the evidence, including their numbers for the prior and subsequent quarters, which the court felt gave “no evidence of the total amount of materials it purchased [those quarters], nor the amount of those it consumed, so there is no way to determine whether the gross sales were comparatively significant to those [during the time frame in question].”

    If You Have Questions Related to Your CDTFA Tax Bill, Call our Experienced Sales Tax Attorneys and CPAs Today

    In this case, the Office of Tax Appeals did not believe that the Martinez Steel Corporation could make a compelling argument that they were engaged primarily in the resale of the steel products they purchased based on the simple fact that 99.9 percent of the materials purchased were not resold. As such, they could not write off the resale of any of the material purchased. However, this does not mean that others in similar situations where they devote a larger percentage of their business to resale are necessarily ineligible for a write-off. The facts of each case are different, and you should consult with a skilled tax attorney and CPA like those at the Tax Law Offices of David W. Klasing before making any decisions about whether to pay or challenge a bill from the CDTFA.

    More Questions and Answers

    We Are Here for You

    Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.

    In addition to our main office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento. During the COVID-19 pandemic, our staff are working from home, but have full virtual meeting capability.

    Our office technology allows clients to meet virtually via GoToMeeting. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office at (800) 681-1295 and request a GoToMeeting if you are an existing client.

    Tax Help Videos

    Representing Clients from U.S. and International Locations Regarding Federal and California Tax Issues

    tax lawyers

    Main Office

    Orange County
    2601 Main St. Penthouse Suite
    Irvine, CA 92614
    (949) 681-3502

    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

    Outside of our 4 hour initial consultation option, we do not charge travel time or travel expenses when traveling to one of our Satellite offices, or surrounding business districts, where it is necessary to meet personally with taxing authority personnel, make court appearances, or any in person meeting deemed necessary for the effective representation of a client. To make this as flexible, efficient, and convenient as possible, David W. Klasing is an Instrument Rated Private Pilot and Utilizes the Firms Cirrus SR22 to service client’s in California and in the Southwest by air. Offices outside these areas are serviced via commercial jet airlines. None of these costs are charged to our clients.

    Satellite Offices

    California
    (310) 492-5583
    (760) 338-7035
    (916) 290-6625
    (415) 287-6568
    (909) 991-7557
    (619) 780-2538
    (661) 432-1480
    (818) 935-6098
    (805) 200-4053
    (510) 764-1020
    (408) 643-0573
    (760) 338-7035
    Arizona
    (602) 975-0296
    New Mexico
    (505) 206-5308
    New York
    (332) 224-8515
    Texas
    (512) 828-6646
    Washington, DC
    (202) 918-9329
    Nevada
    (702) 997-6465
    Florida
    (786) 999-8406
    Utah
    (385) 501-5934