Sales tax on invoices in California

California treats a construction contractor as the consumer of the materials it furnishes and installs and the retailer of the fixtures, on lump-sum, time-and-material and cost-plus contracts alike, with the exceptions below. Sales tax collected on the total price of a lump-sum contract to improve real property is excess tax reimbursement, which must be returned to the customer or paid to the state.

Seller’s permit and who owes the tax

The seller owes California sales tax to the California Department of Tax and Fee Administration (CDTFA) and may be reimbursed by the customer. Most construction contractors must register with CDTFA for a seller’s permit, which is free, though CDTFA may require a security deposit.

You don’t need a permit if you exclusively perform construction contracts with the United States Government, are a general contractor who hires subcontractors exclusively to perform construction contracts, or exclusively furnish and install materials under lump-sum contracts. If you don’t need a permit but your gross receipts are $100,000 or more a year, register with CDTFA for a Consumer Use Tax Account.

Materials and fixtures under Regulation 1521

• Materials, such as lumber, piping, electric wiring and tile, lose their identity and become part of the real property. You’re their consumer: sales or use tax applies when you buy or use them.
• Fixtures, such as air-conditioning units, furnaces, lighting fixtures and plumbing fixtures, keep their identity as accessories once installed. You’re their retailer, and tax applies to your sale of them.

On a lump-sum contract (one price to furnish and install) and a cost-plus-a-fee contract, you pay tax on materials when you buy them and report tax on the fixtures’ selling price. When a lump-sum contract states no price for a fixture, its selling price is your cost for it. On cost plus, the separately stated fee counts as nontaxable installation labor, and your itemized costs may include tax, labor and overhead but not markup.

On a time-and-material contract (the contract states the charge for materials or fixtures separately from installation or fabrication), you report tax on your stated selling price of fixtures and pay tax on materials when you buy them, unless you bill sales tax on the materials, as below.

Exceptions to California’s materials-and-fixtures rule

• Title passes first: if your contract explicitly transfers title to the materials before installation and states their sale price apart from the installation charge, you’re the retailer of those materials.
• Fixture repairs: a contract to repair a fixture in place, or one the contract requires you to reaffix to the realty, is a construction contract. You’re the retailer of the parts when you bill their price separately from the repair labor, and their consumer on a lump-sum repair contract.
• Federal jobs: on contracts with the United States Government, you’re the consumer of both the materials and the fixtures you furnish and install.
• Machinery and equipment: you’re their retailer even when you furnish them with a construction contract, and tax applies to your gross receipts from them. Wiring, conduit, switches, junction boxes, valves, pipes and tubing incorporated into a structure aren’t machinery and equipment.
• Subcontractors generally owe tax on the cost of their materials and on the cost price or selling price of the fixtures, machinery and equipment they furnish and install. A prime contractor’s charges to clients for subcontracted improvements to real property aren’t taxable, and a general contractor may not give a subcontractor a resale certificate for installed materials or fixtures.

Services: not taxed as such under Regulation 1501

A California business rendering a service is the consumer of the property it uses incidentally, and a contract whose true object is the service itself isn’t taxable even though some property changes hands. Labor isn’t generally exempt, though: charges for producing, fabricating or processing property for a customer are taxable.

Tax line on your invoice: reimbursement or a tax-included notice

A California seller may pass its tax on to the customer as sales tax reimbursement when that’s agreed as part of the sale, and listing a separate amount for reimbursement on your invoice counts as agreement. If you put the reimbursement into your prices instead, you must tell the buyer that tax is included, with a statement such as “All prices of taxable items include sales tax reimbursement computed to the nearest mill.”

• Lump-sum contracts: no tax on the total price. Excess tax reimbursement is an amount shown to your customer as sales tax, computed on an amount that isn’t taxable or is more than the taxable amount, and paid by your customer. Because you’re the consumer of the materials, tax collected on the total price of a lump-sum contract to improve real property is excess, and must be returned to your customer or paid to the state, less the offsets Regulation 1700 allows. In CDTFA’s example, a contractor spreading asphalt or concrete under lump-sum contracts pays tax on the materials it buys and bills its customers no sales tax.
• Time-and-material contracts: tax on materials only if you bill it. In CDTFA’s example, a residential roofer whose time-and-material contracts show materials and labor separately pays tax to the supplier and never bills customers sales tax on the marked-up materials. If you do separately state a charge for sales tax on your stated selling price of materials, you report tax on that stated price, and billing “sales tax” on marked-up materials makes you presumed to be their retailer, absent convincing evidence to the contrary.

Separately stating materials, fixtures, labor or tax on the invoice for a lump-sum job doesn’t make it a time-and-material contract. Under Regulation 1521, a time-and-material contract is one that itself sets out a charge for the materials or fixtures and a separate charge for installing or fabricating them.

District taxes and the jobsite

In most areas of California, district taxes of 0.10% to 2.00% add to the statewide rate on this page, and some areas have more than one. For a construction contractor or subcontractor, the jobsite is the place of business: you owe the rate in effect where you install materials, fixtures and equipment, so if you paid a lower rate where you bought them, you owe the difference. You generally allocate local and district taxes on your return to each job location.

Landscaping, HVAC, electrical, plumbing and roofing

CDTFA lists these among the building trades of construction contractors, so the materials-and-fixtures rule applies to their construction contracts:

• Landscaping: a landscaper who furnishes and installs plants, trees and lawns is a construction contractor. Sod and flowers are generally materials. Plants, trees and shrubs are generally fixtures, and tax generally applies to their sales price, which on a lump-sum contract is generally your cost. CDTFA’s example also counts sprinkler heads and control boxes as fixtures and PVC pipe as a material.
• Heating and air-conditioning: furnishing and installing what becomes part of a building’s central heating or air-conditioning system is a construction contract. Air-conditioning units, furnaces, boilers and heating units are typical fixtures.
• Electrical and plumbing: electric wiring and piping are materials; lighting fixtures and plumbing fixtures are fixtures.
• Roofing: in CDTFA’s residential roofing example, roofing paper, nails, shingles and tiles are all materials.