Industry Topics for Construction Contractors Español

Sales and Use Tax for Construction Contractors

How California's Sales and Use Tax Law applies to construction contracts depends on the type of contract, how contractors purchase materials, fixtures, machinery and equipment, and how they install such items under contracts to improve real property.

California's law considers construction contractors to be consumers of materials they use and retailers of fixtures they install. Both of these concepts are explored in the Materials and Fixtures section of this guide.

Permits

Most construction contractors are required to register with the CDTFA for a seller's permit, which allows them to make retail sales of tangible personal property, which the law defines as an item that can be seen, weighed, measured, felt, or touched.

A seller's permit also allows you to issue a resale certificate to your suppliers when making purchases for resale. Issuing a resale certificate allows you to purchase items that you intend to sell without payment of tax.

As a construction contractor, you are not required to hold a seller's permit if:

• You perform construction contracts exclusively with the United States Government, or
• You are a general contractor who hires subcontractors exclusively to perform construction contracts
• You exclusively furnish and install materials under lump-sum contracts

Use Tax

Use tax is a companion to California's sales tax, and is due whenever you purchase taxable items without payment of California sales tax from an out-of-state vendor for use in California. You also owe use tax on items that you remove from your inventory and use in California when you did not pay tax when you purchased the items. To pay use tax, report the purchase price of the taxable items under “Purchases Subject to Use Tax” on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

Construction contractors who are not required to hold a seller's permit, but whose gross receipts are $100,000 or more annually, must register with the CDTFA for a Consumer Use Tax Account.

For more information, see publication 9, Construction and Building Contractors.

Recordkeeping

Businesses that are required to hold a seller's permit because they make taxable sales or purchases in California should keep books and records that are necessary to accurately determine their tax liability. In most cases, that means normal “books of account” and the bills, invoices, and other documents that support them. In addition, owners and operators should keep the schedules and working papers used to prepare tax returns.

In addition, contractors should keep records of the following:

• Purchase invoices, especially out-of-state purchases
• Job cost folders
• Billing records, both in progress and final
• All documents supporting nontaxable purchases or sales

Contract Types

There are three basic types of construction contracts; lump-sum, time and material, and cost plus a fee. Although all are equally acceptable and should be chosen based on how well they work for your business, using lump-sum contracts and paying taxes on your purchases of materials and fixtures can simplify tax reporting.

Lump-Sum

In a lump-sum contract, you agree to provide and install materials and/or fixtures for a single price. You pay tax on your cost of materials when you purchase them. You report tax on the selling price of your fixtures. If you manufacture the fixtures, the cost price is the prevailing price of the fixtures sold to other contractors or, if that can't be established, the amount stated in the price lists, bid sheets or other records, or the manufactured cost, including your profit.

Time and Material

In a time and material contract, your charges for materials and/or fixtures are stated separately from your charges for installation or fabrication. You pay tax on your cost of materials when you purchase them unless you separately state a charge for sales tax on the stated selling price of the materials. If you do, then you report tax on the stated selling price. You report tax on the selling price of your fixtures which is your stated selling price.

Cost Plus a Fee

In a cost plus a fee contract, you itemize the cost of fixtures and materials, which may include tax, labor, overhead, and other costs, but not markup. In addition, you separately state a fee, which is considered to represent nontaxable installation labor. You pay tax on your cost of materials when you purchase them. You report tax on the selling price of your fixtures. If you manufacture the fixtures, the selling price is the prevailing price of the fixtures sold to other contractors or, if that can't be established, the amount stated in the price lists, bid sheets or other records, or the manufactured cost, including your profit.

United States Government Contracts

Generally, whenever you are performing contracts for the United States Government, you owe tax on your cost of materials and fixtures.

Materials

The term materials has a specific legal meaning. For the purposes of construction contracting, California's Sales and Use Tax Law considers materials to be property that, when combined with other property, loses its individual identity to become an inseparable part of real property. Examples of materials include bricks, plaster, lumber, windows and paint.

Construction contractors are generally the consumers of the materials they use. As a consumer, you owe tax on the cost to you of materials you use in the performance of a construction contract.

When Fabricating Materials

If you fabricate or process materials prior to use or installation and you are not the retailer of the materials, no tax is due on your fabrication or processing costs – only the actual cost of the materials to you is taxable.

When Materials Are Fabricated by a Third Party

When you pay another party to fabricate or process materials for you, those costs are part of the taxable cost of the materials to you.

Beginning January 1, 2013, a new law requires a one percent (1%) assessment on purchases of lumber products and engineered wood products for use in California, based on the selling price of the products.

The new law affects retailers of lumber products or engineered wood products and purchasers, including construction contractors, who use these products in California.

For more information see California Lumber Products Assessment

Fixtures

The term fixture has a specific legal meaning. California's Sales and Use Tax Law considers fixtures to be accessories to a building that do not lose their identity when installed. Air conditioning units, prefabricated cabinets, furnaces, and signs are examples of fixtures.

Construction contractors are the retailers of fixtures that they provide and install. As a retailer, you owe tax on the selling price of fixtures you provide and install in the performance of a construction contract.

Fixtures Manufactured by Others

If a contract states the selling price of the fixture, tax applies to that price. If no price is stated, the selling price is considered to be the cost price of the fixture to you – including any manufacturer's excise tax or import duties that are imposed before your sale of the fixture to your customer.

Fixtures You Manufacture

If you fabricate the fixture you are to provide and install in the performance of a construction contract, and the contract does not state the sale price of the fixture, you owe tax on the cost price of the fixture. The cost price will be that at which you have sold similar fixtures to other contractors.

If you have not sold similar fixtures to other contractors, the cost price will be the sum of:

• The cost of materials
• Freight-in and/or import duties
• Direct labor cost, including benefits and payroll taxes
• Factory costs attributable to the fixture
• Manufacturer's excise taxes
• Pro-rata share of overhead attributable to the manufacture of the fixture, and
• Reasonable profit, which is generally five percent of the total costs listed above.

Jobsite fabrication labor and its prorated share of manufacturing overhead must be included in the sale price of the fixture. Jobsite fabrication labor includes assembly labor performed prior to attaching a fixture to real property.

Machinery and Equipment

The phrase machinery and equipment has a specific legal meaning. For the purposes of construction contracting, California's Sales and Use Tax Law considers machinery and equipment to mean property that is used in producing, manufacturing or processing of tangible items. Examples of machinery and equipment include drill presses, lathes, printing presses, and machine tools.

Machinery and equipment is used for purposes that are not essential to the structure to which it is attached. Machinery and equipment can be attached to a structure without losing its identity, and can be removed from a structure without damage to it or the structure.

As a construction contractor, you are the retailer of machinery and equipment you provide in the performance of a construction contract.

If a construction contract only requires the furnishing and installation of machinery and equipment, tax applies to the total contract price, excluding installation labor.

Determining Retail Price

If a lump-sum contract includes the furnishing of materials, fixtures, and machinery and equipment, tax applies to the price at which the machinery and equipment would be sold at retail, including the cost of delivery to the jobsite. If the retail price of such machinery and equipment cannot readily be identified, the price will be determined from contracts, price lists, bid sheets, or other records.

Determining Gross Receipts

If you manufacture the machinery and equipment, the gross receipts cannot be determined in the manner described above, the gross receipts from the sale will be a combination of:

• The cost of materials
• Freight-in and/or import duties
• Direct labor cost, including benefits and payroll taxes
• Factory costs attributable to the fixture
• Manufacturer's excise taxes
• Pro-rata share of overhead attributable to the manufacture of the fixture, and
• Reasonable profit, which is generally five percent of the total costs listed above.

Additionally, jobsite fabrication labor and its prorated share of manufacturing overhead must be included in the sale price of the fixture. Jobsite fabrication labor includes assembly labor performed prior to attaching a fixture to real property.

Subcontractors

Generally, subcontractors owe tax on the cost of materials they use and owe tax on either the cost price or selling price of fixtures, machinery, and equipment they furnish and install.

As a prime contractor, your charges to clients for subcontracted improvements to real property are not taxable. The subcontractor is responsible for reporting and paying the tax. If your client pays the subcontractor directly, the subcontractor may bill your client for tax.

As a general contractor, you may not give your subcontractor a resale certificate for materials or fixtures installed in a construction contract.

For more information, see publication 9, Construction and Building Contractors.

Local and District Taxes

The jobsite is considered the place of business of a construction contractor or subcontractor.

It is the location where sales of fixtures and use of materials occur. This location may be different than your registered business location, therefore you are generally required to allocate local and district taxes on your returns to each job location.

District Taxes

District taxes are an additional tax above and beyond the state rate that is imposed by some cities and counties. Currently the state rate is 7.25%. You owe the tax rate in effect where you install your materials, fixtures, and equipment. If you paid a lower rate at the location where you purchase your items than the rate where you install your items, then you owe the difference.

For example:
You purchase materials in Orange County where the applicable rate is 7.75%.
You install the materials on a job in Los Angeles County where the applicable rate is 9.50%.
You would owe tax on the additional 1.75% and should pay it on your return.

(Note: the above example includes the statewide rate of 7.25% plus applicable district taxes of .5% and 2% for Orange County and Los Angeles County respectively as of 10/01/17. Rates are subject to change. You should verify current rates on our website. See the City and County Tax Rates link on the resources tab.)

Local Tax

Local tax is a portion of the state tax that is allocated to the local city or county. Local tax is part of the overall state rate, and you don't owe anything extra, however, you will need to allocate the local tax on your sales and use tax return based on your job location.

A comprehensive listing of city and county tax rates can be found here: California City & County Sales & Use Tax Rates

Exemption from Sales and Use Tax on Certain Purchases for the Construction of Certain Military and Veteran Medical Facilities

Beginning January 1, 2019, through December 31, 2024, Revenue and Taxation Code (R&TC) section 6369.7 provides for a sales and use tax exemption for the sale and use of building materials and supplies purchased by a qualified person for use by that qualified person in the construction of a qualified facility.

A qualified person is either or both of the following:

• A “qualified nonprofit organization” which means an organization exempt from taxation under section 501(c)(3) of the Internal Revenue Code that constructs a “qualified facility” as a gift to the United States Department of Defense (USDOD), pursuant to section 2601 of Title 10 of the United States Code or the United States Department of Veterans Affairs (USDVA), pursuant to section 8301 of Title 38 of the United States Code; or
• A contractor, sub-contractor, or builder working under contract with a “qualified nonprofit organization” to construct a “qualified facility.”

A “qualified facility” is either:

• A medical facility, or a temporary residential facility for families of patients receiving care, including either or both inpatient and outpatient care, at a medical facility, located on a United States military base in California; or
• A USDVA medical center, or a temporary residential facility for families of patients receiving care at or as part of a USDVA medical center, located in California.

Building materials and supplies that may be purchased under this exemption include any machinery, equipment, materials, accessories, appliances, contrivances, furniture, fixtures, and all technical equipment or other tangible personal property of any other nature or description that meet all of the following:

• Are necessary to construct and equip a qualified facility.
• Become part of the completed qualified facility.
• Are transferred to the USDOD or USDVA as a gift, as specified.

The exemption does not apply to purchases of tools or other construction equipment that are not specified above and meet the three listed criteria.

This exemption from tax only applies to sales and purchases made after the date the USDOD or USDVA accepts the qualified nonprofit organization’s offer to construct the qualified facility and on or before the date the USDOD or USDVA accepts the qualified facility.

If you are a contractor, subcontractor, or builder working under contract with a qualified nonprofit organization to construct a qualified facility, you may issue CDTFA-230-C-2, Exemption Certificate for Property Used in the Construction of a Qualified Facility,to your vendors for your qualifying purchases of building materials and supplies.

A purchaser that issues an exemption certificate for its purchases made pursuant to R&TC section 6369.7, and who subsequently uses the items purchased in a manner not qualifying for the exemption, will be liable for the payment of tax (calculated on the sales price of the property), plus any applicable interest.

California Alternative Energy and Advanced Transportation Financing Authority (CAEAFTA) Sales and Use Tax Exclusion

A construction contractor (including subcontractors) may use the sales and use tax exclusion provided by RTC 6010.8 for a CAEAFTA approved project, when they are furnishing and installing materials and/or fixtures for a participating party.

Construction contractors are generally the consumer of materials that they furnish and install in the performance of a construction contract. Therefore, when a construction contractor purchases materials to be used for the construction of an approved CAEFTA project, they should provide their vendors with form CDTFA-192, CAEATFA Exclusion Certificate for Sales and Use Tax.

On the other hand, construction contractors are generally retailers of fixtures and/or machinery and equipment that they furnish and install. As the retailer, a construction contractor may issue a resale certificate when purchasing fixtures and/or machinery and equipment from its vendors. When the construction contractor resells the fixtures and/or machinery and equipment to a participating party or to a prime contractor for use in an approved CAEFTA project, they should obtain form CDTFA-192, CAEATFA Exclusion Certificate for Sales and Use Tax, to support that the sale qualifies for the exclusion provided by RTC 6010.8.

For more information about this program, see our webpage on CAETFA Sales and Use Tax Exclusion.