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.

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

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.

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

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 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.

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.

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

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.

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.

Spencer's contracts with his customers are lump-sum contracts, in which he agrees to provide and spread the asphalt or concrete at the jobsite specified in the contract. He is doing more than simply delivering the materials to the jobsite; in spreading the asphalt or concrete, Spencer is making improvements to real property.

Concrete and asphalt are generally considered under the Sales and Use Tax Law to be materials. As a construction contractor, Spencer is the consumer of materials he furnishes and installs in the performance of construction contracts. As a consumer, Spencer owes sales tax on the purchase price of the materials he purchases from his supplier, and does not bill his customers for sales tax.

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

Jorge prefers to use lump-sum contracts with his customers. He knows that in most cases the granite he installs is considered materials, because it loses its identity as a separate component when installed.

Jorge is construction contractor who furnishes and installs materials for his customers under lump-sum contracts. Jorge doesn't pay any sales tax when he purchases the granite from his out-of-state supplier, so he pays use tax to the state based on the purchase price of the granite and the tax rate in effect at his jobsite.

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

Bruno knows that as a construction contractor he is generally regarded to be the consumer of materials and the retailer of fixtures he provides and installs in the performance of his contracts. He knows that the items he uses in his contracted jobs – laminate, linoleum, padding, and baseboard – are all considered to be materials under the Sales and Use Tax Law.

Bruno pays sales tax for his materials at the time of purchase from his supplier. Having paid sales tax, Bruno has no additional tax liability unless his jobsite is located in an area with a tax rate higher than that where the materials were purchased. Bruno has bookmarked the CDTFA's webpage of city and county tax rates, so he always knows the tax rate in effect at his jobsite.

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

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

Brian knows that as a construction contractor, he is the consumer of materials and the retailer of fixtures that he provides and installs in the performance of his construction contracts. He knows that under the Sales and Use Tax Law, trees, shrubs, sprinkler heads, and control boxes are considered fixtures, while sod, flowers, and PVC pipe are considered to be materials.

Brian paid sales tax to his supplier on all his purchases needed for his contracted jobs. Brian knows that when he uses a lump-sum contract, the selling price of fixtures is deemed to be the cost price.

Because Brian paid sales tax on his purchase of materials and fixtures and uses a lump-sum contract, he has no further tax to report unless his jobsite is located in an area with a tax rate higher than that where the materials and fixtures were purchased. If the jobsite is in an area with a higher tax rate, Brian owes the difference between the higher and lower rates.

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

Kathryn knows that movable shutters, venetian blinds, and shades are all considered fixtures under the Sales and Use Tax Law. She knows that the screws and fasteners she uses are considered to be materials. She knows that under the law she is considered to be the retailer of fixtures and the consumer of materials she provides and installs in the performance of her lump-sum construction contracts.

Kathryn paid sales tax on all her purchases of fixtures and materials needed for her contracted jobs.

Under a lump-sum contract, the cost price of fixtures is considered the selling price. Since Kathryn has paid sales tax to her vendor for her purchases of materials and fixtures, she does not owe additional tax unless her jobsite is located in an area with a tax rate higher than that where the materials and fixtures were purchased. If the jobsite is in an area with a higher tax rate, Kathryn owes the difference between the higher and lower rates.

Kathryn has bookmarked the CDTFA's webpage of city and county tax rates, so she always knows the tax rate in effect at her jobsite.

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

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

Brandon purchases solar panels, disconnect boxes, inverters, and transformers tax-paid from a local supplier who delivers them directly to his jobsite. He purchases wire, wire harnesses, strapping, and piping from a local hardware store, paying sales tax on his purchases.

Brandon's most recent contract was for installing rack-mounted solar panels on the roof of a customer's home in San Bruno.

Brandon knows that rack-mounted solar panels, AC and DC disconnect boxes, inverters, and transformers are considered fixtures. He knows that wire, wire harnesses, strapping, and piping are considered materials. Having read CDTFA publication 9, he knows that under the Sales and Use Tax Law he is considered to be the consumer of materials and the retailer of fixtures he provides and installs in the performance of his construction contracts.

Brandon has paid taxes on all his purchases. Since he is using a lump-sum contract, he would have no additional tax to report if the required materials were used in an area where there is no district tax or where the district tax rate is lower than that of Sacramento, which has a tax rate of 8.25 percent.

San Bruno, however, has a tax rate of 8.75 percent. Brandon knows that the jobsite is the place of use for materials and the place of sale for fixtures, and so he is responsible for paying the additional .5 percent in taxes on the cost of the materials and fixtures to him.

Note: Rates in this example were effective 10/01/2017, rates are subject to change.

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

Francine knows that, under the Sales and Use Tax Law, she is considered to be the retailer of fixtures she furnishes and installs under a time and material construction contract. She also knows that since at least 90 percent of the total cost of labor and materials needed to produce the kitchen cabinets are incurred prior to installation, the cabinets are considered to be "prefabricated" and "fixtures".

As a retailer of the fixtures she furnishes and installs for her customers, Francine owes sales tax based on the billed price of the prefabricated kitchen cabinets.

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

Antonio knows that as a construction contractor, he is the consumer of materials he provides and installs in the performance of his contracts. He knows that under the law, the items he uses – roofing paper, nails, shingles and tiles – are all considered materials.

As a consumer of materials, Antonio knows that he should not issue a resale certificate when purchasing them, and so he pays sales tax to his supplier. Having read CDTFA publication 9, Antonio never bills his customers for sales tax on his marked-up and separately stated price of materials.

Having paid sales tax to his suppliers for his purchase of materials, Antonio has no additional tax liability unless his jobsite is located in an area with a tax rate higher than that where the materials were purchased. Antonio has bookmarked the CDTFA's webpage of city and county tax rates, so he always knows the tax rate in effect at his jobsite.

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

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