California Board of Equalization BOE Sales Tax Audit of Construction Business: Contractors and Subcontractors- Sales Tax Problem
California Board of Equalization California Sales Tax
APPLICATION OF CALIFORNIA BOARD OF EQUALIZATION - BOE SALES TAX TO CONSTRUCTION CONTRACTORS AND SUBCONTRACTORS
A. MATERIALS — California contractors are consumers of materials which they furnish and install in the performance of construction and builidng contracts, and sales tax applies to the cost of materials to the construction contractor.
However, a construction contractor may contract to sell materials and also to install the materials sold. If the contract explicitly provides for the transfer of title to the materials prior to installation, and separately states the sale price of the materials, exclusive of the installation charge, the contractor will be considered the retailer of the materials.
In the case of a time and material contract, if contractors bill their customers an amount for sales tax computed on their marked-up billing for materials, they are considered to be retailers of materials, and are subject to sales tax on the amount on which tax reimbursement is charged.
If the sale occurs in California, the sales tax applies to the contractors’ gross receipts from the sale of the materials.
If the sale occurs prior to the time the property is brought into this state, the customer is considered the consumer and must pay their use tax based on the sales price.
The contractor must collect this use tax from the customer and pay it to the State of California.
When a contractor fabricates or processes material prior to installation, no tax is due on such processing costs; only the contractor’s actual material cost is subject to the tax.
Where the contractor sublets fabrication or processing of material to an outside firm, such fabrication is considered part of the taxable cost of materials.
B. FIXTURES — Contractors are the retailers of fixtures which they furnish and install, and tax applies to their sales of the fixtures. If the contract states the selling price of the fixture, tax applies to that price. If no sales price is stated, the taxable retail selling price is the cost price of the fixture to the contractor. If contractors purchase a manufactured fixture, the cost price is the sales price of the fixture to them, including any manufacturer’s excise tax or import duty imposed prior to the sale by the contractor. However, if the contractor manufactures the fixture, the cost price is considered to be:
1. The prevailing price at which similar fixtures in similar quantities ready for installation are sold by the contractor to other contractors, or
2. If similar fixtures are not sold to other contractors, then the cost price shall be deemed to be the amount stated In the price lists, bid sheets, or other records. If the sale price cannot be established in the above manner, the cost price shall be the aggregate of the following:
a. Cost of materials, including freight-in and import duties; direct labor, including fringe benefits and payroll taxes; specific factory costs attributable to the fixture; any manufacturer’s excise tax; pro rata share of all overhead attributable to the manufacture of the fixture; and reasonable profit from the manufacturing operationswhich, in the absence of evidence to the contrary, shall be deemed to be 5 percent of the sum of the preceding factors.
b. 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 attachment of a component or a fixture to a structure or other real property.
3. A construction contractor may furnish and install a fixture for a person, other than the owner of the realty, who intends to lease the fixtures in place as tangible personal property and pay tax measured by rental receipts. In this case, the contractor may take a resale certificate from the lessor at the time of the transaction, and the sale to the lessor will be considered a sale for resale.
C. PREFABRICATED CABINETS — A cabinet will be considered “prefabricated,” and a “fixture” when 90 percent of the total direct cost of labor and material in fabricating and installing the cabinet is incurred prior to affixation to the realty. In determining this 90 percent, the total direct cost of all labor and materials in fabricating the cabinet to the point of installation will be compared to the total direct cost of all labor and materials in completely fabricating and installing the cabinet. Each cabinet will be considered separately if more than one cabinet is fabricated and installed under the contract.
D. MACHINERY AND EQUIPMENT — A construction contractor is the retailer of machinery and equipment, even though the machinery and equipment are furnished in connection with a construction contract. If the contract only requires the furnishing and installation of machinery and equipment, tax applies to the total contract price, less installation labor charges and other excludable charges. If a lump-sum contract includes the furnishing and installation of materials, fixtures, and machinery and equipment, tax applies to the price at which such machinery and equipment in similar quantities ready for installation are sold at retail, delivered to the area where the installation takes place. If no such retail price for the machinery and equipment exists, then tax applies to the retail price determined from contracts, price lists, bid sheets, or other records of the contractor.
If the gross receipts cannot be established in the above manner and the machinery and equipment is manufactured by the contractor, the gross receipts from the sale shall be aggregate of the following: 1. Cost of materials, including such items as freight-in and import duties; direct labor, including fringe benefits and payroll taxes; specific factory costs attributable to the machinery or equipment; any manufacturer’s excise tax; pro rata share of all overhead attributable to the machinery or equipment, including overhead attributable to manufacturing, selling, contracting, and administration, and; reasonable profit from the manufacture and sale of the machinery or equipment which, in the absence of evidence to the contrary, shall be deemed to be 5 percent of the sum of the preceding factors. 2. Job site fabrication labor and its prorated share of manufacturing overhead must be included in the sale price of the machinery or equipment. Job site fabrication labor includes assembly labor performed prior to attachment of a component or the machinery or equipment to a structure or other real property.
E. SUPPLIES AND TOOLS FOR SELF-USE — Contractors are the consumers of supplies such as oxygen, acetylene, gasoline, acid, thread-cutting oil, and tools and parts for tools, which they use in their business, and the tax applies to the sale of such supplies and tools to contractors.
F. MISCELLANEOUS — Items such as adhesives, clips, and nails, could be classified as material, fixtures or equipment, depending on the use made of the product, i.e., if clips are used merely to prevent movement of the item while in production they would be supplies; but if they attach an item to realty, they would be considered materials. However, if attached to a manufactured fixture or piece of equipment, they would assume that identity.
G. TAX-PAID PURCHASES RESOLD — If the contractor sells short ends or pieces which are not used other than in severing them from larger units purchased by him and on which he has paid sales tax reimbursement or use tax, he may claim the deduction for tax-paid purchases resold, but the amount of the deduction shall not exceed the price at which he sells such short ends or pieces.