Tax Guide For Construction Contractors (Español)

Helping your business succeed is important to the Board of Equalization. Taxes you collect and pay to the state help fund state and local services and programs important to you and your community. We recognize that understanding the tax issues specific to construction contractors can be time-consuming and complicated, and want to get you the information you need so that you can focus on starting and growing your business.

To help you better understand the tax obligations specific to construction contractors, we have created this guide to tax issues and information important to your business.



How to Use This Guide

Contractor

Each section of this guide contains information important to your business.

The Getting Started section provides key resources related to registration, filing returns, account maintenance and other important information you need.

The Industry Topics covers many topics, each in an at-a-glance format that can be expanded to provide more extensive information if you need it.

The Specific Jobs section covers many topics, each in an at-a-glance format that can be expanded to provide more extensive information if you need it.

Lastly, the Resources section provides links to a wealth of information, including web-based seminars, forms and publications, statutory and regulatory information, and access to live help from our customer service representatives.

Please note that this information included is general in nature and is not intended to replace any law or regulation.



Contractor

If You Need Help

If at any time you need assistance with topics included in this guide - or with others we may have not included - feel free to contact us by telephone or email for assistance. Contact information and hours of operation are available in the Resources section.

If you have suggestions for improving this guide, please contact us by email.

Getting Started

Construction contractors in California who sell or lease tangible personal property, which the law defines as an item that can be seen, weighed, measured, felt or touched, are generally required to register with us for a seller's permit.

In most cases, if you perform construction contracts exclusively for the US Government, or if you are a general contractor who exclusively hires subcontractors to perform construction contracts, you are not required to register for a seller's permit. However, if you earn gross receipts of a least $100,000 annually, and are not already registered, you must register with us for a Consumer Use Tax Account.

Whether starting out as a construction contractor, or growing your existing business, you'll find these tools helpful in maintaining your accounts with us.

Registration

Online Registration — Register with the BOE for a seller's permit or Consumer Use Tax Account, or add a business location to an existing account.

Filing and Payments

Common Industry Topics

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 BOE 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 BOE for a Consumer Use Tax Account.

For more information, see BOE 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 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.

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.

  • At-a-Glance Chart: Tax Liability by Type of Contract
    TYPE OF CONTRACT
    KIND OF ITEM HOW ACQUIRED LUMP-SUM OR COST-PLUS TIME AND MATERIAL TIME AND MATERIAL WITH SALES TAX ADDED TO BILLED PRICE OF MATERIALS UNITED STATES CONSTRUCTION CONTRACTORS
    MATERIALS Purchased ex-tax Cost Cost Billed price Cost
    Purchased tax-paid None None Excess of billed price over cost None
    By conversion of realty None None Billed price None
    FIXTURES Purchased ex-tax Cost Billed price Billed price Cost
    Purchased tax paid None Excess of billed price over cost Excess of billed price over cost None
    Manufactured from ex-tax material by installing contractor Prevailing price to contractors or, if that cannot be established, the amount stated in the price lists, bid sheets or other records, or manufactured cost, including profit, to contractor-manufacturer. Billed price Billed price Cost
    Manufactured from tax-paid material by installing contractor Excess of prevailing price, or manufactured cost, including profit, over tax-paid cost of materials Excess of billed price over tax-paid material cost Excess of billed price over tax-paid material cost None

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, no tax is due on those 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 BOE 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 7.5%. 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 8%.
You install the materials on a job in Los Angeles County where the applicable rate is 9%.
You would owe tax on the additional 1% and should pay it on your return.

(Note: the above example includes the statewide rate of 7.5% plus applicable district taxes of .5% and 1% for Orange County and Los Angeles County respectively as of 4/1/2013. 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: www.boe.ca.gov/sutax/pam71.htm

Specific Jobs

Lump-Sum Contracts

Asphalt – Installing Materials

Spencer is a construction contractor in Fresno who supplies asphalt and concrete to homeowners and businesses. He pays sales tax on his purchases of concrete and asphalt from his supplier in Bakersfield, who delivers the products to Spencer's jobsites.

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 BOE publication 9, Construction and Building Contractors.

Counter Tops – Installing Materials

Jorge is a construction contractor who installs custom granite counter tops for his customers, usually homeowners and restaurants. He purchases the counter tops from the manufacturer, who pre-cuts them to his specifications and delivers them to his jobsites.

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 BOE publication 9, Construction and Building Contractors.

Flooring – Installing Materials

Bruno is a construction contractor who installs wood and laminate flooring in his customer's homes, using lump-sum contracts.

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 BOE's webpage of city and county tax rates, so he always knows the tax rate in effect at his jobsite.

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

A comprehensive listing of city and county tax rates can be found here: www.boe.ca.gov/sutax/pam71.htm

Landscaping – Installing Fixtures and Materials

Brian is a construction contractor who, under contract, designs and landscapes gardens. He uses lump-sum contracts, and purchases plants, trees, sod and flowers from his local supplier, who delivers the items directly to Brian's jobsite.

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.

Although Brian could issue a resale certificate to his supplier for the fixtures he installs, he chooses instead to pay 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 chose to pay sales tax on his purchase of materials and fixtures and uses a lump-sum contract, he has no further tax to report.

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

Shutters and Blinds – Installing Fixtures and Materials

Kathryn is a construction contractor who installs movable shutters, venetian blinds, and shades for residential customers using lump-sum contracts.

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.

Because she feels that it simplifies her tax reporting, Kathryn chooses to pay sales tax on all her purchases of fixtures and materials needed for her contracted jobs.

Since under a lump-sum contract the cost price of fixtures is considered the selling price, and Kathryn has paid the proper amount of sales tax to her vendor for her purchases of materials and fixtures, she owes no 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 BOE's webpage of city and county tax rates, so she always knows the tax rate in effect at her jobsite.

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

A comprehensive listing of city and county tax rates can be found here: www.boe.ca.gov/sutax/pam71.htm

Solar Panels – Installing Fixtures and Materials

Brandon is a construction contractor in Sacramento who installs rack mounted solar panels and free-standing solar arrays for his customers. He prefers to use lump-sum contracts because he feels they simplify his tax reporting.

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 BOE 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 8.5 percent.

San Bruno, however, has a tax rate of 9.0 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 4/1/2013, rates are subject to change.

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

Time and Material Contracts

Custom Cabinets – Installing Fixtures

Francine is a construction contractor who installs custom kitchen cabinets for her customers, typically homeowners. She always uses time and material contracts with her clients. She purchases the materials needed to fabricate the cabinets from her local supplier, issuing a resale certificate at the time of purchase so that the supplier does not charge her sales tax.

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 is 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 BOE publication 9, Construction and Building Contractors.

Roofing – Installing Materials

Antonio is a construction contractor who uses time and material contracts with his customers for installing aggregate shingles and tile roofs on residential properties. His contracts always show separate charges for materials and labor.

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 BOE 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 BOE's webpage of city and county tax rates, so he always knows the tax rate in effect at his jobsite.

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

A comprehensive listing of city and county tax rates can be found here: www.boe.ca.gov/sutax/pam71.htm

Resources

Need to know more? Follow the links below for more information about the topics covered in this guide, as well as other information you might find helpful:

Top Three Resources

Other Industry-Specific Resources

Other Helpful Resources

  • Contact Us — A listing of BOE contacts for your questions and concerns.
  • Sign Up for BOE Updates — Subscribe to our email lists and receive the latest news, newsletters, tax and fee updates, public meeting agendas, and other announcements.
  • Videos and How-To Guides — These resources will help you avoid common mistakes, file your tax returns online, and more.
  • City and County Tax Rates — A listing of current and historical tax rates.
  • Special Notices — BOE special notices are issued whenever there is a change in law, tax rates, or BOE procedures.
  • BOE Online Services — Learn about the online services BOE offers.
  • Verify a Permit or License — You can use this application to verify a seller's permit, Cigarette and Tobacco product retailer license, eWaste account, or Underground Storage Tank Maintenance Fee Account.
  • BOE Field Offices — A comprehensive listing of all BOE field offices and contact information.
  • Find Your Board Member — You can use this application to quickly identify your elected BOE representative.
  • Get It In Writing! — The Sales and Use Tax Law can be complex, and you are encouraged to put your tax questions in writing.
  • Taxpayers' Rights Advocate (TRA) — The TRA Office helps taxpayers when they are unable to resolve a matter through normal channels, when they want information regarding procedures relating to a particular set of circumstances, or when there are apparent rights violations.