Construction sales tax is complicated! A really nice guy named Richard called us because he was awarded a construction project in California. He stated emphatically that he wanted to do the right thing. He wanted to do his job, comply with state tax law, and rest easy knowing that he covered both his bases and those of his client.
As a construction company owner, Richard has it tough. Not only does he struggle to find skilled labor, he is also challenged with high levels of competition, decreasing profit margins, and sales or use tax complexities.
He knew when to charge and collect sales or use tax for his home state but not California. He wanted to know:
- If he was required to register with the state taxing authority in California
- Whether he was required to charge sales tax
- If he should pay sales or use tax on his purchases
- If there were withholding issues related to payroll if he hired people in California
Matters of franchise and corporate income tax were handled by an unrelated third party.
State sales or use tax responsibilities are complex and vary based on a variety of things:
- The jurisdiction in which you operate
- The types of services you provide a client
- How the contract is written
- How you compose purchase orders and invoices
- The tax status of the client you are working with
- State tax exemption documentation requirements
Richard asked himself some good questions, but there are additional issues that he has not identified:
- What is the deadline for registering with the state taxing authority?
- What are deadlines for reporting and paying sales or use tax?
- How do I calculate the right amount of tax due to the state and local authorities?
- What responsibilities do I have related to hiring subcontractors to provide labor?
- Do I need to withhold state income tax if my current employees work in California?
Once the questions are answered, he can truly understand the state requirements. Richard was the general contractor [GC]. Richard needed to make sure he the tools and processes needed to retain the documentation that the state requires were effective. Richard needs to retain the following documents for at least 3 years (if sales tax returns have been filed):*
- Executed contracts between his company and the owner with all exhibits
- Executed agreements with subcontractors
- Invoices issued by subcontractors
- Receipts for materials and supplies
- Purchase Orders
- Exemption certificates, if applicable
*–The statute of limitations named above reflects the general rule. There are circumstances that dictate an extended statute of limitations.
The very first thing we did when researching on Richard’s behalf is reviewing his contracts. We reviewed the scope of work, as stated in the contracts, with both the property owners and the subcontractors. We researched the law and subsequently received a written letter ruling from the taxing authority. Important: This is not available in all jurisdictions.
At the end of the day, Richard received written tax letter rulings from the state. The company did activate an account with the California Board of Equalization. The receipts and contracts were scrutinized to ensure compliance with reporting responsibilities. Tax filing deadlines were clearly communicated to Richard and report dates were noted on his calendar to ensure no deadline was missed. The company reported and remitted sales and use tax timely. The company billings complied with state sales tax rules. Success!
Richard no longer wonders how California sales or use tax registration requirements apply. Richard is no longer stressed over the shrinkage of his profit margin due to unforeseen sales or use tax expense. He doesn’t dread potentially calling a customer to levy the sales tax that was not charged timely.
Going forward Richard and staff know their state and local sales and use tax responsibilities and are positioned to meet them. And Richard, who just wanted to do the right thing, has accomplished his objective.
Remember, construction sales tax is complicated and state and local requirements vary depending upon location and your specific fact pattern. The content of this blog is intended to convey general information only and does not represent accounting, tax or legal advice or opinion. Please consult with a state tax professional for a complete analysis of law as it may apply to your specific situation at a particular time. If you require an in-depth review of a specific fact situation, please contact our offices to establish a client relationship for opinion and advice.
Our FREE whitepaper for the construction industry provides great insight. We also create customized tax guides that outline state and local sales and use tax requirements based on the work you do, the kinds of contracts you use, and where you are located. Feel free to reach out if we can help.
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About the author
Mary C. Thomas is a TX CPA/attorney who works in state and local sales/use tax. As a principal of Thomas, Thomas & Thomas, PC, she helps business owners and accountants comply with sales/use tax regulations. When she is not solving tax puzzles, Mary enjoys taking her dog Ella on social dates, gardening, and walking off good meals.
The story is a generalized composite of experiences with several clients. No one client is described with specificity.
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