Real property fixtures are an important part of your (or your client’s) work as a contractor in California. They improve property value and provide essential utility in many cases. You likely handle real property fixtures for your customers in one or more ways. You might serve as an intermediary who sells fixtures from larger manufacturers or distributors, self-manufacture fixtures, or simply install fixtures that customers provide at a job site.
No matter your involvement, California sales or use tax will apply. How you manage your fixture transactions for sales tax purposes can have a direct impact on your profit margin from a project and your administrative needs in case of an audit from the CDTFA. Understand how sales tax applies to the fixtures you provide in your construction projects so you can begin to develop a strategy for compliance that aligns with your business model.
How California Sales Tax Applies to Fixtures in Real Property Contracts
Fixtures are the items that you attach to a building or structure but that don’t lose their identity once you install them. Appendix B of California Regulation 1521 provides several examples of fixtures, some of which include:
- A/C or heating units
- Plumbing fixtures (e.g., a toilet or sink)
- Cabinets and counters
You may contrast fixtures with the materials you use that become indistinguishable from the building or structure, such as lumber, cement, paint, tile, etc. Generally, contractors are seen as retailers of the fixtures they provide to customers through their contracts (in contrast with being the consumers of materials). This means you collect sales tax from your customers based on the fixture’s sale price.
What Happens When Your Contract Doesn’t State the Sale Price of a Fixture?
Depending on the construction project, you may not always list the individual sale price for every fixture you transfer to the customer. Unfortunately, this doesn’t relieve you of your tax obligation. California requires you to pay tax on your cost price for the fixture when the sale price is unstated. If you provide fixtures and frequently deal with lump-sum contracts, then this will likely be your approach for tax compliance.
You will determine your cost price in one of three ways depending on how you acquired the fixture in the first place. If you buy your fixtures from another party, the cost price will generally be the sale price of the fixture to you and will include any manufacturer’s excise tax or import duty placed on the fixture before you buy it. However, the cost price is different for contractors who make their own fixtures (i.e., self-manufacturers).
Calculating Your Cost Price for California Sales Tax on Self-Manufactured Fixtures
You have two options for calculating your cost price on self-manufactured fixtures in California. The easiest method is to use the price at which you sell similar fixtures of similar quantity to other contractors. This method works if you regularly sell your fixtures to other contractors and have invoices or other documentation to support that sale price.
Alternatively, you can establish your cost price by totaling the cost for the following items that went into manufacturing the fixture:
- The cost of your materials (including any freight-in or import duties).
- The cost of direct labor (including any fringe benefits and payroll taxes.
- Any specific factory costs attributable to the fixture.
- The cost of the manufacturer’s excise tax.
- The prorated share of overhead for manufacturing the fixture (e.g., rent, utilities, etc.).
- The reasonable profit from the manufactured fixture (California Reg. 1521 assumes a profit of 5% of the total costs previously listed unless you can prove otherwise).
When Fixtures Create Problems for California Contractors During a Sales Tax Audit
California can be a tough state for contractors from a sales tax perspective because both the type of property and type of contract affect your tax liability. Fixtures add to that complexity in several ways, and you may find issues arise during a sales tax audit related to your purchase, sale, and documentation of fixture transactions:
- You mislabel a fixture as material consumed by real property or vice versa.
- You issue resale certificates to vendors but don’t collect sales tax when used in a future contract.
- Incorrect calculation of sales tax for the fixture based on the type of contract you use (e.g., lump-sum, cost-plus, or time and material).
- Inconsistency in how you charge sales tax on self-manufactured fixtures at retail versus when sold as part of a larger construction project.
- Lack of documentation to support exempt retail sales of fixtures to people or businesses located outside of California.
- You don’t apply the proper local rate for fixtures bought in one California county but resold or used in a construction project located in a different county.
Opportunities for California Contractors to Appeal Sales Tax or Claim a Refund
Construction businesses and contractors that buy and sell fixtures as part of their operations may also have opportunities to appeal unfair tax assessments or to collect refunds from the CDTFA. Consider how the following may apply to your business practices when it comes to reducing your overall California sales tax liability:
- Purchasing fixtures on a tax-paid basis and not claiming a refund after the retail sale.
- Purchasing fixtures on a tax-paid basis and not claiming a refund when resold in another state.
- The CDTFA incorrectly labels an item as a fixture when it is a part of exempt real property.
- Capturing differences in local rates when a fixture is sold to a consumer in a jurisdiction with a lower rate.
- Changes in costs that alter your calculation of tax for self-manufactured fixtures.
We Help Real Property Contractors with California Sales Tax Audit and Compliance Issues
If you recently received an audit notice or have questions about the California sales tax consequence of your sale or purchase of fixtures, our office may be able to help. We provide contractors with the sales tax guidance and defense they need to challenge unfair determinations from the CDTFA and to take advantage of all available tax credits or refunds. When necessary, we also have the professional resources for taking your case to the California Office of Tax Appeals and beyond.
Schedule a free consultation for your California sales tax audit questions regarding real property fixtures or other contractor services.