My client, an out-of-state contractor, had questions about California sales tax after being hired to perform a job in the state.  The contractor stated emphatically that he wanted to do the right thing for his company and his client.  The goals were to do the job, comply with California sales tax laws– state and local, and rest easy knowing that he covered both his bases and those of his client.

My client knew the sales and use tax rules for his home state but California sales tax was a new frontier. He wanted to know:

  • If he was required to register with the taxing authority in California.
  • Whether he was required to charge the customer sales tax.
  • If he should pay sales or use tax on his purchases. 
  • If there were withholding issues as it related to payroll.

Matters of franchise tax were handled by an unrelated third party and are not addressed here.  Issues did exist.

California Sales Tax:  Sales Tax Nexus

My client did not have questions about nexus.  He knew that he had a physical presence in California because he hired staff in the state.  Registration with the Secretary of State, the California Board of Equalization (now the California Department of Tax and Fee Administration) and other appropriate agencies was completed timely.

The finding of nexus is very important and should be carefully analyzed when expanding business operations.

California Sales Tax:  Factors that Impact Sales & Use Tax Compliance

State and local sales and use tax responsibilities governing contractors are complex and vary based on a variety of things, including, but not limited to:

  • The jurisdiction in which you operate,
  • The types of services you provide a client,
  • How the contract is written,
  • How you structure purchase orders and invoices,
  • The tax status of the client you are working with, and
  • State tax exemption documentation requirements, if any exemption applies.

For access to an online class on nexus, visit Physical Nexus Explained.

California Sales Tax: Documentation is KEY to Effective Compliance

The following information was gathered to address issues of state and local sales and use tax compliance, such as:   

  • Executed contracts between the general contractor and the owner with all exhibits,
  • Subcontractor agreements with the general contractor,
  • Invoices issued by the general contractor,
  • Invoices issued by subcontractors,
  • Receipts for materials and supplies,
  • Purchase orders, and
  • Exemption certificates, if applicable.

The very first thing we did when researching taxability on the client’s behalf is review 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 policy of the taxing authority.  

We scrutinized contracts, pay applications, change orders, and receipts to ensure compliance with reporting responsibilities. Tax filing deadlines were clearly communicated to the client and his staff.  Report dates were noted on calendars to ensure no deadline was missed. The company reported and remitted sales and use tax timely.

The company billings complied with state and local sales tax rules. All documentation has been retained and a plan has been adopted to retain all documentation for the statute of limitations that kicks off when the engagement ends.  

The client no longer wonders if and how California sales or use tax registration requirements apply. He is no longer stressed over the potential shrinkage of his profit margin due to unforeseen sales or use tax expense.  He doesn’t dread potentially calling a customer to bill sales tax that was not charged timely. 

Going forward the client and his staff know their state and local sales and use tax responsibilities and are positioned to meet them. The objective, i.e. doing the right thing, was accomplished.  Success!

For more information on sales and use tax compliance, visit Get A Tax Code Reference (Taxability Research) and Clear Invoices and Contracts.

For a private consultation, schedule a call with Mary at Ask Mary or Stephanie at Ask Stephanie.  

Remember, 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.

More Tips in The Sales Tax Sisters Academy

Our mission to provide a resource so business owners, accountants and bookkeepers can understand sales & use tax compliance. We know that sales and use tax laws are not the easiest to understand. Our focus is on empowering you with a framework and general understanding, so you know what questions to ask and where to go to get the information you need to stay on the right side of sales and use tax compliance.

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Selling Fixed Assets & Occasional Sales- 5 Things to Consider!

When selling fixed assets, it is important to remember that there may be sales and use tax consequences.

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Taxable Sales & Choosing the Right Sales Tax App

All sales fall in one of two buckets. The sale is either taxable or nontaxable. Once a sale has been categorized, it is important to figure out how that categorization affects you or your client’s sales tax responsibilities. And how sales tax apps can help.

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“Did Somebody Say Jail?”- Sales and Use Tax Penalties & Collections

Everyone knows that there will be penalties if sales and use tax is not correctly addressed. A colleague asked if we ever heard of anyone going to jail because of sales and use tax compliance issues. The answer is no. We have not run into that. But there is a myriad of things that the taxing authority can do to collect sales and use tax that is owed.

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Different Jurisdictions, Direct Sales & Use Tax Rules

While most business owners know the importance of understanding their sales and use tax responsibilities in the jurisdiction where they first start their business, it is important to remember to focus on the various sales and use tax laws when making sales into different jurisdictions.

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Do You Have To Register? Sales & Use Tax Nexus Quiz

We are excited to announce the creation of a quiz to help you address the question of whether you should register to collect sales and use tax. It is five questions that can help you start asking the right questions about your sales and use tax compliance responsibilities and whether your company may have a sales and use tax registration requirement in more than one jurisdiction. We hope you enjoy the quiz!

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Recovering Sales Tax From Customers

We are going to discuss charging your customer sales tax after the sales transaction has been completed. What should you do if you discover (usually in a sales tax audit) that you didn’t; charge sales tax on a taxable transaction or you did not charge the correct sales tax.

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Interim Reviews Can Keep You Sales Tax Compliant!

As your business changes or expands, or you make large purchases, interim reviews can help ensure that you are sales and use tax compliant. Once you determine that you owe additional tax or that you should charge sales tax on sales, you can make a plan to address the issue.

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Sales Tax Exemptions Explained!

Every jurisdiction has sales and use tax exemptions available to certain taxpayers. Some exemptions are related to exempt organizations (i.e., who is purchasing the item), while others are based on what is being sold and /or how it is being used.

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Do Your Sales Tax Accrual Account Reconciliations!

When most people think of reconciliations, they focus on bank statement reconciliations. While they are important, if you are ever audited, one of the first things that the auditor will do is reconcile your sales tax accrual account.

Bank Reconciliations

The Dangers of Combining Sales & Non-Sales Related Deposits

Auditors routinely request bank statements as part of their document request.
If you are commingling personal deposits and business deposits, you must be able to identify and substantiate which deposits are not related to your sales.


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