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.