A really nice guy named Richard called 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 finding skilled labor, he is also challenged with high levels of competition, decreasing profit margins and sales and use tax law 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 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 as it related to payroll.
Matters of franchise 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 handle purchase orders and invoices,
- The tax status of the client you are working with, and
- State tax exemption documentation requirements.
Richard asked himself some good questions, but there are additional issues that he had not identified:
- If I must register to do business or collect sales tax in California, what is the deadline?
- What are deadlines for reporting and paying sales or use tax?
- How do I calculate the right amount of tax due 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 employees work in another jurisdiction?
Once the questions are answered, he can truly understand the state requirements. He MUST make sure he has the tools and processes in place to retain the documentation that the state requires, such as:
- Executed contracts between the GC (general contractor) and the owner with all exhibits,
- Subcontractor Agreements with the GC,
- Invoices issued by subcontractors,
- Receipts for materials and supplies,
- Purchase Orders, and
- Exemption certificates, if applicable.
The very first thing we do when researching on Richard’s behalf is review his contracts. We review the scope of work, as stated in the contracts, with both the property owners and the subcontractors. We research the law and policy of the taxing authority.
After a review of California nexus rules and policy, Richard did activate an account with the California Board of Equalization (now the California Department of Tax and Fee Administration). We scrutinized receipts and contracts 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 bill 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, 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 can also create a customized tax guide that outlines the 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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Mary C. Thomas is a TX CPA/attorney who works in state and local sales/use tax. As a principal of Thomas, Thomas & Thomas P.C, she helps business owners and accountants comply with sales/use tax regulations. When she is not solving tax puzzles, Mary enjoys taking Ella (her dog) on social dates, gardening, and walking off good meals.