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socrateaser
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 34185
Experience:  Retired (mostly)
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i am a California licensed general contractor and bid remodeling

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i am a California licensed general contractor and bid remodeling jobs on a lump sump basis. Is it legal for me to markup construction material? I was thinking since i bid on a lump sum and invoice customer base on progress, there is no itemization of material (kitchen cabinets, granite countertop, wires, faucets etc), i can mark it up as long as the customer agree to pay the lump sum, correct?

How about sales tax implication? My bookkeeper was suggesting that if i mark up material, i'll need to pay sales tax. Is it true and does it apply to my case? If not, when will that theory apply?
Submitted: 1 year ago.
Category: Business Law
Expert:  BizIPEsq. replied 1 year ago.

BizIPEsq. :

Hello, I will be assisting you

BizIPEsq. :

You are permitted to mark up building materials as long as the customer knows how much they are paying and what they are getting.

BizIPEsq. :

As far as sales tax, you should register with the Board of Equalization as you may be deemed to be an end seller. To avoid paying double sales by registering with the board you can acquire good for resale without paying sales tax however you will be required to charge the sales tax when you sell (mark up) the good to your customers. You can find more information here

BizIPEsq. :

It is entirely possible that you may need to pay sales tax even on goods that are not marked up that is why it's important to register so that you can buy the goods without paying the sales tax.

BizIPEsq. :

Finally, you are under no legal obligation to itemize the materials you provide.

Customer:

I have been under the impression that in lump sum contract, as long as i am stating what material we are installing, i don't need to disclose the cost of the material.

BizIPEsq. :

that is correct

Customer:

Your reply "You are permitted to mark up building materials as long as the customer knows how much they are paying and what they are getting." seem to suggest that I need to disclose all my material cost before i can mark it up.

BizIPEsq. :

this was more of a general statement

BizIPEsq. :

as long as they know what they are getting not necessarily what it is made of

Customer:

"how much they are paying", do you mean the overall contract or the material part

BizIPEsq. :

over all contract

Customer:

i pay sales tax when i buy my material. So i don't need to pay sales tax for my remodeling income, right

Customer:

the board of equilization can't classify me as end seller because i already pay sales tax once.

BizIPEsq. :

that's a more complicated issue. If you use a lump sum contract you may need to charge sales tax for it

BizIPEsq. :

the goods at that point are combined with the services you provide

Customer:

is there any government publication that talks about when i need to charge sales tax and when i don't?

BizIPEsq. :

let me look

Customer:

it seems to me marking up the material and the obligation to charge sales tax are orthogonal. My understanding is,

Customer:

1) in a lump sum contract, i can mark up material, as long as i disclose what they material they are getting and the overall contract price.

Customer:

2) as a building contractor, in a lump sump contract, i am exempt from charging sales tax

Customer:

BOE Publication 9

BizIPEsq. :

you do purchase these items with your resale certificate?

Customer:

i don't have resale certificate

Customer:

that's exactly why i shouldn't need to worry about charging sales tax

Customer:

page 4 of Pub 9 "If the contract explicitly provides for the transfer of title to the materials prior to installation, and separately states the sale price of the materials, exclusive of the installation charge, the contractor will be considered the retailer of the materials."

Customer:

"Contractors are consumers of materials which they furnish and install in the performance of construction contracts, and tax applies to the cost of materials to the construction contractor"

BizIPEsq. :

With your permission I am going to opt out and I'll see see if there is CA tax expert available.

Expert:  socrateaser replied 1 year ago.
Hello,

Different contributor here. Please permit me to assist.

Marking up the value of materials is irrelevant in the calculus of whether or not materials are subject to sales tax. The question is whether or not materials are separately itemized and sold to the client/customer as part of the contract. If yes, then materials are taxable at their sales price to the customer -- otherwise, they are taxable to the contractor at the contractor's purchase price.

Fixtures, are not materials. Materials are products used in the creation of a finished product (e.g., flooring, shingles, paint, stucco, drywall, baseboard molding, wire, pipes, etc.). Fixtures are finished products, separately itemized on an invoice and installed by the contractor (e.g., water heater, toilet, faucet, electrical outlet, chandeliers, 90% ore more prefabricated windows, doors, cabinets, etc.).

The fact that something is marked up does not change its character for the purposes of determining whether or not the item is subject to sales tax collection from the ultimate consumer.

Hope this helps.
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 34185
Experience: Retired (mostly)
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