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Is labor taxable in California?
The word labor on an invoice is not enough to determine sales tax treatment. Review what the customer is buying, whether property is produced or installed, and the contractor’s role before deciding how the charge should appear in the books.
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General information, not legal or tax advice.
Start with what the customer is buying
CDTFA Regulation 1501 examines whether the real object of a transaction is the service or the property it produces. A service provider is generally the consumer of property used incidentally in providing the service. Preserve the scope and invoice description so the reviewer can understand the transaction.
Sources: CDTFA Regulation 1501, Service Enterprises Generally
Separate installation from fabrication
Regulation 1546 excludes charges for installing or applying sold property from the tax measure. Regulation 1526 applies tax to producing, fabricating or processing property for a consumer who supplies it, while distinguishing repair that restores original use. The nature of the work matters more than a generic labor category.
Sources: CDTFA Regulation 1546, Installing, Repairing, Reconditioning in General; CDTFA Regulation 1526, Producing, Fabricating and Processing Property
Review parts in a repair transaction
Under Regulation 1546, a repairer separately charging for parts is their retailer. Parts above 10% of the total charge require separate statement from labor; where parts are 10% or less and not separately charged, the repairer is their consumer. Keep parts detail available before applying that distinction.
Sources: CDTFA Regulation 1546, Installing, Repairing, Reconditioning in General
Distinguish installed materials from fixtures
Regulation 1521 describes construction contractors as consumers of materials they furnish and install, but retailers of fixtures and machinery or equipment they furnish and install. An accounting category called materials does not decide the legal classification. Review the contract and the installed property with your adviser.
Read a lump sum contract as a whole
CDTFA Publication 9 says separately listing materials, labor or tax on an invoice does not turn a lump sum contract into a time-and-material contract. Keep the signed agreement with the billing record. For an unusual transaction, seek CDTFA written advice or CPA review before changing the tax treatment.
Sources: CDTFA Publication 9, Construction and Building Contractors (February 2025)
Sources: labor and construction sales tax
- CDTFA Regulation 1501, Service Enterprises Generally
- CDTFA Regulation 1546, Installing, Repairing, Reconditioning in General
- CDTFA Regulation 1526, Producing, Fabricating and Processing Property
- CDTFA Regulation 1521, Construction Contractors
- CDTFA Publication 9, Construction and Building Contractors (February 2025)
Organize invoices for a supported sales tax review
Tidwell helps maintain sales and purchase records for filing, working with your CPA on the treatment of unusual transactions.