California treats most contractors as consumers of the materials they install. That means you pay sales tax when you purchase materials at the supply house and you don’t add a separate sales tax line on your invoice to the customer. This is the default rule, and it trips up a lot of construction and contractor businesses because it works differently than a typical retail transaction.

The specifics depend on how your contracts are structured.

On lump sum or fixed price contracts, you are the consumer of those materials. You pay sales tax when you buy them. Your contract price to the customer includes the cost of materials with tax baked in, but you never charge sales tax separately to the customer. The tax you paid at the store is simply part of your job cost.

On time and materials contracts where you separately state the cost of materials on your invoice, you may be considered a retailer of those materials. In this scenario, you can purchase materials tax-free using a resale certificate and then charge sales tax to your customer on the materials portion only. Labor remains non-taxable.

This distinction matters for your pricing and your recordkeeping. On a lump sum job, the sales tax you paid on materials needs to be factored into your bid so you’re not eating it out of your margin. On a T&M job where you’re retailing materials, you need to track taxable sales and remit that tax to the California Department of Tax and Fee Administration on schedule.

A few edge cases are worth knowing about. If you fabricate items in your shop, like custom cabinets or sheet metal ductwork, and then install them on site, those fabricated items are generally treated as taxable sales. The CDTFA looks at whether you’re primarily a fabricator or primarily an installer. And if you sell materials to a customer without installing them at all, you’re acting as a retailer regardless of your contract type and need to charge sales tax.

The practical takeaway for most contractors working fixed price jobs is simple. Pay sales tax when you buy materials and don’t charge it to customers. Make sure your estimates account for that tax as a real job cost. For T&M contractors, keep your invoices clean with materials and labor separated. If you’re buying materials tax-free with a resale certificate, you are responsible for collecting and remitting sales tax on those materials.

Getting this wrong goes in both directions. Some contractors pay tax on purchases and then charge tax to customers, which means the state collects twice and your customer overpays. Others buy tax-free with a resale certificate but never charge or remit sales tax, which creates a liability that shows up during an audit.

If you’re unsure how your contracts are classified or whether your books reflect the right tax treatment, working with contractor bookkeeping services that understand California’s rules can save you from expensive corrections down the road. The rules themselves aren’t complicated once you understand the lump sum versus T&M distinction, but applying them consistently across every job and every material purchase is where most contractors fall behind.