California generally does not tax labor or services. If you’re a plumber charging for two hours of labor to fix a pipe, that labor charge is not subject to sales tax. The same applies to electricians, HVAC technicians, landscapers performing maintenance, and cleaning companies. Pure service revenue is not taxable in California.

Where it gets complicated is when materials are involved, which is the reality for most construction and contractor businesses. The rules depend on how you structure your contracts and whether California considers you a “contractor” consuming materials or a “retailer” selling them.

Under a lump sum contract where you quote one price for the entire job, you’re considered the consumer of the materials you install. That means you pay sales tax when you purchase the materials from your supplier. You do not charge your customer sales tax on the contract price. The tax was already paid at the point of purchase. This is the default classification for most contractors in California.

If you work on a time-and-materials basis and separately itemize materials on your invoice, you may be treated as a retailer of those materials. In that scenario, you’d purchase materials tax-free using a resale certificate and then charge your customer sales tax on the materials portion of the invoice. The labor portion stays nontaxable.

Getting this wrong goes in both directions. Some contractors pay sales tax on materials at the supplier and then also charge the customer sales tax on the same materials. That’s double taxation. Others don’t pay sales tax anywhere, which puts them on the wrong side of the California Department of Tax and Fee Administration. The CDTFA does audit contractors, and the back taxes plus penalties on materials-heavy jobs add up fast.

Fabrication is another area worth understanding. If you build something custom in your shop and then deliver or install it, the fabrication labor may be taxable because you’re creating tangible personal property. A cabinet maker fabricating custom cabinets, for example, would typically owe sales tax on the full price including labor. This is different from repair labor performed on-site, which is generally not taxable.

Pure service businesses have it simpler. Cleaning companies, property management firms, and pest control operations are selling services with no tangible goods changing hands. No sales tax. Landscaping gets tricky when you’re also selling and installing plants or hardscape materials, since those are tangible goods subject to the same contractor vs. retailer rules.

Keep in mind that California’s combined sales tax rate varies by city. In Long Beach it runs around 10.25%, which is a meaningful number on materials-heavy jobs. Always use the correct rate for the location where the sale or use takes place.

If you’ve been handling this incorrectly, whether overcollecting from customers, underpaying on materials purchases, or ignoring it entirely, it’s worth getting it sorted out before the CDTFA comes knocking. A CPA for construction businesses can review your current setup, determine how your contracts should be classified, and make sure you’re paying the right amount in the right place going forward. This is one of those areas where a small misunderstanding costs real money over time.