Is There Tax on Services in California?

Sales tax in California primarily applies to the sale of tangible personal property, which includes items that can be seen, weighed, measured, felt, or touched. The taxability of services often causes confusion for businesses and consumers. Understanding when services are subject to sales tax is important for compliance.

General Rules for Service Taxation

In California, services are generally not subject to sales tax. A “pure service” does not result in the creation or transfer of tangible personal property, and typically falls outside the scope of sales taxation.

Examples of non-taxable pure services include professional advice, such as legal or accounting services, and medical treatments. Consulting services, where the primary deliverable is intangible advice or analysis, also typically remain untaxed. These activities are excluded from the tax base because they do not involve the sale of physical goods.

Situations Where Services May Be Taxable

Services can become subject to sales tax in California under specific circumstances, particularly when they are closely linked to the sale of tangible personal property. This often occurs when a service is an inseparable part of a transaction that includes goods.

If services like delivery, shipping, or installation are included in a transaction for taxable goods, they generally become taxable as well. This applies even if these service charges are separately itemized on an invoice, as they are considered integral to the overall sale of the product.

Services performed on or applied to tangible personal property can also trigger sales tax. Fabrication labor, which involves creating, producing, or processing tangible personal property, is typically taxable. This includes tasks like manufacturing a new machine or custom-making an item. Similarly, repair labor performed on tangible personal property can be taxable if new parts are also sold as part of the repair. For instance, if auto repair includes the sale of parts, sales tax applies to those parts. Installation labor may also be taxable if it is part of the creation of a new item or if it involves attaching a fixture to real property.

Bundled transactions, where taxable tangible personal property is sold together with non-taxable services for a single price, present another situation where services may become taxable. California applies a “true object test” to determine the primary purpose of the buyer in such transactions. If the true object of the transaction is the acquisition of the tangible personal property, the entire bundled price, including the service component, may be subject to sales tax. For example, if a cellphone is sold at a discounted price as part of a service contract, the sales tax might be applied to the full retail price of the phone, even though the service itself is not taxable.

While California primarily taxes goods, a few specific services are explicitly enumerated as taxable by statute. An example of this is certain services related to physical photographs. However, these are generally limited, and the most frequent scenarios for service taxation revolve around their connection to tangible personal property.

Business Obligations for Taxable Services

Businesses providing services that are determined to be taxable in California must fulfill specific compliance obligations with the California Department of Tax and Fee Administration (CDTFA). The first step for any business selling taxable goods or services is to obtain a seller’s permit. This permit authorizes the business to collect sales tax from customers on behalf of the state. The application process for a seller’s permit can be completed online through the CDTFA website.

Once a seller’s permit is secured, businesses are required to collect the applicable sales tax from customers on all taxable transactions. The statewide sales tax rate is 7.25%, but local district taxes can increase the combined rate to as high as 10.50% depending on the specific location of the sale. Businesses must apply the correct local sales tax rate based on the point of sale or the delivery location.

After collecting sales tax, businesses must remit these funds to the CDTFA by filing sales and use tax returns. The filing frequency, which can be monthly, quarterly, or annually, is assigned by the CDTFA based on the business’s average monthly sales tax liability. Returns and payments are typically due by the last day of the month following the reporting period, and even if no sales tax was collected, a “zero return” must still be filed.

Maintaining accurate and complete records of all sales, purchases, and collected and remitted taxes is another important obligation. The CDTFA requires businesses to keep these records for at least four years to verify the accuracy of returns and ensure proper tax payment. These records are essential for demonstrating compliance during potential audits by the CDTFA.