What Services Are Not Taxable in California?
Clarify California sales tax on services. Explore the primary rule for non-taxable services and important taxable exceptions.
California’s sales and use tax system applies to the retail sale of tangible personal property. The California Department of Tax and Fee Administration (CDTFA) is the entity responsible for administering sales and use taxes. Businesses engaged in sales of tangible personal property in California generally must register with the CDTFA and obtain a seller’s permit.
The General Rule for Services
In California, the sales tax primarily applies to the sale of tangible personal property, which refers to physical items that can be seen, weighed, measured, felt, or touched. The fundamental principle is that the performance of services, in and of itself, is generally not subject to sales tax.
Services are typically excluded from the tax base because they do not involve the transfer or consumption of tangible personal property as their primary object. For example, if a service provider uses incidental tangible personal property while rendering a service, sales tax applies to the service provider’s purchase of that property, not to the charge for the service itself.
Services Tied to Tangible Personal Property
While services are generally not taxable, exceptions arise when they are closely connected to the sale or creation of tangible personal property. When a service is considered an inseparable part of a taxable sale of goods, it can become subject to sales tax. This applies even if the service charge is itemized separately on an invoice.
Fabrication labor, which involves creating new tangible personal property or modifying an item as part of a sale, is generally taxable. This includes tasks like manufacturing a new machine or altering new clothing to fit a customer.
Installation charges are typically not subject to sales tax when separately stated, especially for used items. However, if installation is part of the sale of new tangible personal property, or if the installation labor is considered fabrication (e.g., creating the property in place), then it may be taxable. For instance, installing parts on a new vehicle is generally taxable.
Repair labor is generally not taxable when it involves restoring a product to its intended use and is separately itemized. However, if the repair involves furnishing tangible parts, and the retail value of these parts exceeds 10% of the total charge, or if the parts are separately charged, then sales tax applies to the fair retail selling price of those parts. If a different part is returned to the customer instead of repairing their original part, the entire charge may be taxable as a sale of a rebuilt item.
Common Non-Taxable Service Categories
Numerous service categories are typically exempt from sales tax in California, adhering to the general rule that services are not taxed unless tied to tangible personal property. Professional services, such as those provided by legal, accounting, consulting, and architectural firms, are generally not subject to sales tax. These services primarily involve expertise and advice, not the transfer of goods.
Medical and healthcare services are generally exempt from sales tax. This includes patient services like room and nursing care. While the sale of prescription medicines is exempt, medical devices and other supplies may be taxable unless specifically exempted or furnished by a licensed professional as part of treatment.
Educational services are not taxed. Advertising services are generally non-taxable, unless they involve the sale of tangible items like printed materials. Personal services, such as hair styling or dry cleaning, are usually not subject to sales tax, although any tangible materials sold might be taxable. Repair labor, when no new tangible parts are furnished or sold, remains non-taxable, reinforcing the distinction between labor and goods.
Services Related to Real Property
Services performed on real property, such as construction, installation, or repair of buildings and land improvements, follow sales tax rules. Labor charges for these activities are generally not subject to sales tax. This is because these services are considered improvements to real estate, not sales of tangible personal property.
However, the tangible materials incorporated into the real property by a contractor are subject to sales tax. Contractors are considered consumers of these materials, meaning they pay sales tax on their purchases of materials from suppliers. This tax is typically paid at the time of purchase or as use tax if the materials were acquired without sales tax.