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When are services subject to California sales tax?

Q: I’m a tailor based in California. Since I provide a service, do I have to charge sales tax?

Because of your particular situation, there is no easy answer to this question. You may sometimes have to charge sales tax, while at other times you should not.

California law restricts the application of sales or use tax to transfers or consumption of tangible personal property or physical property other than real estate. Unlike many other states, California does not tax services unless they are an integral part of a taxable transfer of property. The law does not specifically name most services as exempt, but such activities are automatically excluded from the tax base because they are outside the definition of tangible personal property.

Two types of service activities still may be swept into the tax base, however. The first is any service that is so tied to the sale of property that it is considered a part of that sale and, thus, inseparable from the measure of the tax. Example: a taxable sale of machinery that the seller must calibrate as a condition of the sale. The calibration fee will be taxable even if the seller separates the charge.

The second taxable service is fabrication. Fabrication (manufacturing) is the labor involved in creating tangible personal property that is different in form or function from its component parts. This type of labor includes something as simple as drilling holes in a metal strap and bending the strap to make a bracket. The charge for drilling and bending would be taxable unless some other exemption applied.

The line between taxable fabrication and nontaxable repair labor can be hard to discern. For example, the alteration of new garments is taxable but the alteration of used clothing is exempt. Thus, if a person buys new clothing and takes it to a tailor to be altered, the tailor must charge sales tax on both the labor and the price of any materials provided. Reason: the alteration is regarded as a step in the creation of a new item, which is taxable fabrication. (See California Sales and Use Tax Regulation 1524(b)(1)(A).)

Conversely, if the same person buys the clothing, wears it, and then brings it to the same tailor for the same alteration, the tailor’s services will be regarded as exempt repair or restoration labor. The tax will only apply to the sale of any accompanying materials and supplies, and then only if either the retail value of the materials and supplies is separately stated on the bill or the value exceeds 10 percent of the tailor’s total charge. (California Sales and Use Tax Regulation 1524(b)(1)(B).)

Sales and use tax law is often assumed to be relatively simple and straightforward.

As you can see, that assumption may be hazardous to your financial health.

Dan Davis, CPA, CFE, is a partner with Associated Sales Tax Consultants in Sacramento. You can reach him at (916) 849-9111 or ddavis@astc.com.

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