As far as California Sales and Use Tax is concerned, there is a widespread belief that labor is not subject to sales or use tax. We have heard statements similar to these so many times over the last 20+ years:
- “It’s labor, so it can’t be taxable.”
- “It’s a service, and how can the state tax my service.”
- “You are crazy if you think my labor is taxable.”
Beware because this misunderstanding can lead to significant and costly problems. Some types of labor may be exempt from sales and use tax in California, but many types of labor are subject to such tax. Additionally, exempt labor must be properly documented and supported as exempt labor, or such labor can be held subject to the tax when questioned by the state.
This can be a very tricky area. There are many California Sales and Use Tax Law sections, regulations, and state interpretations governing, or impacting, this area, including California Sales and Use Tax Regulation 1546. Because there are so many factors to consider when determining whether a particular labor charge is subject to California Sales and Use Tax, you should be very careful to seek guidance before concluding whether a particular form of labor is subject to the tax.
Although this brief writing only provides a very general warning about the application of sales and use tax to labor in California, the application of sales and use tax should also be carefully evaluated in any state imposing a sales and use tax, or similar tax.