The manufacturing line for any product is complicated and involves many charges, leading many people to ask, “Is labor taxable in California?”
To create a product, a company must ship raw materials from various locations and have workers craft the materials into parts.
The parts will then be assembled and delivered to vendors, and there are tax laws that govern each step of the creation process.
So, what are the labor tax laws in California? This is an important question for any business owner, and here is an article to save you legal trouble with Uncle Sam;
Is Labor Taxable In California?
Yes, California taxes several forms of labor, and business owners should be aware of them since they affect the final product price. You will be expected to pay a tax for fabrication and most manufacturing labor that changes the product’s value.
Repair and installation labor are not taxable. Shipping labor can be fully, partially, or tax-free, depending on the specifics and means of shipping. Assembly labor is not taxable in other States, but California taxes it.
More Information On Labor Taxing in California
Labor taxing is complex; every business owner must understand it to know how to legally go around it.
The issue can be confusing in the manufacturing process, and the easiest way to understand it is through an analogy.
Hypothetically, a businessman named Mark is manufacturing shoes. To create the shoes, he must buy some leather, get the rubber for the soles, cut the various materials into the right shapes and sizes, and assemble them into a shoe by stitching or gluing them together.
This could be at a different facility, so Mark has to ship the parts to the new location for the manufacturing process to continue.
Finally, Mark has to add an artistic touch to the shoes to make them ready for the market and more appealing to customers so he can get a good price.
This will include coloring the leather and adding the brand name or logo to the products before shipping to retailers.
As you can see, the supply chain can become complex, but the value is added to the shoe through each step of production.
When value is added at a point in the manufacturing process, the skill in that transaction is taxable unless the businessperson has a resale certificate.
Many people believe that the steps in a manufacturing process cannot be taxed, but this is inaccurate since states will tax some types of labor.
As a retailer, you must understand when labor is taxed and the legal repercussions of missing out on this fee.
In California and many other states, fabrication labor is considered taxable labor. Fabrication is labor put in to create, produce, assemble, or process a product.
Changing a product or system in a sale is also considered fabrication, and the charges for its labor are taxable.
Generally, when you add a new component to the product’s value, that labor is taxable. When deciding how much tax to remit, the product’s market value will depend on how much liability the business owns.
The state won’t discount the taxing price based on labor costs, so the seller can’t reduce the price. Manufacturing labor is also taxable in California. This refers to labor that involves resizing, cutting, or altering a product in any way.
So, if you alter an item and the alteration results in a step in the production line or creates a new item, it will likely be viewed as taxable labor. It is crucial to understand this so you don’t get in trouble when the government does a business audit.
Assembly labor refers to joining already manufactured parts of a product together, and no American jurisdiction considers this taxable except for California. The only exception for taxable labor in California is installation and repair labor.
Repair work is work performed on a product to restore its intended use, and in most cases, the tax will be on the parts you get for the product.
Assembly and installation labor are often confused, and it is crucial to understand the difference between them.
The determining difference in whether a product constitutes installation or assembly depends on whether the step is necessary in creating the final product.
Understanding Delivery Labor In California
Delivery is a crucial step in the manufacturing process of any company’s products, and there is often more than one delivery in the manufacturing process of a product. Understanding how the law views these deliveries is crucial in getting the tax you owe.
A company must ship raw materials from vendors to its manufacturing locations and deliver the ready products to stores nationwide.
So, how does California treat delivery labor? Their criteria are complicated, but a few exemptions exist to tax delivery labor.
First, if an item is shipped directly to the buyer by contract carrier, US mail, or common carrier, then the labor is taxable.
Secondly, the delivery labor is not taxable if the invoice itemizes the delivery, postage, and shipping charges separately.
Thirdly, the delivery labor is not taxable if the charge on the invoice isn’t higher than the actual cost of the product getting delivered to the customer. The delivery labor will be taxed if the company does not retain records showing the delivery cost.
Aside from labor that meets the three mentioned criteria, all other forms of delivery labor will be partially or fully taxable in California.
Determining what delivery labor is taxable can be challenging, depending on the type of company and products it sells.
Most factors about this will be determined by how the company invoices delivery labor, so it is a fluid setup. However, one important rule to remember regarding delivery labor: charges for delivery via common carriers will be tax-exempt.
If you aren’t using a common carrier, you must determine if and how much tax you must pay for the labor, as it will most likely be taxable.
How To Determine Whether or Not Labor is Taxable
The criteria for deciding whether or not labor is taxable is an essential concept for any business owner, and it will save you a lot of time and effort in the future. California’s labor tax laws are similar to other states, so how do you know when labor is taxable?
Whether or not a labor tax is imposed in California and most states will depend on how much value is added to the product at each stage of its development.
A significant change in value will lead to substantial taxation for labor that caused that change in value.
Sometimes, you will be exempt from the normal taxation laws if you are a reseller, but you will pay labor fees if you modify and add value to the product. This could add new parts not initially in the product, but repairs will not be taxed.
Some repairs will be taxed depending on their cost and the parts involved. Labor taxation is also common for intellectual services and property such as blueprints from an accountant or software and other company valuables.
Most categories of delivery labor aren’t taxed, but some are taxable, so don’t write off all your delivery services. The exemptions have made many companies ship with the United States Postal Service or common carriers since they won’t have to pay delivery taxes.
The complicated system creates a lot of space for manufacturers to avoid paying their taxes. Most businesses can write off some labor taxes because they are hard to follow, but this is a bad idea since an audit could quickly reveal this, and before you know it, you are in court.
This complexity is why most big companies have large legal teams and accounting departments. They can go through the law and all the aspects of manufacturing to know each step that will be taxed to save the company problems when Uncle Sam does an audit.
Get a good lawyer or firm to help you create the company to ensure you are on the right side of the law. A minor error in your beginning taxes can become a problem for your company years later for it is best to solve the issue before it gets to that.
Conclusion
That is all you need to answer, “Is labor taxable in California?” The answer is yes, but many complicated rules govern the taxes.
Most of the aspects will depend on the specific company and the processes it carries that lead to the completion and selling of its products.
The best thing is to get good lawyers and accountants when you are starting your business so that they give you well-detailed guidelines.
Many companies are in court for tax errors they made in their early days, so it is best to prevent the problem rather than fix it.
