California State Sales Tax is due when the client is invoiced and cannot be paid on a cash basis.
The following question was asked of one of our consultants, who is a Tax Practitioner in the State of California.
Just wanted to ask you a question after I had been speaking with a potential client today. She was saying in California that you can invoice your client and collect money for a project but not pay sales tax on that project until it was "installed" and then you only need to pay tax on the actual payments (on the cash received) that client has made, not on the invoice amount. Just wanted to see if you could shed some light on this as our main focus of course is not individual tax laws but we are definitely curious and the information does come in handy.
Sales Tax in California is required to be paid on an accrual basis. When the item changes hands, the sales tax is counted as due, even if the invoice is not paid. What the designer may have been trying to say is that a firm can collect the client's deposit and hold onto the funds (even the sales tax collected in the deposit) and not declare the sales tax on their quarterly return. They then must declare the sale and tax when the client is billed for the final product. If they bill the client before the item is delivered and installed the sale should be declared and tax paid over (It is recommended that the client billed around same time as installation/delivery). However, there is a clause in California Sales Tax law that states that tax is not due on a product until the purchaser takes delivery. That is the quirk that many designers have used and are still using not to declare the sale and pay over the tax. If they are audited, the Board representative will call them on it and they will pay penalties and interest (because the invoice marks the official transfer of ownership).
The Board of Equalization does not look kindly on this practice and some firms have paid dearly for it.
The other practice I have seen in some firms can equally cause problems is designers who only declare the sale and pay over the tax when the client has paid the invoice, no matter when it was billed. This is absolutely wrong and can be very costly when uncovered. A firm I assist went through an audit on this recently and only received some penalty relief by agreeing not to do this any longer.
I have been fighting both these "myths" and issues for several years now with designers, furniture stores and workrooms.
Hope that clears this up somewhat for you,
Cristina G. Park, EA (Enrolled Agent)
Federally Authorized Tax Practitioner
770 N. 2nd Street
El Cajon, CA 92021
619-444-2829 (Voice); 619-444-2831 (Fax)
As required by U.S. Treasury regulations, any written tax advice contained
herein was not written or intended to be used (and cannot be used) by any
taxpayer for the purpose of avoiding penalties that may be imposed under the
Internal Revenue Code.