CDTFA audits of construction contractors turn on a rule that exists nowhere else in sales tax: under Regulation 1521 you are the consumer of materials and the retailer of fixtures — and the tax result of every job depends on which side of that line each component falls. Most contractor assessments we see are not fraud cases. They are classification cases: the wrong side of the materials/fixtures line, a resale certificate used where it should not have been, or use tax never reported on out-of-state purchases.
The whole audit hinges on two questions: how your contracts are written, and how each job component is classified.
Materials vs. fixtures — the line the audit is fought on
Under Regulation 1521, materials are things that lose their identity when incorporated into real property — lumber, drywall, concrete, wiring. On those, the contractor is the consumer: tax is measured by cost. Fixtures are items that keep their identity — prefabricated cabinets, counters, signs, machinery. On those, the contractor is the retailer: tax is measured by selling price. Auditors reclassify components years after the fact, and every reclassification from material to fixture converts a tax-on-cost item into a tax-on-price item with markup included. Defending the classification, component by component and contract by contract, is where these audits are won.
Lump-sum vs. time-and-material contracts
Contract form matters as much as classification. A lump-sum contract generally leaves the contractor as consumer of materials. A time-and-material contract that separately states and marks up materials can make the contractor the retailer of them. The CDTFA reads your contracts — the ones you signed years before the audit — and applies the tax consequences you may never have priced in. If your audit involves a mix of contract forms across the audit period, expect the auditor to test a sample and project it; whether that sample is representative is a fight worth having.
Use tax, resale certificates, and subcontractors
Three recurring assessments: use tax on materials and equipment bought out of state (the CDTFA cross-checks vendor data); resale certificates issued for materials that were consumed in jobs rather than resold — each misuse carries the tax plus penalties; and subcontractor allocation, where prime and sub each assume the other paid. The fix is rarely an argument about honesty — it is job-cost records, invoices, and contract language, assembled the way an auditor has to accept.
How the audit actually runs — and where it goes next
Construction audits are job-cost audits: the auditor ties your reported taxable measure to job files, purchase records, and contracts, then projects the errors found in a sample across the audit period. Since 2013 we have represented more than 400 clients in audits, and contractors and building trades are a standing part of the CDTFA side of that book. The playbook is the same one on our CDTFA audit defense page: control the sample, fight the classification, and preserve the petition for redetermination deadline — 30 days from the Notice of Determination, no extensions for being busy. If the balance is already assessed, CDTFA collections has its own rules, including responsible-person exposure for owners under § 6829 covered here.
One honest limit: if your books are clean, your contracts are consistent, and the proposed adjustment is small, your accountant may be able to close it out — we will tell you that on the first call rather than sell you representation you do not need.
How engagements work
Many matters like this one run as a monthly flat-fee engagement: one number, agreed up front, that covers the work — agency contact, deadlines, document responses, strategy — until the matter resolves. Shorter, well-defined projects are often a one-time flat fee instead, and some matters genuinely fit hourly billing better. We will tell you which you are looking at on the first call, before you commit to anything. If you want the details first, see how we price our work.
Frequently asked questions
Are construction contractors retailers or consumers under California sales tax?
Both, depending on what they install. Under CDTFA Regulation 1521, a construction contractor is generally the consumer of materials (lumber, drywall, concrete – tax is owed on their cost) and the retailer of fixtures (prefabricated cabinets, counters, machinery – tax is owed on the selling price). Classifying each job component correctly is most of the audit.
Does it matter whether my contracts are lump-sum or time-and-material?
Yes, materially. Contract form changes what is taxed and on what measure – a time-and-material contract that separately states a marked-up price for materials can make the contractor the retailer of those materials, shifting the tax base from cost to selling price. Auditors read the contracts you signed years ago; so do we.
What triggers a CDTFA audit of a construction business?
Common triggers: resale certificates used on materials consumed in jobs, use tax never reported on out-of-state purchases, mismatches between reported sales and 1099/contract data, and industry sweeps. Construction is a standing CDTFA audit priority because the materials-versus-fixtures line produces recurring errors.
What happens if I disagree with the audit result?
You have 30 days from the Notice of Determination to file a petition for redetermination. That deadline is jurisdictional – miss it and the assessment becomes final. File it properly and the assessment is stayed while appeals proceed.
Is the CDTFA auditing your construction business?
Tell us what stage it is at. We respond to new inquiries within one business day.
By Sam Brotman, JD, LLM, MBA — Managing Attorney, Brotman Law. California Bar No. 274966. Last updated August 30, 2026.
