Publication 35, Interior Designers and Decorators
Reporting Tax and Keeping Records
This page includes information on reporting sales and use tax, common deductions, and keeping records.
Reporting sales tax
You generally must report all of your charges on your sales and use tax return. The amount you list for total (gross) sales must include all of your charges for merchandise, labor, professional fees, overhead, delivery, etc., whether the charges are taxable or nontaxable. The tax due with each return is based on your total gross sales for the period, plus your purchases subject to use tax, less any allowable deductions.
Collecting an amount for tax from your clients
When you make sales as a retailer, the law allows you to collect from your clients an amount equal to the sales tax you will owe on each sale. This is known as sales tax reimbursement. You may add the reimbursement amount to your charges, being sure to itemize the amount on your invoice or receipts (most retailers itemize this charge as sales tax). Or, you may include the reimbursement in the total price you charge. If you choose the latter method, you must post a visible sign stating, “All prices of taxable items include sales tax reimbursement calculated to the nearest mill,” or include a similar statement on your sales invoices. For more information, see Regulation 1700, Reimbursement for Sales Tax.
Credit sales and installment payments
The total sales you list on your sales and use tax return must include the price of items you sold on credit during the reporting period, even though you may not receive full payment until a later date. Tax is due on the full selling price. However, you may exclude amounts for insurance, interest, finance, and carrying charges from the taxable selling price you report for a credit sale, provided you keep adequate and complete records documenting those charges.
Please note: Tax is due when ownership or possession of the product sold transfers to your client, regardless of when you receive payment. Consequently, if you take a deposit for future delivery of merchandise, you should not report that amount on your tax return until the delivery is actually made or you transfer ownership to your client.
Example: In June, a client places an order for new chairs, tables, and a desk for her office, for a total price of $7,500. You deliver the products in July. The client pays you $4,500 in June and agrees to pay the balance in two monthly installments. Regardless of when you receive the balance due, the full $7,500 sale must be included in your total sales for the tax return that covers the month of July.
For more information, see Regulation 1641, Credit Sales and Repossessions.
Credit card sales
You should report credit card sales as if they were cash transactions. The service charge or discount you pay the credit card organization is not allowed as a discount or deduction for sales tax purposes. You should report the sale when the client takes possession or ownership of the merchandise, not when you are paid by the credit card company.
Purchases subject to use tax
As discussed in the previous section, some of your purchases are subject to use tax. You must report the total cost of all of your taxable purchases on your sales and use tax return as Purchases Subject to Use Tax. Tax is due with the return for the period in which you incurred the tax liability.
Example: You issue a resale certificate in January when you purchase 1,000 square yards of fabric for $7 a yard. You sell 400 square yards to walk-in clients in your showroom and use another 580 square yards in making draperies you sell to clients. In August, you give the remaining 20 yards to a friend—a taxable use. You must report your $140 cost for that fabric ($7 per yard x 20 yards) as a $140 purchase subject to use tax on your tax return that covers the month of August.
Common sales and use tax deductions
Nontaxable labor
As discussed in Designer fees and charges related to the sale of merchandise, tax does not apply to your charges for repair and installation labor or to certain professional fees. On your tax return, you should list these amounts under “Nontaxable Labor” and deduct them from your total sales.
Tax-paid purchases resold prior to use
You may take a deduction on your sales and use tax return if you paid an amount for California sales or use tax when you purchased an item and then sold that item in a taxable transaction before using it. Include the price of the item under Cost of Tax-Paid Purchases Resold Prior to Use. For more information, see Regulation 1701, Tax-Paid Purchases Resold.
Example: You buy furniture for your office, paying an amount for sales tax to your supplier. You decide not to use one end table and sell it to a client. You can take a deduction for the cost of the table on the same tax return on which you report the sale to your client.
Credit for payment of another state’s tax
If you were required to pay, and did pay another state’s sales or use tax on a purchase, you may take a credit against your use tax liability by:
- Reporting the amount of the purchase under Purchases Subject to Use Tax, and
- Deducting the amount of tax paid under Sales or Use Tax Paid to Other States on your return. You can claim a credit up to the amount of California use tax due.
Bad debts
If you pay tax on a sale and then cannot collect all or part of the amount due to you for that sale, you may claim a deduction for the taxable portion of the bad debt. You must first charge off the bad debt for income tax purposes, or if you are not required to file income tax returns or you file income tax returns on a cash basis, charge it off in accordance with generally accepted accounting principles. You should claim the deduction on the tax return for the period in which you found the account worthless and charged it off.
If only a portion of your original charges were taxable, you may deduct only a like portion of the bad debt. First, you must determine the taxable percentage of your original sale (taxable portion ÷ total charge = taxable percentage of total). Next, apply the taxable percentage to the total bad debt to determine the allowable bad debt deduction.
Example: You contract with a client who pays you 50 percent of your charges in advance and does not pay the balance due (you do not repossess any of the property you provided). Your invoice reads:
| Details of Bad Debt | Taxable or Nontaxable Amount |
|---|---|
| Furnish and install draperies - Custom draperies, track and hardware (Taxable) | $700.00 |
| Furnish and install draperies - Installation labor (Nontaxable) | $100.00 |
| Reupholster sofa - Fabric and other materials (Taxable) | + $275.00 |
| Reupholster sofa - Labor (Taxable) | + $25.00 |
| Reupholster sofa - Labor (Nontaxable) | + $100.00 |
| Preliminary design consultation (Taxable) | + $0.00 |
| Preliminary design consultation (Nonaxable) | + $180.00 |
| Subtotal of Taxable ($1,000.00) + Nontaxable ($380.00) | =$1,380.00 |
| Sales tax (8.25% × $1,000) | + $82.50 |
| Total charge | =$1,462.50 |
| Deposit—50% ($1,462.50 × 50% = $731.25) | − $731.25 |
| Balance due | =$731.25 |
Notes
To calculate your bad debt deduction:
- Divide taxable portion of charge ($1,000) by the total charge including tax ($1,462.50): $1,000.00 ÷ $1,462.50 = 68.376%
- Multiply the result of step 1 by bad debt to determine the amount of deduction: $731.25 × 68.3876% − $500.00. Your total allowable bad debt deduction is $500.00.
Please note: If the tax rate has changed since you originally paid tax on the sale, you will need to make adjustments in your calculation. For more information, call our Customer Service Center for assistance.
If you collect payment from your client after you have claimed a bad debt deduction, you must report and pay tax on the taxable percentage of the amount collected. You cannot take a deduction for any amounts you paid a collection agency to collect a bad debt or for related legal fees or court costs.
Note for construction contracts: If you are the retailer of materials and fixtures furnished in a contract to improve real property (see Improvements to Real Property), you may take a bad debt deduction for bad debts related to that construction work. Otherwise, you may not take a bad debt deduction for unpaid amounts related to charges for improvements to real property.
Please note: The rules regarding bad debts are somewhat complex. Before you claim a deduction for a bad debt or pay tax on an amount you received after you claim a bad debt deduction, you may contact our Customer Service Center for help. Detailed information is also available in Regulation 1642, Bad Debts.
Keeping adequate records
You are required to keep complete records documenting your sales and purchases. For nontaxable transactions, those records should clearly indicate the reason the transaction was not subject to tax. You should maintain resale and exemption certificates, and other information necessary to support each exemption or deduction.
How long should I keep my business records?
You should keep required records for at least four years unless we give you specific, written authorization to destroy them sooner.
Exception: Records that cover reporting periods before January 1, 2003, may be covered by an extended statute of limitations if you did not participate in the 2005 tax amnesty program. You must keep those records for at least ten years.
If you are being audited, you should retain all records that cover the audit period until the audit is complete, even if that means you keep them longer than four years. In addition, if you have a dispute with us about how much tax you owe, you should retain the related records until that dispute is resolved. For instance, if you appeal the results of an audit or another determination (billing), or you file a claim for refund, you should keep your records while that matter is pending.
For more information, see Regulation 1698, Records, and publication 116, Sales and Use Tax Records.
Revision July 2026