Tax withholding is calculated on the entire bill amount, including any purchase tax, unless that tax is clearly itemized and directly remitted to the tax authority by your company. This approach ensures compliance with the California Franchise Tax Board (FTB) rules, which state that gross payments to nonresident vendors covering services, materials, and applicable taxes are subject to withholding unless the tax is separately accounted for and paid out by the payer.
Example:
Bill Amount = $100 (includes $10 purchase tax)
Withholding Rate = 7%
Withholding Amount = $7
Vendor Payment = $93
In this example, withholding is calculated on the full $100, not the $90 excluding tax. This avoids under-withholding and meets FTB requirements that purchase tax be included in gross income when determining withholding, unless your company remits that tax directly to the tax agency.