Who owed tax when a subcontractor fabricated a prime contractor's fixture before installing it on real property?

Plain-English summary

A material-handling systems contractor owned fixtures, remained responsible to its customer for furnishing and installation, and hired a subcontractor to fabricate and then attach them to real property.

The prime contractor remained the construction contractor and retailer of the finished fixtures because it had the true responsibility to furnish and install them. Tax applied to its fixture sale to the customer.

The subcontractor's pre-installation processing or fabrication was a separate sale under section 6006(b). The subcontractor was the retailer of that fabrication labor, owed tax on the fabrication portion of its charge, and could not accept a resale certificate from the prime for that labor.

Common questions

Who was retailer of the completed fixture?

The prime contractor.

Was the subcontractor's fabrication separately taxable?

Yes.

Could the subcontractor take a resale certificate for the fabrication labor?

No.

Citations and references

• California Code of Regulations, title 18, section 1521(b)(2)(B)1. — true furnishing-and-installation responsibility used to identify the fixture retailer
• California Revenue and Taxation Code section 6006(b) — subcontractor fabrication treated as a separate sale
• Business Taxes Law Guide Annotation 190.0980 (October 24, 1952) — prime-contractor fixture-retailer responsibility cited
• Business Taxes Law Guide Annotation 190.0660 (April 17, 1950) — subcontractor tax on pre-installation processing or fabrication cited

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/190-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/190-0233.pdf

Original ruling text

190.0233

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 324-2655
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

August 29, 1996

KATHLEEN CONNELL
Controller, Sacramento
___
E. L. SORENSEN, JR.
Executive Director

Mr. C--- L. N--Attorney and Counselor at law
XXXX --- --- ----- ----- ---, CA XXXXX
Re:

M---, Inc.
Permit No. SS -- XX-XXXXXX

Dear Mr. N---:
This is in response to your letter dated July 1, 1996, in which you inquire of the application of tax to subcontractors’ fabrication labor. You state: “M---, Inc., (‘Taxpayer’), is . . . a distributor and systems integrator of material handling equipment and related storage facilities. The Taxpayer sells items such as conveyor systems, pallet racks and flow racks and arranges for their installation through subcontractors. . . . “. . . . “The Taxpayer generally contracts with the property owner or a prime contractor to furnish and install conveyer systems and storage racks. The taxpayer subcontracts the actual installation/assembly to its subcontractors.” You describe a transaction where the taxpayer’s subcontractors “perform fabrication labor on the fixtures owned by the Taxpayer prior to attachment. Subsequently, the subcontractor attaches the ‘fabricated fixture’ to the real property.” You ask: “[W]ho is responsible for reporting tax on the fabrication labor performed by the subcontractor, the subcontractor or my client, the Taxpayer? “[C]an the subcontractor accept a resale certificate from the Taxpayer for its fabrication labor when the subcontractor is responsible for the subsequent attachment of the fixture upon which its fabrication labor was performed?”

Mr. C--- L. N---

-2-

August 9, 1996
190.0233

As you know, Sales and Use Tax Regulation 1521(b)(2)(B)1 provides that generally “[c]onstruction contractors are retailers of fixtures which they furnish and install in the performance of construction contracts and tax applies to their sales of the fixtures.” To determine whether it is the prime contractor or the subcontractor who is the “construction contractor” who is regarded as the retailer of the fixture, the basic rule is that the last person who has the true responsibility to furnish as well as the true responsibility to install the fixture is the construction contractor/retailer with respect to the fixture. (See Bus. Taxes L. Guide Annot. 190.0980, 10/24/52.) We understand that the taxpayer does not sell the fixture to the subcontractor, and remains responsible to the customer for both the furnishing and installation of the fixture. Thus, the taxpayer is the “construction contractor/retailer” within the meaning of Regulation 1521(b)(2)(B)1 with respect to the fixture it furnishes, and tax applies to the taxpayer’s sale of the fixture to the customer. The processing or fabrication work performed on the fixture by the subcontractor prior to the installation by the subcontractor is a “sale” within the meaning of Sales and Use Tax Law. (Rev. & Tax. Code § 6006(b).) It is a separate sale from the taxpayer’s sale of the fixture. As Business Taxes Law Guide Annotation 190.0660 indicates, when a subcontractor does not furnish a fixture, but prior to installation performs processing or fabrication work resulting in the production of the complete fixture, and thereafter installs the fixture, the subcontractor is subject to tax on that portion of his charge attributable to processing or fabrication. (Bus. Taxes L. Guide Annot. 190.0660, 4/17/50.) Since the subcontractor is the retailer of the fabrication labor, he or she may not accept a resale certificate from the taxpayer. To reiterate, a subcontractor who performs fabrication labor on materials provided by the taxpayer is obligated to pay tax on the sale of that fabrication labor. The subcontractor may not accept a resale certificate for such fabrication labor. If you have any further questions in regard to the matters contained herein, please do not hesitate to write again. Yours very truly,

Anthony I. Picciano
Tax Counsel
AIP:cl
cc:

--- --- District Administrator