Was a quarry owner still the consuming prime contractor when it supplied materials and subcontracted their installation?

Plain-English summary

The quarry-owning company was treated as the construction contractor and consumer of the materials because it would contract directly with the land developer to furnish and install the streets, curbs, and gutters. The developer would look solely to that company for performance if its installation subcontractor failed.

Sales or use tax applied to asphalt, cement, and other materials the prime contractor purchased for the work. No sales or use tax arose when it consumed rock and aggregate taken from its own quarry because there was no sale of that material to the contractor.

The legal staff placed limits on that conclusion. It assumed the parties had not revised or eliminated an earlier contract merely to restructure the relationships. It also distinguished an arrangement where the purported prime subcontracted installation back to the party that hired it; in that case, the purported prime could instead be treated as a material supplier.

Common questions

Did subcontracting installation prevent prime-contractor treatment?

No, because the quarry owner retained full furnish-and-install responsibility to the developer.

Were purchased materials taxed?

Yes, through sales tax on the supplier's sale or use tax on the contractor's use.

Were materials taken from the contractor's own quarry taxed?

No, where no sale of those materials to the contractor occurred.

Could contract restructuring change the result?

Yes. The opinion expressly conditioned its answer on genuine, unrestructured relationships and substantive responsibility.

Citations and references

• California Code of Regulations, title 18, section 1521(a)(2) — construction-contractor status and consumer treatment of materials

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/190-0545.pdf

Original ruling text

585.0280

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

October 11, 1989

Mr. R--- -. C--B---, P--- & H--S--- Street Tower
--- M--- Plaza
--- ---, CA XXXXX
Re:

S--- Industries, Inc.
SZ – XX-XXXXXX

Dear Mr. C---:
This is in regard to your letter dated September 12, 1989 regarding the application of sales or use tax to certain construction contractor transactions. V--- D--- Company is developing land and has a current contract with G--- B--- for the grading of the development site. V--- has also been negotiation with G---for the construction of streets, curbs, and gutters. In turn, G---has discussed with S--- Industries the furnishing of materials to be used in that construction, such as rock, aggregate, asphaltic concrete, and readymix concrete, some of which would be obtained by S--- from its nearby quarry. S--- is also a licensed construction contractor. The parties are now discussing a change in the proposed contractual relationships whereby S--- would enter into a contract with V--- for the furnishing and installation of the materials to construct the streets, curbs, and gutters. Rock and aggregate would be supplied by S--- from its own quarry. S--- would then subcontract with G---to receive and install materials supplied by S---. S--- will attempt to structure the pricing of its prime contract with V--- and its subcontract with G---so that it will receive the same amount for its materials that it would have received had G---acted as the prime contractor and S--- acted as a supplier to G---. You also explain that V--- does not currently have a contractual relationship with G--- or S--- regarding the furnishing and/or installation of the materials. The proposed arrangement would make S--- contractually obligated to V--- for furnishing and installation, in the event that

Mr. R--- -. C---

-2-

October 11, 1989
190.0545

G---failed to perform its obligations under its subcontract with S---, V--- would look solely to S--- for performance and S--- would be free to seek any appropriate redress from G---. You ask that we confirm the following:

1. “Sales or use tax liability would be incurred on materials purchased by S--- in
   the form of tangible personal property for use in the performance of a construction contract for the construction of the streets, curbs and gutters. Sale tax liability would be incurred by suppliers on the sale to S--- in California of such items as asphalt and cement purchased by S--- in the form of tangible personal property, measured by the gross receipts received by the supplier. If acquired in a transaction not subject to the sales tax, use tax liability would be incurred by S--- measured by the sales price to S---.
2. No sales or use tax liability would be incurred on the furnishing and
   installation of rock and aggregate from S---’s own quarry pursuant to its contract with V--- D--- Co.” A construction contractor is a person who agrees to perform and does perform a construction contract. (Reg. 1521(a)(2).) As you know, a construction contractor is a consumer of any materials it uses in the performance of a construction contract. Your statements, quoted above, are accurate statements of the application of tax to materials used by S--- in the performance of a construction contract. The question is whether we will regard S--- as the construction contractor under these facts or whether the agreements will be disregarded and S--regarded as a supplier to G---, the construction contractor. Generally, we will regard as a construction contractor the person agreeing to perform a construction contract for the landowner when the contract requires that person to furnish and install the items to be attached to the real property. If that person then subcontracts with another person to perform the services required by the prime contractor and supplies the subcontractor with the materials to install, we would still regard the general construction contractor as the consumer of the materials supplied to the subcontractor for installation. This conclusion assumes that there has been no previous contract with respect to such construction activity which had been revised or eliminated to restructure the relationships. This conclusion also assumes that the general construction contractor does not subcontract for installation of materials he supplies with the person who hires him for the performance of the construction contract. In such transaction, we would regard the purported general contractor as a supplier of materials to the purported subcontractor, who is actually the person contraction to purchase supplies. For example, in the transaction about which you inquire if G---was the person hiring S--- to perform the general construction contract, we would regard S--- as selling materials to G---, the consuming construction contractor.

Mr. R--- -. C---

-3-

October 11, 1989
190.0545

As you have set forth the facts, there was no previous contractual relationship between the parties with respect to the particular construction contract activities about which you inquire. S--- is a licensed construction contractor and has full responsibility to V--- as the construction contractor for doing the street work, regardless of the performance of its subcontractors. G---’s only relationship to S--- with respect to this project is as a subcontractor. Based on these facts, we conclude that sales or use tax will be incurred on materials purchased by S--- for use in the performance of its construction contract with V---. No sales or use tax liability will be incurred when S--- consumes materials obtained from its own quarry when no sale of that material to S--is involved. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel

DHL:wak
1621C
cc:

Mr. Gary J. Jugum
Mr. E. L. Sorensen, Jr.