Could a gravel-pit owner become a construction subcontractor by having the prime contractor install the material it sold?

Plain-English summary

When the gravel-pit owner genuinely contracted to furnish and install aggregate or road mix, it was a construction contractor consuming materials. Tax applied to materials purchased or used, but no tax arose on gravel extracted from its own pits where there was no sale to itself.

The result changed when a prime contractor bought the aggregate or road mix and performed placement. Without a contract with the landowner making the pit owner responsible for final installation, the pit owner was a retailer and sales tax applied to its gross receipts from the material sale.

Calling the arrangement a subcontract did not change the substance. An agreement under which the prime contractor installed the very goods it bought from the pit owner did not turn the seller into a construction contractor.

Common questions

Was owning a contractor license enough?

No. The actual final-installation responsibility controlled.

Were genuine furnish-and-install jobs treated as retail material sales?

Generally no. The contractor consumed the materials under Regulation 1521's general rule.

Was self-extracted gravel taxed on those jobs?

No, where the contractor extracted it from its own pit and no sale occurred.

Could subcontract language avoid tax on a sale to the installer?

No. The opinion disregarded that form where the seller lacked installation responsibility.

Citations and references

• California Code of Regulations, title 18, section 1521(a)(4), (b)(2)(A), and Appendix A — contractor-consumer and material rules
• California Revenue and Taxation Code sections 6012 and 6051 — gross receipts and retailer sales tax
• Business Taxes Law Guide Annotations 190.0040 and 190.0050 — cited for final-installation responsibility

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/190-0585.pdf

Original ruling text

STATE OF CALIFORNIA
190.0585
STATE BOARD OF EQUALIZATION
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-3485

February 19, 1988

Mr. --- --- ---

--- ---, --- -----

RE: --- ---, Inc.
SZ -- -- – ------

Dear Mr. ---:

This is in response to your letter of January 7, 1985, which describes certain transactions, entered into by your client, --- ---, Inc. (---). You requested our advice as to whether or not ---’s treatment of the transactions for sales and use tax purposes was proper.

The nature of the transactions and your client’s treatment of them was described in your letter as follows:

“--- ---, Inc., is a licensed contractor that both (1) acts as a contractor in the sale and placement of aggregate and asphalt based road mix, and (2) sells aggregate and road mix to contractors who place the material. Their customary practice has been to treat as nontaxable those situations where it acts as a contractor and aggregate is taken from the company’s own gravel pit while reporting as taxable the sale of aggregate and road mix to contractors. From time to time the company has been asked to bid prospective jobs alternatively as a material supplier (which would include sales tax) or as a contractor (which presumably would not include sales tax) under circumstances where the company contracts with the prime contractor for placement of the materials by the prime contractor. The cost of application paid by the prime contractor to the company would equal the amount charged by the company, in addition to the material cost, in its contract for the sale and placement of the material.”

Page 2

Mr. --- --- --- -2- February 19, 1988
190.0585

As discussed with you on the telephone the other day, it is our opinion that under situation (1) --- would generally be deemed a construction contractor as defined in Regulation 1521. The items (gravel and road mix) it contracts to furnish and install constitute “materials” under the regulation so it would generally be considered the consumer of such items with tax applicable to the sale to it or use by it of such materials (Regulation 1521(a)(4), (b)(2)(A)1., App.
A). Of course, to the extent --- utilizes gravel or other items extracted from its own pits, no tax would be due. The exceptions to the general contractor-as-consumer rule are found in subsection (b)(2)(A)2. of the regulation. If --- is a seller of materials within these provisions, it would be regarded as the retailer of the items in question and tax would be due based on its gross receipts from such sales (Revenue and Taxation Code §§ 6012, 6051).

Based upon our discussions, we understand that ---’s contracts come within the general rule. Assuming that all materials which are furnished and installed are extracted from ---’s pits, then, ---’s treatment of situation (1) as nontaxable is proper.

Regarding situation (2), assuming there is no contractual arrangement between the land owner and --- which requires --- to furnish and install aggregate or road mix for the land owner, our opinion is that this situation is a retail sale of these items by --- to the prime contractor.
Accordingly, ---’s reporting of sales tax based upon such sales is proper. The attempt to avoid this result by some type of sub-contract arrangement between --- and the prime contractor requiring the prime to install the items sold to it, is without substance for sales and use tax purposes. In this situation, --- would clearly not be acting as a construction contractor since it would not be responsible for final installation or placement of the goods (See Business Taxes Law Guide Annotations 190.0040 and 190.0050).

We hope this has answered your questions. If it has not, or if further assistance is required, feel free to contact us again.

Sincerely,

E. L. Sorensen, Jr.
Senior Tax Counsel

ELS:jb
cc: --- District Principal Auditor (--)