Was an HVAC control-system provider a construction contractor when it selected, assembled, programmed, and supplied controls but only supervised another contractor's installation?

Plain-English summary

An HVAC computerized-control provider selected, assembled, programmed, and furnished control units, supervised installation, and attended startup and troubleshooting. A separate mechanical contractor performed the actual installation.

Because the provider did not appear contractually obligated to install the controls, supervision alone did not make it a construction contractor under Regulation 1521.

The transaction was a sale of tangible personal property. Under Regulation 1501, tax applied to the gross receipts without deductions for work, labor, skill, programming, engineering, or other production expense.

Common questions

Did installation supervision create construction-contractor status?

No.

Did engineering and programming make the transaction a service?

No. The controls were the true object of the transaction.

Could those labor costs be deducted?

No.

Citations and references

• California Code of Regulations, title 18, section 1521(a)(2), (a)(1)(A)1, and (a)(1)(B)2 — construction-contractor definition and contractual responsibility for final installation quoted and applied
• California Code of Regulations, title 18, section 1501 — true-object test and taxable gross receipts without production-expense deductions quoted and applied
• Albers v. State Board of Equalization (1965) 237 Cal.App.2d 494 — taxable transfer of a draftsman's construction-plan drawing under the true-object test, applied by analogy to the control system
• December 9, 1993 request letter — client's engineering, control-component, programming, supervision, startup, and troubleshooting work described; quoted only in part and not reproduced separately in the official PDF

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/190-1010.pdf

Original ruling text

190.1010

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2608

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

January 20, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. -. S--- B--Attorney at Law
XXXX West --- --- Avenue, Suite D
---, CA XXXXX
Dear Mr. B---:

This is in response to your letter dated December 9, 1993 in which you ask how tax applies to your client's business. You state: "My client provides profession[al] engineering services under various state engineering licenses in the heating and air conditioning industry. As part of the professional service provided, my client also provides computerized control system components. Consistent with construction industry standard practice, lump sum quotations, including all taxes are requested. "In general, the control systems involve sensors, actuators, computer systems and software to control the environment in large commercial and industrial buildings. My client provides engineering services and control components to the installing mechanical contractor. The installing mechanical/air conditioning contractor lacks the technical expertise to select and design the appropriate control system elements or to program the system for the operation desired by the owner's architect. "By using my client's engineering expertise and access to control system components, the control system can be designed and installed at a lower cost to the owner than if a specialty contractor, with in-house engineering staff, provided the full service and installation.

Mr. -. S--- B---

-2-

January 20, 1994
190.1010

"....
"My client selects and assembles the control units. He
programs the units, supervises the installation and is onsite to start up and troubleshoot the installation. At the present time, my client does not have a contractor's license, but could easily obtain one." You believe your client may be a construction contractor within the meaning of Regulation 1521 which provides that a construction contractor is any person who for himself, in conjunction with, or by or through others agrees to perform and does perform a construction contract. (Reg. 1521(a)(2).) Subdivision (a)(1)(A)1 of Regulation 1521 defines a construction contract to include a contract to erect, construct, alter, or repair any building or other structure. Subdivision (a)(1)(B)2 excludes from the definition of construction contract: "The furnishing of tangible personal property under what is otherwise a construction contract if the person furnishing the property is not responsible under the construction contract for the final affixation or installation of the property finished." This provision is clear, a person who contracts to furnish tangible personal property to be installed onto real property is not performing a construction contract unless that person is also contractually responsible for the final affixation or installation of the property furnished. Here, you state your client selects and assembles the control units, furnishes them, and then "supervises" their installation. As noted above, a construction contractor is a person who contracts to furnish and install property becoming an improvement to real property. Although your client performs some supervision, it does not appear to be contractually obligated to install the property in question. Thus, it is our opinion your client is not performing a construction contract, and is not a construction contractor within the meaning of Regulation 1521. You also ask if your client is selling tangible personal property (which is taxable) to its customers or transferring tangible personal property incidental to a service (which is not taxable). The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service is one of the true object of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. (Reg. 1501).) The true object test was applied in Albers v. State Board of Equalization (1965) 237 Cal.App. 2d 494 in which the Court held that the sale of a draftsman's drawing of construction plans was taxable because the true object of the transaction was the drawing itself rather than the architectural or engineering services. The same analysis would apply to your client's contract. We assume the control systems is similar to a thermostat, thereby controlling

Mr. -. S--- B---

-3-

January 20, 1994
190.1010

usage of the cooling and/or heating system. Although your client may design the control system, it is our opinion your client's customer seeks that control system. Thus, it is our opinion your client is making a sale of tangible personal property. The taxability of that sale is provided for in section 1501: "When a transaction is regarded as a sale of tangible personal property, tax applies to the gross receipts from the furnishing thereof, without any deduction on account of the work, labor, skill, thought, time spent, or other expense of producing the property." If we can be of further assistance, please feel free to contact us. Sincerely,

Rachel M. Aragon
Staff Counsel

RMA:ljt
---.Ltr

bc: --- - District Administrator