When was freight-in excluded from or included in a fixture contractor's tax measure?

Plain-English summary

A lump-sum contractor that bought a completed fixture and installed it without further manufacturing could exclude separately stated freight-in when the transportation charge qualified for exclusion from gross receipts or sales price under sections 6012(c)(7) or 6011(c)(7).

The result changed when the contractor bought components and performed further manufacturing or assembly. Freight-in on those components became part of the cost price of the contractor-manufactured fixture. The letter's example was a purchased pump mounted on a frame before the combined unit was installed.

For manufactured fixtures, the cost-price measure was the price at which similar fixtures in similar quantities, ready for installation, would be sold to other contractors. Tax Counsel reasoned that this comparable selling price would include inbound freight.

Common questions

Was freight on every fixture purchase excluded?

No. The exclusion described in the letter applied to completed fixtures installed without further manufacturing and only when sections 6011 or 6012 were satisfied.

What if the contractor assembled purchased components?

Freight-in on the components was included in the manufactured fixture's cost price.

Did the rule depend on contractor trade?

No. The letter said the same transportation-charge treatment applied to elevator, air-conditioning, and electrical fixture contractors.

Citations and references

• California Revenue and Taxation Code sections 6012, 6011, 6012(c)(7), and 6011(c)(7) — gross-receipts and sales-price transportation exclusions discussed and applied
• California Code of Regulations, title 18, section 1521 — fixture-contractor cost-price rule applied in the letter
• Prior Agency letter identified by the requester as May 12, 1976 but corrected by the source to May 14, 1976, including item “(2) freight-in on fixtures” — prior advice clarified; letter not reproduced in the official PDF
• Inglewood reaudit and the requester's claimed items on which no further labor was performed before installation — audit staff instructed to follow the stated rule; reaudit records and item support not reproduced 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/190-2485.pdf

Original ruling text

190.2485

STATE OF CALIFORNIA

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

June 23, 1976

--- --- ----- --- ----- --- --Dear Mr. ---:
You refer to our letter of 12 May 1976. We assume you mean our letter of 14 May 1976 which discusses “(2) freight-in on fixtures”. We agree that as to the taxability of transportation charges, “fixtures” installed by elevator contractors are not different than “fixtures” installed by air conditioning contractors or electrical contractors. Historically, when a contractor purchases and installs fixtures without further manufacturing, the Board has considered freight-in as not subject to tax if the freight-in is excluded from “gross receipts” under Section 6012 or “sales price” under Section 6011. Contrariwise, the Board has historically considered freight-in on components of fixtures as part of the “cost price” of fixtures manufactured by the contractor and subject to tax, e.g., he buys a pump, expends labor in putting the pump on a frame, and installs the pump/frame combination; freight-in to him is taxable. The distinction drawn is that a lump sum contractor who does not manufacture fixtures is taxable on the cost price of the fixture to him (Regulation 1521). The “cost price” is seen as excluding separately stated transportation charges excluded from “gross receipts” by Section 6012(c)(7) and from “sales price” by Section 6011(c)(7). A lump sum contractor who does manufacture fixtures (under the Board’s definition of “manufacturing”, not yours) is taxable on “cost price”, which is deemed to be the price at which similar fixtures in similar quantities ready for installation would be sold by him to other contractors. The “cost price” of manufactured fixtures is seen as including any freight-in; such freight-in would surely be included in the price for which a manufacturing contractor would sell to other contractors. The Inglewood audit staff is aware of this tax application and will follow it in the reaudit now under way. If, as you state, many of the items on which the audit asserted tax on freight-in were items on

Mr. ---

-2-

June 23, 1976
190.2485

which no further labor was performed by C--- prior to installation, such tax will be deleted if Section 6012 or 6011 are satisfied. We suspect that the real point in contention here is your disagreement with the Board’s position as to what constitutes “manufacturing” a fixture. Very truly yours,

Donald J. Hennessy
Tax Counsel

DJH:RW