How did California reduce an out-of-state contractor's taxable material cost for fabrication short ends that never entered California?

Plain-English summary

An out-of-state contractor bought and fabricated materials outside California, installed the finished property in California, and left fabrication short ends or scrap outside the state.

If a short end was sold, the contractor could reduce the California use-tax material purchase price by the short end's selling price. The reduction could not exceed that price under the tax-paid-purchase-resold rule.

If the short end was incorporated into another out-of-state job, the original California job's material cost was reduced by the short end's prorated cost. If the scrap was neither sold nor used on another contract, no reduction was allowed. Legal staff approved these conclusions in 1996 and said the Board decision applied to both in-state and out-of-state contractors.

Common questions

What reduction applied to a sold short end?

Its selling price.

What if the piece was used on another job?

Its prorated cost reduced the original job's material cost.

What if it was discarded or left unused?

No reduction.

Citations and references

• California Code of Regulations, title 18, section 1521(b)(6)(C) — tax-paid-purchase-resold treatment of short ends discussed
• Unidentified recent case heard before the State Board of Equalization and resulting Board decision involving an out-of-state contractor's short ends — effect summarized in the July 13, 1982 memorandum; caption, date, docket, and decision record not provided 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/190-2511.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

190.2511

To:

District Principal Auditors

From:

Headquarters – Principal Tax Auditor

Subject:

Out-of-State Contractors – Sales of Tax-Paid Short Ends

Date:

July 13, 1982

Sales and Use Tax Regulation 1521(b)(6)(C) allows contractors to claim a “tax-paid purchase resold” deduction on short ends or other tax-paid pieces which are sold and not used other than in severing them from larger units. The deduction shall not exceed the selling price of these items. If the short end or scrap is not resold, -no tax-paid purchases resold deduction is allowable; the value of the material used is the cost of the larger unit purchased necessary to form the item required. If the short ends are sold, their sales price will be considered their cost for purposes of the tax-paid purchases resold deduction. A recent case, heard before the Board, involved an out-of-state contractor who purchased and fabricated materials out of state and claimed a credit for short ends, which did not enter the state. Following is the effect of the Board’s decision: (a) as to short ends which are sold, the credit for the short ends is their selling price. (b) as to short ends incorporated into another job, the cost of the original job should be reduced by the prorated cost of those short ends. (c) As to short ends or scrap not sold or used on another contract, there is no credit. This decision of the Board should be applied to both in-state and out-of-state construction contractors.

DFB:j
cc:

Mr. J. D. Dotson
Mr. R. Nunes
Mr. R. L. Lively
Mr. D. E. Carey
Mr. R. H. Anderson

Mr. P.M. Fiorino
Mr. G. J. Jugum
Mr. J. H. Murray
Headquarters Audit Supervisors

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
190.2511

To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

Non-Attorney Opinions

Date:

May 14, 1996

I have reviewed D. R. Brady’s memorandum of July 13, 1982 to District Principal Auditors. We are in agreement with his conclusion, as follows:

Out-of-State Contractor-Short Ends. The following interpretations apply to out-of-state contractors who purchase and fabricate materials out-of-state and install the property in California, but the short ends or scrap resulting from the fabrication process do not enter the state. (1)

As to short ends which are sold, a reduction in the purchase price of materials subject to use tax is allowed for the price at which the contractor sells the short ends.

(2)

As to short ends incorporated into another job out-of-state, a reduction in the purchase price of materials subject to use tax is allowed by the prorated cost of the short ends.

(3)

As to short ends not sold or used on another job, no reduction in the purchase price of materials subject to use tax is allowed. 7/13/82

Gary Jugum