Was outsourced fabrication of a contractor's own steel taxable when a deadline forced the outsourcing?

Plain-English summary

A steel construction contractor sent its own steel to an outside firm for fabrication into trusses because workload and a contract deadline prevented completing the work in-house.

The outside fabrication was a sale under Revenue and Taxation Code section 6006 because it was paid processing or fabricating of tangible personal property for a consumer that furnished the material.

The contractor's purchase order marked "for resale" and resale certificate did not change the result. The trusses were not resold; they were consumed in improving real property under the construction contract. Use tax therefore applied to the $51,000 fabrication charge, and the hearing officer recommended no adjustment.

Common questions

Did the project deadline create an exemption?

No.

Did it matter that the contractor normally fabricated its own trusses?

No. Tax applied to the outside fabrication purchased for this project.

Did the resale certificate eliminate the contractor's liability?

No. The contractor consumed the trusses rather than reselling them.

What was the tax measure?

The price paid for the fabrication labor.

Citations and references

• California Revenue and Taxation Code section 6006 — customer-furnished-property fabrication definition quoted and applied in the decision
• Audit for October 1, 1968 through September 30, 1971 and June 15, 1972 determination measuring use tax by $51,000 of purchased fabrication labor — protested; audit and determination records not reproduced in the official PDF
• Construction contract and bid, purchase order marked “for resale,” and resale certificate held by the outside fabricator — facts applied; copies and supporting records 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/190-2535.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition for
)
Redetermination of State and Local )
Use Tax;
)
)
F--- S--- Corporation
)
)
Petitioner.
)

190.2535

DECISION AND RECOMMENDATION
OF HEARING OFFICER

Account No. SS -- XX XXXXXX

The above-entitled matter came on regularly for hearing on Thursday, February 1, 1973 at 2:00 p.m. in Downey, California. Appearances: For Petitioner:

Mr. D--- L---, Vice President

For Board of Equalization:

Mr. C. Buch, Supervisor
Long Beach District
Mr. J. K. Elliott, Auditor
Long Beach District
Protest

Pursuant to an audit covering the period from 10-01-68 through 9-30-71, and a determination issued on June 15, 1972, Petitioner protests liability for use tax measured by $51,000 representing the purchase of fabrication labor on steel furnished by Petitioner. Contentions Petitioner purchased fabrication labor in the best interest of all concerned to meet scheduled deadlines of a construction contract; and it is not the intent of the law to add additional costs to the corporation due to misfortune in having to meet scheduling that is or cannot be controlled by the corporation. Summary Petitioner is a corporation that engages in business as a steel construction contractor. The audited liability being protested arose as a result of a construction contract deadline which Petitioner was unable to meet without the purchase of some fabrication labor on steel into trusses which ultimately were used to improve real property under Petitioner’s construction contract.

F--- S--- Corporation
SS -- XX XXXXXX

-2-

March 22, 1973
190.2535

Mr. L--- stated that due to other workload requirements the steel trusses could not be fabricated in the Petitioner’s plant and because of the schedule and deadline the steel had to be sent our to be fabricated. He pointed out that the contract bid was computed on the basis that F--- S--- would do its own fabrication of the trusses. The auditor pointed out that no tax was charged on the fabrication because Petitioner issued a purchase order marked “for resale” to the firm that did the fabricating and that the firm had Petitioner’s resale certificate on file so there was no basis on which the state could assert the tax against the seller of the fabrication labor. Conclusion Section 6006 of the Revenue and Taxation Code defines sale to mean and include “the processing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing, or imprinting.” Petitioner issued a resale certificate for the purchase of the fabrication of its steel and the steel trusses were not resold; they were consumed. Accordingly, use tax applies to the price paid for the fabrication and there is no basis in the Sales and Use Tax Law on which any exemption applies under the circumstances. Recommendation Redetermine without any adjustment to the audited liability.

__________
Hearing Officer

3/22/73
______
Date

REVIEWED FOR AUDIT:

__________
Principal Tax Auditor

______
Date