Did the taxable price under a time-and-material construction invoice include fabrication labor and material markup when sales tax was separately itemized?

Plain-English summary

A contractor fabricated a railroad switch cover, transported it to the site, removed the old cover, and installed the new one under a time-and-material contract. Its invoice separately stated installation and itemized sales tax on the cover price, including fabrication and material markup.

The separately itemized sales-tax amount created a presumption that the contractor was the retailer of materials under Regulation 1521. If the switch cover was instead a fixture, the contractor was also its retailer. Either way, sales tax applied to the stated property price, including pre-installation material cost, fabrication charges, and markup.

Separately stated installation charges were excluded. The same analysis applied to the contractor's described similar time-and-material contract for seismic restraints.

Common questions

Was fabrication included in the taxable property price?

Yes.

Was material markup included?

Yes.

Were separately stated installation charges taxable?

No.

Citations and references

• California Code of Regulations, title 18, section 1521(a)(4) and (a)(5), including Appendices A and B — materials and fixture definitions and typical-item lists discussed
• California Code of Regulations, title 18, section 1521(b)(2)(A)1 — lump-sum contractor-consumer rule contrasted
• California Code of Regulations, title 18, section 1521(b)(2)(A)2 — time-and-material retailer presumption and separately stated property treatment applied
• California Code of Regulations, title 18, section 1521(b)(2)(B)2 — fixture retail price and installation exclusion applied
• Requester's August 2, 1994 letter to the Union City branch office, Port time-and-material contract and invoice, and similar seismic-restraint contract — facts and quoted invoice dispute answered; letter, contracts, invoice, 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/190-2545.pdf

Original ruling text

190.2545

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976
FAX (916) 323-3387

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

November 14, 1994

────────
BURTON W. OLIVER
Executive Director

Mr. O--- K--K--- C---, Inc.
XXXX --- Avenue
---, Ca XXXXX
Re: K--- C---, Inc.
SR -- XX-XXXXXX
Dear Mr. K---:
Your letter dated August 2, 1994 to the Board's Union City branch office has been referred to the Legal Division for response. You ask whether the measure of tax includes charges for fabrication labor, and whether it includes your markup. You state that you recently received a time and material contract to maintain railroad and crane rails for the Port of ---. Pursuant to this contract, you fabricated and installed a switch cover for one of the railroad switches. The new switch cover was made in your --- facility and was then transported to the railroad switch site. You removed the old switch cover and installed the new cover. Your invoice to the Port of O--- itemized "sales tax" measured by your charges for the switch cover, including fabrication charges and markup on the materials. You state: "The Port of O--- has removed the fabrication tax from my invoice, is this the correct procedure? The Port also said that I should not tax my mark up on materials...." You separately stated installation charges, and did not include them in the measure of tax. Sales and Use Tax Regulation 1521, which explains the application of sales and use tax to construction contracts, defines "construction contract" to include a contract to erect, construct, alter or repair any building or other structure, project, development, or other improvement to real property. You have not described the switch cover sufficiently for us to determine whether it constitutes an improvement to real property. However, we will assume for purposes of this letter that the switch cover is an improvement to real property.

Mr. O--- K---

-2-

November 14, 1994
190.2545

Regulation 1521 defines the terms "materials," "fixtures," and "machinery and equipment" as those terms apply to construction contracts. Materials are items which, after being incorporated into real property, lose their identity to become an integral and inseparable part of that real property. (Reg. 1521(a)(4).) A list of typical items regarded as materials is set forth in Appendix A of Regulation 1521. "Fixtures" are defined as items which are accessory to a building or other structure and do not lose their identity as accessories when installed. (Reg. 1521(a)(5).) A list of typical items regarded as fixtures is set forth in Appendix B of Regulation 1521. Items which constitute machinery and equipment are not improvements to real property. Since we assume the switch covers are improvements to real property, we will not discuss the application of tax to machinery and equipment. The application of tax depends on whether you are the retailer or the consumer with respect to your contract with the Port of O---. The general rule is that construction contractors are consumers of materials they furnish and install in the performance of lump sum construction contracts, and tax applies to the sale to, or use by, contractors of such materials. (Reg. 1521(b)(2)(A)1.) In your situation, this would mean that no tax would be due on your charges for your own fabrication or markup. However, a construction contractor is the retailer of materials furnished and installed pursuant to a time and material contract when the contract provides that the transfer of title to the materials will take place prior to the time the materials are installed, and separately states the sale price of the materials, exclusive of the charge for installation. (Reg. 1521(b)(2)(A)2.) In the case of a time and material contract, if the contractor bills his or her customer an amount for "sales tax" computed upon the contractor's marked up billing for materials, it will be assumed, in the absence of convincing evidence to the contrary, that the contractor is the retailer of the materials. (Id.) Sales tax will apply measured by the retail sale price, including the cost of the materials prior to installation, the markup, and the fabrication charges, but not including installation charges. Contractors are the retailers of fixtures which they furnish and install in the performance of construction contracts, and tax applies to their sales of those fixtures measured by the retail selling price. (Reg. 1521(b)(2)(B)2.) When the contract does not state the sales price, Regulation 1521 explains how the sales price shall be determined. However, since you separately state the sales price, tax will be measured by that price, which includes the cost before installation, the markup, and the fabrication charges. Tax does not apply to installation charges. Therefore, under a time and material contract which includes a separate charge itemized as "sales tax," you are the retailer whether the switch covers constitute materials or fixtures, and

Mr. O--- K---

-3-

November 14, 1994
190.2545

sales tax applies to the separately stated charge for the switch covers, including markup and fabrication charges. You indicate that you have another contract to fabricate and install seismic restraints for office furniture and other items within buildings for C--- Real Estate Management Company. Since you state that this is a "similar ongoing project" to the Port of O--- contract, it appears that this contract is also a time and material contract with a separate charge itemized as "sales tax"; therefore, the same analysis as above applies. If you have further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Staff Counsel

KWC:cl
cc:

--- District Administrator