Were separately billed consulting charges taxable when a machine shop also fabricated the parts specified by its advice?

Plain-English summary

A machine shop described two arrangements. In the first, it provided consulting and delivered no product. In the second, its consulting specified parts that it then manufactured, with separate charges for consulting, machine-shop time, and the parts.

The Board treated the first arrangement as a nontaxable service because no tangible personal property was provided or produced.

The second arrangement was taxable. Machining customer-ordered parts was fabrication, and the consulting directly led to and accompanied that sale. The separately stated consulting and machine-shop charges were therefore included in taxable gross receipts from the custom parts.

Transaction comparison

• Consulting only, with no property produced or delivered: nontaxable.
• Consulting that specifies parts fabricated by the same shop: consulting, machine time, and part charges taxable as part of the sale.

Citations and references

• California Revenue and Taxation Code sections 6006(f), 6012(a)(2), 6012(b)(1), 6051, and 6091 (as cited)
• California Civil Code section 1656.1 (as cited)
• California Sales and Use Tax Regulation 1526(b) (as cited)
• California Sales and Use Tax Annotation 515.0920 (as cited)
• Requester's May 19, 1992 letter following a telephone conversation with the requester's office — two scenarios and question supplied; letter, attachments, call notes, requester identity, employee identity, and correspondence not reproduced in the official PDF
• Consulting-only work and consulting that led to separately billed machine-shop time and customer-specified parts, with assumptions about the same and other customers — facts and assumptions supplied; consulting agreements, customer orders, specifications, time records, invoices, manufactured parts, delivery records, returns, and tax computations not reproduced in the official PDF
• Official Annotation 295.0065's consulting-plus-fabrication and consulting-only conclusions, dated June 30, 1992 — annotation omits the statutory and regulatory authority, same/other-customer assumptions, request and call provenance, and missing transaction records and supplies no additional transaction record
• Possible later consulting, order, fabrication, delivery, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied 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/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0065.pdf

Original ruling text

295.0065

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

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

June 30, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. REDACTED TEXT
XYZ, INC
RE: REDACTED TEXT
Taxation of Consulting Services
Dear Mr. REDACTED TEXT:
I am writing this in response to your letter to me of May 19, 1992, following up on my previous telephone conversation with REDACTED TEXT of your office. You have requested our opinion as to the application of sales tax to XYZ, INC's charges for consulting services. Your letter sets forth two types of consulting transactions as follows: "a. We provide consulting services to one of our customers. We do not deliver any products other than our consulting services. We bill the customer only for consulting services. "b. We provide consulting and machine shop service to the same customer. In addition to the consulting services, we manufacture parts that are specified in the course of our consulting, and we bill the customer separately for consulting, machine shop time, and for the parts we manufacture." OPINION A. Sales and Use Tax Generally. In California, except where specifically exempted by statute, Revenue and Taxation Code Section 6051 imposes an excise tax, computed as a percentage of gross receipts, upon all retailers for the privilege of selling tangible personal property at retail in this state. (Unless otherwise noted, all statutory references are to the Revenue and Taxation Code.) The definition of "gross receipts" includes the "cost of the material used, labor or service cost, interest paid, losses or any other expense." (§ 6012(a)(2).) The total amount of the sale price includes any services that are a part of the sale. (§ 6012(b)(1).) "It shall be presumed that all gross receipts are subject to tax until the contrary is

Mr. REDACTED TEXT

-2-

June 30, 1992
295.0065

established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale ...." (§ 6091.) The retailer owes the sales tax but may collect sales tax reimbursement from the purchaser pursuant to agreement. (Civ. Code § 1656.1.) B. Tax Consequences to XYZ, INC. Under the above authority, services are not subject to tax unless they are a part of the sale. As a result, we have previously determined that where solely consulting services are performed and no tangible personal property is given or produced, then the consultant's charges for his services are not subject to tax. (Annot. 515.0920. Sales and Use Tax Annotations are excerpts from previous Board staff opinion letters and serve as a guide to Staff positions.) Thus, XYZ, INC's charges for consulting only are not subject to tax. However, pursuant to its consulting work, XYZ, INC also manufactures parts to the order of the customer. Such orders are a direct result of some of XYZ, INC's consulting work. Both the scenarios outlined apply to the same customer, but we assume that XYZ, INC also does consulting and/or consulting-+-manufacture for other customers. A "sale" includes the transfer for a consideration of tangible personal property which has been produced or fabricated to the special order of the customer. (§ 6006(f).) We have previously considered that the machining of metal is a step in a process resulting in the production or creation of tangible personal property. (Reg. 1526(b). Sales and Use Tax Regulations are Board promulgations which have the force and effect of law.) Thus, in the second case you outline, XYZ, INC's machining operations, which result in a product made to the order of the customer, are fabrication. Under the above authority, XYZ, INC's charges for consulting and machine shop time are included in the taxable gross receipts from the sale of the parts manufactured. Sincerely,

John L. Waid
Tax Counsel
JLW:es
bc: Oakland District Administrator