Was mandatory start-up assistance included in taxable receipts from wastewater equipment, and could lump-sum freight be excluded?

Plain-English summary

The wastewater-equipment supplier's start-up assistance was included in taxable gross receipts because it appeared to be required for the equipment's purchase or functional use. The supplier did not install the equipment, so the statutory exclusion for installation labor did not apply to this start-up work.

The published sources conflict on freight. The PDF quotes Regulation 1628 as excluding qualifying common-carrier transportation only when the charge is separately stated, then says the company's freight was not separately stated, but concludes that tax did not apply. The official annotation page instead says no freight deduction was allowed because the freight was not separately stated. Because the PDF's final sentence conflicts with its own stated rule and facts, this page does not present the freight result as settled.

Citations and references

• California Revenue and Taxation Code sections 6012 and 6051 (as cited)
• California Revenue and Taxation Code section 6012(c)(3) (installation-labor exclusion, as cited)
• California Sales and Use Tax Regulation 1628 (transportation charges, as cited)
• August 6, 1996 request describing subcontracted manufacture and start-up, common-carrier delivery, lump-sum bids and invoices, and bid-work-up cost breakdowns — request not separately reproduced beyond the letter's quotation
• Regulation 1628 — listed as an enclosure, but the enclosure copy is not appended to the official PDF
• Redacted seller's permit and proposed or actual wastewater-equipment transactions — permit record, contracts, bids, work-up sheets, invoices, equipment and start-up descriptions, subcontractor records, freight bills, payments, and tax records not reproduced in the official PDF
• Official Annotation 295.0711's wastewater equipment, no seller installation, subcontracted start-up, common-carrier shipment, lump-sum bid and invoice, mandatory-service rule, taxable start-up, no freight deduction, and Oct. 17, 1996 date — annotation resolves the source's freight sentence against its literal text, states the service as required although the PDF says only that it appears so without a description, and omits the request, permit, enclosure, conditional analysis, missing records, reliance status, and later outcome and supplies no additional transaction record

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/295-0711.pdf

Original ruling text

295.0711

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION – MIC: 85
450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082
TELEPHONE (916) 324-2653
FAX (916) 324-2618

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

E. L. SORENSEN, JR
Executive Director

October 17, 1996

Ms. M--- N--E--- Systems
XXXX --- --- Avenue
Suite XXX
---, California XXXXX
Re:

E--- Systems
Permit No. SR -- XXXXXXXXX

Dear Ms. N---:
This is in response to your letter dated August 6, 1996, requesting advice as to the application of sales tax to freight and/or installation labor of wastewater treatment equipment. In your letter, you state: “E--- Systems designs and manufactures, (manufacturing is done through a sub-contractor), equipment used in wastewater treatment of municipalities and industrial applications. We are strictly an equipment supplier and are not involved in the installation of such equipment at the job site. We do, however, have a sub-contractor that goes to the job site when the equipment is ready to begin operation and assists in the ‘start-up’ of the equipment. The equipment is shipped to the job site via common carrier. “The equipment is bid and invoiced as a lump sum price. There are no separate line items on the invoice for start-up costs, freight costs or materials. There are breakdowns for these costs in our bid work up sheet.” Our understanding of your question is whether a portion of your lump sum charge is excludable from tax. Before addressing that question, we will provide some background information. Revenue and Taxation Code section 6051 imposes a sales tax on all retailers

Ms. M--- N---

-2-

October 17, 1996
295.0711

measured by their gross receipts from retail sales of tangible personal property unless the sale is specifically exempt from taxation by statute. Although Revenue and Taxation Code section 6012 provides that a retailer’s gross receipts include the total amount of the sales price and charges for any services that are part of the sale, charges for labor or services used in installing or applying the property sold are excluded from the taxable gross receipts. (Rev. & Tax. Code § 6012(c)(3).) You indicate that E--- does not install the wastewater treatment equipment that it sells. Therefore, this exclusion does not apply. Services that are a part of the sale include any the seller must perform in order to produce and sell the property, or for which the purchaser must pay as a condition of the purchase and/or functional use of the property, even where such services might not appear to directly relate to production or sales costs. If E--- requires the purchasers of wastewater treatment equipment to purchase the start-up services as a condition of purchase and/or the functional use of the equipment, then that start-up service is considered a service that is part of a sale. Although you do not describe the start-up service, it appears to be part of the sale, and the charge is therefore taxable as part of the gross receipts for the sale of the wastewater treatment equipment. In regards to your question concerning the taxability of freight charges, you note that wastewater equipment is shipped to the job site via common carrier. Enclosed is a copy of Sales and Use Tax Regulation 1628, Transportation Charges. As noted in subdivision (a), tax does not apply to separately stated charges for transportation of property from the retailer’s place of business directly to the purchaser by common carrier. According to your letter, freight costs are not separately stated on the invoice. Therefore, even though all shipping is done by common carrier, tax does not apply to E---’s charges for transportation of the wastewater equipment from E---’s place of business or other point from which shipment is made directly to the purchaser. If you have other questions regarding the application of sales tax law, please do not hesitate to write again. Very truly yours,

Robert E. Thomas
Tax Counsel
RET/cmm
Enclosure
Cc:

--- District Administrator (--)