Was labor to install a lift gate on a newly registered truck taxable fabrication or nontaxable installation labor?

Plain-English summary

An absent July 10, 2001 internal memorandum attached a determination and recommendation for M--- L--- G---, Inc. that had treated lift-gate labor on new commercial vehicles within 60 days of registration as nontaxable. The supporting memorandum, attached D & R except for one quoted passage, vehicles, registrations, fabrication contracts, charges, audit workpapers, and petition are not reproduced.

California concluded that installing a lift gate or other accessory on a new vehicle was taxable fabrication labor. Even though a lift gate was an accessory rather than an integral truck component, installing it on a new vehicle was a step in producing the finished vehicle specified by the customer.

For audit purposes, the source treated a vehicle as new when it qualified as new upon DMV registration and the customer entered the fabrication contract within 60 days after registration. Counsel called this a traditional bright-line audit test and a reasonable basis for distinguishing fabrication from installation or repair. Under that test, lift-gate installation on a new commercial vehicle was taxable.

Installation on a used vehicle was different. Adding an accessory to a used vehicle was not a step in creating that vehicle, so separately stated installation labor was treated as nontaxable under the repair-and-installation rules discussed in the memorandum.

The memorandum also relied on prior new-van and new-bus conversion annotations and a 1997 auto-repair pamphlet, none of which is reproduced. Its footnote corrects one 315.0150 citation to 315.0140, while a later reference to “315.0410” remains unresolved. The live Annotation 315.0142 publishes the new-vehicle and 60-day rules but omits the contrary D & R, internal provenance, audit-test characterization, missing authorities and records, and any later outcome.

Common questions

Did it matter that a lift gate was only an accessory?

No, for a new vehicle. Installing the accessory still helped create the finished vehicle.

What was the 60-day test?

The vehicle had to qualify as new at DMV registration, and the fabrication contract had to be made within 60 days after that registration.

Was the same labor taxable on a used truck?

Not under the source's used-vehicle analysis when the installation charge was separately stated.

Citations and references

• California Revenue and Taxation Code section 6006(b) — quoted in part for customer-furnished-property fabrication; complete text, definitions, exceptions, amendments, later history, and current law not supplied
• Board Regulation 1526(a) and (b) — creation-or-production fabrication and repair exclusion; complete text, definitions, examples, exceptions, amendments, later history, and current law not supplied
• Board Regulation 1546(a) — used-vehicle repair or installation; complete text, separate-statement and allocation rules, definitions, exceptions, amendments, later history, and current law not supplied
• Business Taxes Law Guide Annotation 315.0140 (Apr. 15, 1957) and Annotations 435.0418 (Dec. 13, 1996) and 435.0470 (Sept. 8, 1977) — underlying supporting opinions not reproduced
• Tax Tip Pamphlet 25, Tax Tips for Auto Repair Garages and Service Stations (1997), page 10 — cited pamphlet not reproduced
• July 10, 2001 William D. Dunn memorandum and attached M--- L--- G---, Inc. D & R — request, attachment, taxpayer facts, vehicles, registrations, contracts, charges, workpapers, petition, and complete analysis not reproduced
• November 28, 2001 Senior Tax Counsel Carla J. Caruso memorandum — no reply, corrected D & R, adjustment, determination, Board action, appeal, or later outcome supplied
• Source citation record — footnote corrects 315.0150 to 315.0140; later “315.0410” reference remains unresolved
• Official Annotation 315.0142's registration, 60-day, accessory, finished-vehicle, fabrication, and date rules — annotation omits the request, D & R, authorities, audit characterization, citation issues, missing records, later outcome, and reliance status and supplies no additional 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/315-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/315-0142.pdf

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

Memorandum

315.0142

To:

Joseph Young
Headquarters Operations Manager
Headquarters Operations Division

From:

Carla J. Caruso
Senior Tax Counsel

Subject:

Installation of Parts on New Vehicles

Date:

November 28, 2001

Telephone: (916) 324-2816
CalNet: 454-2816

This memorandum is in response to the July 10, 2001, memorandum from William D. Dunn requesting clarification of several annotations on the subject of installation of parts on new vehicles. Specifically, Mr. Dunn attached the D & R for M--- L--- G---, Inc., SR -- XXXXXXXXX, which concluded that labor to install lift gates on new commercial vehicles within 60 days of registration was not subject to tax. He noted that this conclusion is in apparent conflict with BTLG Annotations 315.0140 1 , 435.0418, 435.0470 and with page 10 of Tax Tip Pamphlet number 25, “Tax Tips for Auto Repair Garages and Service Stations.” He requested clarification of the 60-day rule and when it applies. We conclude that the installation of accessories on a new vehicle is subject to tax as fabrication labor, and accordingly, that the 60-day rule for determining whether a car is new should apply in this circumstance. We disagree with the conclusion in the D & R that the labor for installing a “lift gate” in a new vehicle is exempt from tax, i.e., is not fabrication labor, because the lift gate is an accessory. As a starting point, Revenue and Taxation Code section 6006(b) defines the term “sale” to include the “producing, fabricating, processing, printing or imprinting” of tangible personal property furnished by a customer. “Producing, fabricating and processing include any operation which results in the creation or production of tangible personal property or which is a step in a process or series of operations resulting in the creation or production of tangible personal property.” (Reg. 1526(b).) Fabrication does not include the mere repair or reconditioning of tangible personal property. (Id.) For example, charges for labor or services used in installing or applying property to a used motor vehicle constitute a repair or installation operation. (See Reg. 1546(a).) Conversely, the installation of parts and accessories on a new motor vehicle 1

A typographical error lists Annotation 315.0150 (11/13/92) (Low Emission Motor Vehicles and Retrofit Devices), instead of Annotation 315.0140 (“Lift Gates” on Used Trucks) (4/15/57).

Mr. Joseph Young

-2-

November 28, 2001
315.0142

constitutes taxable fabrication labor. (Reg. 1526.) This Agency has traditionally regarded a vehicle to be “new” where: 1) the vehicle qualifies as a new vehicle when it is registered with the DMV; and 2) the contract for fabrication operations on the vehicle is entered into within 60 days of the registration date. (See Tax Tip Pamphlet 25, Tax Tips for Auto Repair Garages and Service Stations (1997) p. 10.) Mr. Dunn’s memorandum identifies two annotations discussing taxable fabrication in the context of motor home and van conversions. Annotation 435.0470 (9/8/77) specifies that where a customer provides a van conversion company with a new stock van for conversion into a house car, the conversion operation is a step or series of operations in the creation of a house car and thereby constitutes taxable fabrication. Annotation 435.0418 (12/13/96) also provides that where a customer provides a conversion company with a new bus for conversion into a motorhome, the conversion operation is a step or series of operations in the creation of the motorhome and thereby constitutes taxable fabrication. Each of these annotations provides that the vehicle in question will be considered to have been a new vehicle if the contract for the conversion work is entered into within 60 days of the date the vehicle was first registered with the Department of Motor Vehicles. In each of these annotations, the labor to produce the completed new vehicle was taxable fabrication labor in accordance with Regulation 1526(a). The labor to convert the new vehicles to a house car or motorhome is a step in the process or a series of operations resulting in the creation or production of tangible personal property within the meaning of Regulation 1526(b). Similarly, the labor to install an accessory, such as a lift gate, in a new vehicle, is a step in the process resulting in the creation or production of tangible personal property, i.e., a vehicle produced as specified by the consumer. While installation of a single accessory is not as extensive an operation as a van or bus conversion, installation of an accessory on a new vehicle nevertheless fulfills the requirements of Regulation 1526(b) to qualify as taxable fabrication labor. The 60-day rule for determining whether a vehicle is new is simply a bright line test for audit purposes that appears to be a reasonable basis for determining the application of fabrication versus installation repair rules. Mr. Dunn’s memorandum also identifies one annotation outlining a repair operation involving the installation of property on a used vehicle. Annotation 315.0140 (4/15/57) states: “A ‘lift gate’ is an accessory rather than an integral part of a truck. Separately stated charges for installation labor would not be included in the measure of tax where the installation is made on a used truck.” (Emphasis added.) In other words, installation of an accessory on a used vehicle is not a step in the creation of the used vehicle, and accordingly, is not taxable fabrication labor within the meaning of Regulation 1526. We believe that this annotation properly analyzed the installation of accessories on a used vehicle and is therefore entirely consistent with Annotations 435.0418 and 435.0470 and page 10 of Tax Tip Pamphlet 25, which state that installation labor on new vehicles is taxable fabrication labor.

Mr. Joseph Young

-3-

November 28, 2001
315.0142

We disagree with the analysis in the D & R for M--- L--- G---, and believe it erroneously concluded that the installation labor for a lift gate in a new car was not subject to tax. The D & R adopted portions of the reasoning of Annotation 315.0410, but ignored the critical distinction between the installation of an accessory on a new vehicle and a used vehicle. The D & R, in concluding that the separately stated charges for installation labor should not be included in the measure of tax, reasoned as follows: “Here, the‘lift gates’ are merely accessories and not integral parts of the truck. Neither are they essential items to the operation of the vehicles nor do they change the vehicle’s basic nature. As such, petitioner’s installation labor is not a step in a process resulting in the production of tangible personal property or an operation that results in the creation of the desired product, i.e., a vehicle.” The D & R did not, however, analyze the difference between installing an accessory on a new vehicle and installing an accessory on a used vehicle, apparently assuming that the only significant distinction was that between accessory and integral part of the truck. Installing an accessory on a new vehicle is a step in the creation of the finished vehicle, and accordingly, is taxable fabrication labor under Regulation 1526. Please contact us if you have further questions.

CJC:ljt
cc:

Mr. Jefferson Vest (MIC:85)
Ms. Charlotte Paliani (MIC:92)
Mr. Wayne Mishihara (AB)
Mr. Mike Groover (AB)
Mr. Philip Speilman (MIC:38)
Ms. Lynn Whittaker (MIC:50)
Ms. Leila Khabbaz (MIC:50)
Ms. Janice L. Thurston (MIC:82)
Mr. Warren L. Astleford (MIC:82)