Could machinery-seller charges for training a customer's staff be excluded from taxable gross receipts?

Plain-English summary

A machinery seller labeled a charge “installation,” but two-thirds of the billed time trained the customer's staff to operate and maintain the new equipment. California said that staff training was neither installation nor application of the machinery.

Separately identifiable training charges could be excluded from taxable gross receipts when the training was optional. If training was practically or contractually mandatory with the machinery sale, the receipts reimbursing that training cost remained part of taxable equipment gross receipts.

The broader source distinguished installation—placing, fastening, connecting, and adjusting property at the customer's site—from taxable initial assembly. Reassembling machinery that had been fully assembled and then disassembled only for shipment could be nontaxable reconditioning when separately stated.

Common questions

Was staff training treated as installation labor?

No.

When was training excluded?

When it was separately identifiable and optional.

What if the customer effectively had to buy the training?

The charge remained part of taxable gross receipts.

Citations and references

• California Revenue and Taxation Code § 6012(b)(3) (as cited in the source)

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/315-0335.pdf

Original ruling text

315.0335

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2705

October 4, 1976

F--- and S--XX West XXth Street
--- ---, -- XXXXX
Attention:
Re:

J--- T. G--M--- - M--- Corporation
SC --- XX XXXXXX

Gentlemen:
Our district office has requested the legal office to comment upon the meaning of installation and application as those terms are used in Revenue and Taxation Code Section 6012(b)(3) as they apply to the installation procedures described in M--- - M---’s statement. We have regarded that installation as being only that labor necessary to place, fasten, and adjust property in the particular place designated by the customer. For instance, bolting the machines to the customer’s floor, connecting the electrical systems with the customer’s building, attaching the machines to other machines of the customer, and adjusting the machines to the particular onsite conditions. Installation does not include assembly or reassembly of the machine. Cf, CCH State Tax Reporter California, paragraph 60.351.464. When the machines’ parts have been shipped to the customer and have never before been completely assembled, that final, on-site assembly by the seller is not regarded as installation or application, and the seller’s charges therefore must be included in gross receipts from the sale. On the other hand, assembly of disassembled parts of machines which were previously fully assembled by the manufacturer but disassembled only for shipment is regarded as a reconditioning. Separately stated charges for that assembly may be excluded from the gross receipts.

M--- - M--- Corp.
SC OHB 30 609865

-2-

October 4, 1976
315.0335

An application of the machine would relate to the functional use of it. With printing equipment, an application would be the production of printed matter rather than the bolting of the printing equipment to the customer’s floor. It may be that the “set up” referred to by your client includes aspects of installation, assembly, reassembly and transportation. The “installation procedures” of M--- - M--- note that two-thirds of the time charged is spent on training the staff of the customer on operating and maintaining the new machinery. This is not a charge for either installation or application of the machinery. If M--- - M--- was to operate or to supervise the actual operation of the machinery, the charge would be for application. However, the training of the purchaser’s personnel is about that person’s application of the machinery. That notwithstanding, separately identifiable charges for such training which are not mandatory charges by the seller of the machinery but are optional to the customer are distinct from the sale of the machinery and may be excluded from the measure of the tax. On the other hand, if the training is practically or contractually mandatory, then the gross receipts which reimburse the seller’s cost of that training may not be excluded from the gross receipts of the equipment. Very truly yours,

Phillip R. Dougherty
Tax Counsel
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