Were a sprinkler lessor's field-layout, installation, delivery, and removal charges included in taxable rental receipts?

Plain-English summary

A redacted corporation rented sprinklers, pipe, pumps and accessories. Its protest covered January 1, 1985 through March 31, 1988; a prior audit had run through December 31, 1984.

Item D was $20,000 of disallowed exempt sales from a Branch 95 detailed examination. It involved one quoted $26,111.42 billing for an “installation labor addition” to a numbered rental. The lessor said it covered field layout and connection after rent began; the Department said the work preceded the leasing sale and might be taxable fabrication under section 6006(b). The parties' contract is absent.

Item E was $103,969 of understated taxable sales calculated by statistical sample. The deficiency treated installation as pre-sale work and every removal charge as required by the rental-service contract. The lessor submitted 1989 schedules to show that block-period rent could start before delivery, and a sample lease required the renter to pay delivery and return. Its controller said installation was optional and appeared in only a small portion of leases. The schedules, sample lease, contracts, complete charges and audit computation are absent.

The Department had relied on Annotated Letter Ruling 330.3310 and Business Taxes Law Guide 3223, which treated pre-lease scaffolding erection as a lessor expense included in leasing sales price under section 6011(a)(2). The hearing officer distinguished sprinkler work: field layout and attachment to real property were installation excluded by section 6011(c)(3), whether before or after rent began and whether mandatory or optional. Temporary field assembly also produced no new property and was not fabrication. The officer reached the same installation result for Items D and E.

Delivery remained taxable because amounts were not separately stated as regulation 1628 required and the evidence did not establish delivery after the leasing sale began. Removal also remained taxable because return was an express condition of the hiring contract; lessor-performed removal for an added amount was another leasing charge.

The April 26 decision recommended a reaudit eliminating all installation charges from the test and deficiency. A May 23 cover letter directed cooperation, promised the taxpayer a reaudit report and said appeal options would follow. No reaudit, final agency action or appeal outcome is published. Live Annotation 330.3538 matches the recommendation's installation, assembly, delivery and removal conclusions.

Common questions

Was temporary sprinkler assembly taxable fabrication?

No. The source found no production of new property.

Did the result depend on whether installation was optional or began after the lease?

No. Field layout and attachment were excluded installation under section 6011(c)(3), whether mandatory or optional and whether performed before or after the lease began.

Why did the Department initially tax installation?

It treated the charges as mandatory pre-sale services and invoked the scaffolding-erection rule in 330.3310, including lessor expenses in leasing sales price. The hearing officer found the sprinkler work materially different.

Why was delivery taxable?

It was not separately stated, and its timing relative to the lease was not established.

Why was removal taxable?

Return was required by the lease, so the lessor's removal service was part of the rental charge.

What evidence supported the lessor's timing position?

Representatives submitted schedules for part of 1989 showing block-period rental practice. The schedules are not included, and the officer found delivery timing unproved.

Were the dollar amounts finally determined?

No final amount appears. The source identifies protested audit measures of $20,000 and $103,969, plus a $26,111.42 Item D billing, then recommends a reaudit removing installation charges.

Does the source show the reaudit or later appeal?

No. The cover letter says a report and appeal options would follow, but neither a report nor later agency action appears.

Citations and references

• Revenue and Taxation Code section 6006(b) — fabrication as a sale
• Revenue and Taxation Code section 6011(a)(2) — lessor cost or expense passed to the lessee
• Revenue and Taxation Code section 6011(c)(3) — customer-contracted installation exclusion
• Regulation 1628 — separately stated delivery-charge requirement
• Annotated Letter Ruling 330.3310 and Business Taxes Law Guide 3223 — pre-lease scaffolding erection analogy; live 330.3310 adds July 16, 1968 and January 30, 1987 dates
• Live Annotation 330.3538 — installation, temporary assembly, delivery and removal summary dated April 26, 1990
• Item D contract and full billing, Item E contracts and charges, 1989 schedules, sample lease, audit computations, reaudit report, final action and appeal outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3538
• Original supporting opinion: 330.3538 PDF

Original ruling text

330.3538

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 323-7977

May 23, 1990
R--- F--- R---, Inc.
P.O. Box XXXX
---, California XXXXX
Dear Madam or Sir:
RE:

SZ -- XX-XXXXXX-010

Enclosed is a copy of the Decision and Recommendation pertaining to the petition for redetermination in the above-referenced matter. I have recommended that the Board staff perform a reaudit in accordance with the views expressed in the Decision and Recommendation. No action is required of you at this time, except that you are requested to cooperate with the audit staff during the course of the reaudit. The audit staff will provide you with a copy of the reaudit report. A copy of that report will also be sent to me. At that time, I will write to you informing you of your options for appeal in the event that you disagree with the reaudit results. Very truly yours, W. E. Burkett Hearing Officer WEB:af Enc. cc: Mr. L--- E. C--Attorney at Law c/o R--- F--- R---, Inc. P.O. Box XXXX
---, California XXXXX
With Copy of Hearing Decision and Recommendation
Ms. Janice Masterton
Assistant to the Executive Director
With Copy of Hearing Decision and Recommendation
Mr. Glenn Bystrom
Principal Tax Auditor (file attached)
--- – District Administrator
With Copy of Hearing Decision and Recommendation

STATE OF CALIFORNIA

330.3538

BOARD OF EQUALIZATION
APPEALS UNIT

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
R--- F--- R---, INC.

Petitioner

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HEARING
DECISION AND RECOMMENDATION

No. SZ -- XX-XXXXXX-010

The above-referenced matter came on regularly for hearing before Hearing Officer W. E. Burkett on February 5, 19XX, in ---, California.

Appearing for Petitioner:

Mr. R--- C. L--Treasurer
Ms. M--- P--Controller
Mr. L--- E. C--Attorney at Law

Appearing for the
Department of Business Taxes:

Mr. Spencer B. Stallings
Supervising Tax Auditor
Ms. Eileen M Baier
Senior Tax Auditor

Protested Items
The protested tax liability for the period January 1, 1985 through March 31, 1988 is measured by:

R--- F--- R---, Inc.
SZ -- XX-XXXXXX-010

-2-

State, Local
and County

Item
D.

E.

April 26, 1990
330.3538

Disallowed exempt sales at
Branch 95 – Detailed Examination

$ 20,000

Taxable sales understated at
Branch 95 – Statistical Sample

$103,969

Contentions of Petitioner
D.

Charges for installation and removal are exempt from the tax.

E.

Charges for installation and removal are exempt from the tax.

Summary
The petitioner is a corporation engaged in the business of renting sprinklers, pipe, pumps and related accessories. A prior audit of petitioner was conducted through December 31, 1984. The petitioner’s protest involves the application of the tax for installation and removal charges included in the measure of tax for rental sales. Protested item D involves a single billing to S---, Inc. of --- --- for “installation labor addition to rental #629738 to complete job in ---, CA” $26,111.42. A copy of the parties’ contract is not available. Petitioner contends that the charges were for field layout and connection and that services occurred after the rental period began. The position of the Department of Business Taxes is that the installation occurred prior to sale and that the charge may involve field assembly labor properly classified as a sale under Revenue and Taxation Code Section 6006(b). The second protested item consists of a number of disallowed charges for installation and removal charges made in connection with the rental of sprinklers. The protested measure of tax also includes some charges for delivery which are conceded to be subject to the tax. The audited deficiency was computed on the basis that all “taxable” installation occurred prior to the sale and that all charges for removal were required as part of the rental service contract.

R--- F--- R---, Inc.
SZ -- XX-XXXXXX-010

-3-

April 26, 1990
330.3538

The petitioner contends that many contracts for rentals of sprinklers require that the rental period begin prior to the actual date of delivery of the property. It was explained that in the industry it is necessary to rent sprinklers for block periods to insure that they will be available for use when required. Petitioner’s representatives submitted schedules for a portion of the year 1989 confirming this practice. They also presented a sample copy of the lease agreement. This agreement does not specifically deal with installation although it specifically requires the “rentee” to pay for delivery and return of the leased property. Petitioner’s Controller, M--- P---, advised that installation is strictly an optional service that is contracted for in only a small portion of the lease contracts. Analysis & Conclusions We first consider the various charges involved in the test used to compute the measure of tax deficiency for audit item E. The Department has applied the tax to the charge for the installation portion of the sprinkler rental contracts on the basis that the charges were mandatory service charges for services performed prior to the beginning of the lease agreement as set forth for erection of scaffolding (see Annotated Letter Ruling No. 330.3310; Business Taxes Law Guide 3223). The charge for such service is properly includable as part of the leasing sales price where performed prior to the beginning of the lease for the purpose of placing the personal property (scaffold components) in a form for leasing. In this setting, erection is considered to be a cost or expense of the lessor even though he may obtain reimbursement for the cost from the lessee. (See Revenue & Taxation code Section 6011(a)(2).) However, the charges at issue here are not for reassembly of components of personal property. Rather they are for the field layout and attachment of sprinkler pipe to the real property. The charges for such installation contracted by the customer are specifically exempt from the tax whether performed before or after the lease term begins and without reference to whether the installation service is mandatory or optional (Revenue and Taxation Code Section 6011(c)(3)). Further, a charge for the temporary field assembly of the sprinkler components would not constitute a sale of tangible personal property. There is no fabrication of components and the actual labor of assembling the sprinkler components does not constitute a step or process in the production of a property. We reach the same conclusion with respect to the audit item D installation service and for the same reasons. The delivery portion of the amounts denied exemption is properly subject to tax because the amounts are not separately stated as required by law and Regulation 1628, and for the additional reason that the evidence does not warrant a finding that the delivery was performed after the leasing sale began. It is also our conclusion that no portion of the charge for removal of the leased property is excludable from the measure of tax. The return of the property to the petitioner is an express condition of the hiring contract. The performance of this service by the petitioner for an additional amount is merely an added leasing charge.

R--- F--- R---, Inc.
SZ -- XX-XXXXXX-010

-4-

April 26, 1990
330.3538

Recommendation
It is recommended that a reaudit be conducted for the purpose of eliminating all installation charges from the test and from the measure of tax deficiency.

______
W. E. BURKETT, HEARING OFFICER

4-26-90
_____
DATE