Was labor taxable when assembling customer-furnished electronic kits or repairing previously assembled, used computers and printers?

Plain-English summary

Assembling customer-furnished electronic kits completed a step in producing the finished articles. The business's charges for that work were therefore taxable fabrication labor, including the labor and materials or parts used to produce the finished property.

Materials physically incorporated into the finished articles could be bought for resale. The source also notes the general presumption that sales are taxable retail sales unless the seller accepts a timely, valid resale certificate in good faith.

Labor on previously assembled and already used electronic property was different. Charges merely restoring desktop computers and printers to their original condition for their original use were nontaxable repair labor. Parts sold as part of a repair remained taxable.

Citations and references

• California Revenue and Taxation Code sections 6006(b), 6007, 6051, and 6091 (as cited)
• California Civil Code section 1656.1 (as cited)
• California Sales and Use Tax Regulations 1526, 1546, and 1668 (as cited)
• Sales and Use Tax Annotations 435.0020, 435.0860, and 435.1580 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/435-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/435-0038.pdf

Original ruling text

435.0038

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:85)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2642

MEMBER
First District
BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

December 7, 1993
BURTON W. OLIVER
Executive Director

Mr. E--- M--M--- E--XXXX --- -----, CA XXXXX
Re:

Application of Sales Tax
Regulation 1526, 1546
Fabrication/Repair Labor
SR -- XX-XXXXXX

Dear Mr. M---:
This is in response to your letter dated August 6, 1993, regarding the application of tax to assembly labor performed on electronic kits. My understanding is that your customers bring you electronic assembly kits so that you can assemble their finished product. M--- supplies some of the materials incorporated into the finished product. You purchase these materials for resale. In addition to your electronic assembly work, you also repair desktop computers and printers. Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Although the sales tax is imposed upon the retailer, the retailer may collect sales tax reimbursement (usually itemized on the invoice as "sales tax") from the purchaser if the contract of sale so provides. (Civ. Code § 1656.1.) A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) All sales are presumed to be taxable retail sales unless the retailer in good faith takes a timely and valid resale certificate from the purchaser. (Rev. & Tax. Code § 6091, Reg. 1668, a copy of which is enclosed.)

Mr. E--- M--SR -- XX-XXXXXX

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December 7, 1993
435.0038

Sale means and includes the producing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing, or imprinting. (Rev. & Tax. Code § 6006(b).) As explained in Regulation 1526, a copy of which is enclosed, tax applies to charges for producing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing or imprinting. 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.) This does not include charges for the repair or reconditioning of tangible personal property to restore that property to its original condition to be used for its original use. (The application of tax to repair charges is explained in Regulation 1546, a copy of which is enclosed.) You state that M--- E--- provides assembly labor on electronic kits that are furnished by your customers. Since you are making a retail sale as explained above, your charges for such assembly are taxable. (Business Taxes Law Guide Annotation 435.0020 (7/19/50).) For example, the firing of ceramics or China furnished by consumers is regarded as a step in the production of the finished article and tax applies to the charge for such firing. (Business Taxes Law Guide Annotation 435.0860 7/21/50 and 2/19/53.) Also, charges for drilling holes in, or flattening angles, or cutting steel into desired lengths, for a customer who furnished such steel, constitutes taxable fabrication labor. (Business Taxes Law Guide Annotation 435.1580 6/2/53.) Accordingly, we regard your charges for assembling the customer furnished electronic kits as a step in the production of the finished electronic kit, and thus taxable fabrication labor. When you perform fabrication labor, your total charges for labor and materials or parts used in producing the finished article will be included in the taxable gross receipts. These materials can be purchased for resale to the extent that they are physically incorporated into the finished article to be sold to your customers. (Reg. 1668.) However, if you are providing labor on previously assembled, and already used electronic kits which merely restores them to their original condition for their original use, your charges are for nontaxable repair labor. (See Reg. 1546.) Thus, any labor that you perform on used desktop computers and printers, that merely restores these articles to their original condition to be used for their original use, is also nontaxable repair labor. When you sell parts as part of the repair, your charge for the parts is subject to tax as explained in Regulation 1546.

Mr. E--- M--SR -- XX-XXXXXX

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If you have further questions, feel free to write again.
Sincerely,

Gerald Morrow
Tax Counsel
GM/md
Enclosures:
cc:

Regulations 1526, 1546, and 1668

Mr. B. H. Watson, Supervisor
Michelle L. Sommer, Business Tax Representative
Return Review Section - MIC:35
--- --- - District Administrator

December 7, 1993
435.0038