Were charges taxable for machining steel test bars used to verify castings when the bars were later scrapped, sold, or remelted?

Plain-English summary

A stainless-steel casting manufacturer cast small test bars and sent them to an outside firm for machining to a specified size. The bars were returned for tensile-strength and physical-property testing, and the results were reported to casting customers.

Machining was taxable fabrication under Ruling 15, as cited. The manufacturer used and consumed the machined bars in conducting its tests rather than having them machined for sale.

After testing, the bars were scrapped and either sold or remelted. That later recovery of the metal did not change the consumer-use result or make the machining charge nontaxable.

Citations and references

• California Sales Tax Ruling 15 (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/435-1720.pdf

Original ruling text

435.1720

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 4, 1954

X-----------------------

Your letters of October 27
And December 16, 1954
Account No. X-------------

Attention:

X------------------Accounts Receivable Supervisor

Gentlemen:
In manufacturing stainless steel castings for resale you cast a few small test bars. The test bars are used to determine if the castings meet specifications. You send the test bars to an outside firm for machining to a specific size. The machined test bars are then returned to you for analysis of tensile strength and physical properties. A report of the testing is forwarded to your customer and the test bars themselves are then scrapped and either sold or remelted. As indicated in Ruling 15 (copy enclosed), charges for fabricating tangible personal property for a consumer are taxable. Machining constitutes fabrication. You use the machined test bars in carrying on your business, that is, for the purpose of testing the castings. While it is true that you will eventually resell the metal in the test bars, you do not have them machined for the purpose of sale. Rather, you have them machined for the purpose of sale. After use, they are sold. Accordingly, you are the consumer of the machined test bars and the charge for machining is subject to tax. Yours very truly,

Bill Holden
Assistant Counsel
BH:ja
Cc:

San Diego – Auditing