Were failure-analysis reports taxable when they included photomicrographs or encased component cross-sections, and what if the contractor only prepared a section?
Apply this to your situation
This page answers the general question as of 1976. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
An independent contractor analyzed failures in electronic circuits and components. Its hourly consulting reports sometimes included photomicrographs or a customer component that had been split and encased in plastic to illustrate the analysis. Those items were not separately charged.
California treated the failure-analysis report as a nontaxable service. The photomicrographs and component sections were incidental illustrations of the analysis.
The result changed when the customer requested only that the contractor split a component, encase it in plastic, and return it without a failure-analysis report. That work was taxable fabrication or processing of customer-furnished tangible property under Revenue and Taxation Code section 6006(b), even though the contractor billed hourly.
What this means for you
Testing laboratories and engineers
The analytical conclusion and report supported service treatment; a stand-alone prepared specimen was taxable property processing.
Accountants and tax professionals
Separate consulting and reports from sample cutting, mounting, encasing, photography, replicas, physical specimens, and other customer-property processing.
Common questions
Q: Were failure-analysis reports taxable?
A: No.
Q: Did including photomicrographs make them taxable?
A: No, when the images were unpriced and incidental to the report.
Q: Was a component section taxable without an analysis report?
A: Yes.
Citations and references
- California Revenue and Taxation Code § 6006(b)
- California Sales and Use Tax Regulation 1501
Source
- Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
- Annotation page: Annotation 515.0011.220
- Original supporting opinion: 515.0011.220 PDF
Original ruling text
515.0011.220
(916) 445-2641
September 28, 1976
REDACTED TEXT
Dear REDACTED TEXT,
This is in response to your letter of September 17, 1976. You have a client who is seeking advice regarding the applicability of the California sales tax to the following operation: Your client is an independent contractor who provides failure analysis reports regarding the design and operation of electronic circuitry and components to various companies. As part of such failure analysis reports, your client provides photomicrographs with his reports to illustrate the failure analysis. In other failure analysis reports, your client splits the failing component (provided by the company requesting the report) for analysis and provides a cross-section of the component, encasing the same in plastic for ease of handling. The reason for providing the section is the same as the reason for providing the photomicrographs, that is, to illustrate the failure analysis explained in the report. In some cases, your client is sent the component and requested to split the component at a certain point, encase it in plastic and return it to his client without providing a failure analysis report. Your client charges an hourly rate for his failure analysis consulting work and does not charge separately for the photomicrographs or the sections. In the cases where he provides the service of splitting and encasing the components in plastic and returning the same to his client without providing a failure analysis report, he charges an hourly rate. His fee is based entirely on his hourly rate multiplied by the length of time spent on each project. The distinction outlined in determining whether a particular transaction involves a sale of tangible personal property (taxable) or the transfer of tangible personal property incidental to the performance of a service (nontaxable) is one of the true object of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service? If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. See our Regulation 1501 “Service Enterprises Generally,” copy enclosed for your reference. We are of the opinion that sales tax does not apply to charges made by your client for preparing and furnishing failure analysis reports to his customers. It is immaterial that your client may furnish photomicrographs and sections to his customer since no separate charge is made for these items.
515.0011.220
2
September 28, 1976
Where your client does not provide a failure analysis report but prepares a section from a component provided to him by his customer, the sales tax is applicable. Revenue and Taxation Code Section 6006(b) provides that “sale” means and includes the producing, fabricating, or processing of tangible personal property for a consideration for consumers who furnish the materials used in the producing, fabricating, or processing. Herewith the sample section which accompanied your inquiry. Very truly yours,
Gary J. Jugum
Tax Counsel
j:alicetilton
Enclosures
bc: REDACTED TEXT – District Administrator
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