Were engineering, design, procurement, manuals, drawings, and technical-support charges taxable under a refinery-modification contract?

Plain-English summary

A refinery owner hired one contractor to provide engineering, design, procurement, drawings, specifications, maintenance manuals, technical support, and pricing information for a nitrogen-oxide control project. Another constructor would perform field construction.

California concluded that the engineering contractor made no taxable property sale on the stated facts. The original manuals, specifications, drawings, and pricing information were incidental to the engineering and related services, and the contractor supplied no extra copies.

The contractor also qualified as the owner's purchasing agent because the contract documented agency, the contractor was to disclose the agency to suppliers, and the owner paid actual supplier cost rather than a fixed resale price. Supplier sales tax or the owner's use tax still applied to the procured property; the contractor's separate procurement compensation was an agency fee.

The opinion reserved a different result if the contractor actually fabricated tangible personal property. Fabrication for consideration would be a sale, and the receipts attributable to it would be taxable.

What this means for you

Engineering and procurement contractors

Written agency alone was not enough; supplier disclosure and pass-through of actual cost were also essential.

Project owners and tax professionals

Separate service deliverables, agency purchases, agency fees, extra copies, fabricated property, supplier tax, and owner use tax.

Common questions

Q: Were the engineering and design charges taxable?

A: No, on the opinion's assumptions.

Q: Were original manuals and drawings taxable?

A: No. They were incidental to the services.

Q: Did the procurement arrangement avoid tax on the equipment?

A: No. The supplier sale or the owner's use remained taxable.

Q: Would contractor fabrication be taxable?

A: Yes.

Citations and references

• California Revenue and Taxation Code §§ 6006(b) and 6051

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0456
• Original supporting opinion: 515.0456 PDF

Original ruling text

515.0456

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

September 19, 1990

Mr. R--- L. F--U--- Corporation
1201 West 5th Street
P.O. Box 7600
Los Angeles, CA 90051
Re:

F--- W--- U--- Corporation
SS --- XX-XXXXXX

Dear Mr. F---n:
In a letter dated June 22, 1990, you asked for our opinion regarding the application of sales or use tax to a contract between U--- and F--- W--- U--- Corporation (FW). I provided you with general information in my response, but was unable to provide you with definitive answers because we lacked sufficient information regarding the transaction to do so. With letters dated August 17 and August 29, 1990, you have now sent us copies of the contract between U--- and FW along with exhibits A through D to that contract. U--- is having an NOx reduction/control facility constructed at its Los Angeles refinery. U--- has apportioned the work for this project between FW and an engineer/constructor. The constructor will provide certain engineering, design, procurement, and cost estimates as well as performing all field construction. FW will provide certain engineering, design, and procurement and will furnish necessary drawings, specifications, maintenance manuals, and technical support for proper construction, operations, and maintenance of the modified equipment. FW will also provide technical and pricing information to allow the constructor to prepare the cost estimate. For purposes of this opinion, we assume that all drawings, specifications, and other written materials provided by FW are created by FW based on engineering and technical expertise. We also assume that FW does not supply extra copies of these items (e.g., FW does not furnish a maintenance manual for each of U---’s and constructor’s personnel). FW will be procuring property for U---. As discussed in my previous letter, in order to qualify as an agent for U--- in purchasing that property and not as a seller of property to U---, FW must have written evidence of agency status with U---, FW must clearly disclose to the supplier that it acts as an agent for U--- when making the purchases, and the price billed to U---, exclusive of any

Mr. R--- L. F---

-2-

September 19, 1990
515.0456

agency fee, must be the same amount paid to the supplier. Section 2.2(f) of the contract provides that FW will purchase all machinery, equipment, materials, and supplies agreed to by U--- as being required for the work as an agent for U---. Exhibit B to the contract sets forth the compensation U--- will pay to FW. That exhibit does not provide for a fixed price to be paid by U--- to FW for the property irrespective of the price paid by FW. Rather, section 2.0(c) provides that U--- will pay the actual costs of such property procured by FW. The other charges paid by U--- attributable to such procurement would be regarded as agency fees. Assuming FW discloses to the suppliers that it acts as an agent for U--- when purchasing the property, we conclude that FW purchases the property as an agent for U---. Since U--- is the consumer of the property, sales tax applies to the supplier’s sale of that property to U---, through FW as U---’s agent, or use tax applies to U---’s use of the property. My understanding of the contract is that the only property provided by FW is the property it procures as agent for U--- and property incidentally transferred in providing engineering and related services (such as original maintenance manuals, specifications, and pricing information). Based upon this understanding and the assumptions set forth above, we conclude that FW makes no sales of tangible personal property to U--- and no sales or use tax applies to FW’s charges. However, engineering, design, fabrication, construction, and workmanship performed/furnished by Contractor
[FW] and its subcontractors, [is guaranteed].” It appears that this may merely be a catch-all provision. If, however, FW does actually provide fabrication of tangible personal property, that fabrication would be regarded as a sale. (Rev. & Tax. Code § 6006(b).) FW’s gross receipts attributable to that sale would be subject to sales tax. (Rev. & Tax. Code § 6051.) If you have further questions, please contact me. Sincerely,

David H. Levine
Senior Tax Counsel

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