When were instrument calibration services taxable, and did single-use casts for fighter-aircraft parts qualify for Utah's aerospace government-contract exemption?

Plain-English summary

Utah Private Letter Ruling 90-004 contains two Commission responses.

The first addressed calibration and certification of precision measuring devices. The Commission drew a line between pure testing and work that adjusted or repaired an instrument.

The second addressed disposable casts used to form metal parts for fighter aircraft. The Commission denied the claimed aerospace government-contract exemption.

Calibration services

Calibration involved comparing a measuring device with a more accurate reference and certifying the device when it met required tolerances.

Sometimes the technician made software, dial, screw, or display adjustments. Actual repairs were separately described and priced.

The Commission said a calibration that was only a test, with no adjustment or repair, involved no taxable service.

Adjustment or repair during calibration

The result changed when the device needed correction.

The Commission treated fixing a malfunction or adjusting an item that was not operating properly as taxable repair or renovation work.

It rejected the view that separately stating maintenance services automatically made them exempt.

When calibration included adjustment or fixing, the response said tax was generally due and no part of the service could be excluded from the tax base.

Self-service and initial calibration

A person did not owe tax on services performed on that person's own equipment, such as a trooper calibrating the trooper's own radar gun.

When the purchase price of new equipment included initial calibration and certification, the total purchase price had already been taxed.

Casts for fighter-aircraft parts

The second response addressed one-time casts used to contain and form molten metals into parts or fixtures for fighter aircraft.

Each cast was destroyed by high-pressure water after the part cooled.

The manufacturer could not show government title, a government identification tag, or listing on an approved government property record.

Aerospace exemption denied

The Commission interpreted the cited exemption as applying to qualifying United States government contracts in the aerospace and electronics industries.

It classified the client's work as aircraft, not aerospace, because fighter aircraft were capable of atmospheric flight rather than flight both within and beyond the atmosphere.

That independently defeated the claimed exemption.

The Commission also said the single-use casts would fail because they were destroyed and lacked government tagging or approved-property listing.

Holding

Under the stated facts:

• Pure calibration testing with no adjustment or repair was nontaxable.
• Calibration involving adjustment, fixing, or repair was generally taxable.
• Separately stating maintenance did not automatically exempt it.
• Self-performed work on one's own equipment was not taxed as a third-party service.
• Initial calibration included in an equipment purchase was part of the taxed purchase price.
• Fighter-aircraft parts were treated as aircraft work, not aerospace work.
• Single-use destroyed casts without government tags or approved-property listing did not qualify for the government-contract exemption.

What this means for you

Calibration and metrology businesses

Document whether a job only tests and certifies an instrument or also changes, adjusts, fixes, or repairs it.

Manufacturers purchasing calibration

Invoices should accurately describe pure testing separately from repair work, but separate line items alone did not control the Commission's result.

Aircraft and government contractors

Confirm that the industry, equipment life, government ownership records, and tagging requirements all fit the current exemption.

Common questions

Q: Was a pure calibration test taxable?

A: No, when no adjustment or repair was required.

Q: Was calibration taxable when the technician adjusted the device?

A: Generally yes under this ruling.

Q: Did separate billing automatically exempt maintenance services?

A: No.

Q: Did the fighter-aircraft casts qualify for the aerospace exemption?

A: No.

Key source language

• Pure test: “If a calibration constituted only a test to insure proper operation and no adjustments were required, then no taxable service is involved.”
• Adjustment result: in most described cases “tax is due and no part of the service can be excluded from the tax base.”
• Industry classification: “Your client is performing a contract in the aircraft industry, not in the aerospace industry.”
• Cast failure: the casts were used once, destroyed, and did not meet the government tag or approved-property-listing requirement.

Citations and references

• Utah Code Ann. § 59-12-103(1g)
• Utah Code Ann. § 59-12-104(17)
• Utah Sales Tax Rule 27S
• Utah Sales Tax Rule R865-19-78S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 90-004
• Source-content note: the official page includes both the calibration-services response and the casts response under the indexed 90-004 URL.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
July 9, 1990

July
9, 1990

XXXXX

Re: Advisory Opinion - Calibration Services

Dear
XXXXX:

This
letter is in response to your May 21, 1990 request for an advisory opinion that calibration and certification services are not subject to sales tax. The facts, as you have presented them are: (1) Calibration service is a series of tests that validate the accuracy of the measurements made by a gauge, height meter, validator, load cell, probe, sensitometer, thermometer or other measuring device. (2) From time to time, a device will cease to function properly and it will require a repair and calibration. When a repair is made, it will be shown and priced separately from the calibration and certification. (3) Once a device has been calibrated and found to meet requirements or tolerances, a seal, certifying the machine's accuracy is placed on it.

It
is the policy of the Tax Commission to refer such requests to its division most qualified to analyze the request and make recommendations for rendering an opinion. Your request was referred to the Auditing Division whose recommendations are as follows:

1. Sales Tax Rule 27S, copy attached, clearly
   states that services which are part of a sale or repair are taxable. All services in connection with the repair or maintenance of tangible personal property are taxable as part of the sale, unless they are distinctly not part of the repair. An example is an emission test or state inspection of an automobile is not normally part of a repair. Paragraph D of Rule 78S where it states that the services to lubricate an automobile are taxable unless the vendor separates the charges for materials and service pertains only to lubrication service of an automobile, not to other goods or services.

2. Over the years, the Auditing Division has
   taken the position that if an item is not in proper operating condition or malfunctioning in any way, correcting the problem constitutes a repair or renovation. An example is a piano which is out of tune is not functioning properly. Tuning a piano has been considered a taxable repair service. If a TV set is not producing a satisfactory picture or sound, the service to adjust the set has been considered a taxable service.

3. With today's modern computer operated motor
   vehicles, it is usually necessary to examine or test, through a computer module, to determine where a malfunctioning part is. Then the part is either adjusted (repaired) or replaced. The next step is the re-testing to insure that the proper repair has been made. All of this service is taxable as part of the repair.

4. We do not agree that charges for maintenance
   services are exempt if separately stated.
   If a calibration constituted only a test to insure proper operation and no adjustments were required, then no taxable service is involved. It appears that in most instances as described, some adjustment or fixing is done in a calibration service: therefore, in most cases, tax is due and no part of the service can be excluded from the tax base.

5. In your example of the Highway Patrol
   trooper calibrating his own radar gun, no third party repairman is employed and there is no requirement to tax one's own service to repair one's own equipment. Where the purchase price of a piece of equipment includes an initial calibration and certification, tax has been charged, since the total purchase price, including the initial calibration, was taxed upon sale.

In
conclusion, unless it can be shown that a calibration service was merely a test, and that no adjustments or repairs were made, a calibration service should be taxed when performed for a taxable consumer.

For
the Commission,

Joe
B. Pacheco

Commissioner

XXXXX

Re:
Advisory Opinion - Casts

This
letter is in response to your May 21, 1990 request for an advisory opinion regarding whether the purchase of casts used in the manufacture of parts or fixtures for fighter aircraft can qualify for exemption under 59-12-104(17). The facts, as you have presented them are, the casts are molds used to contain and form molten metals, principally graphite steel, aluminum, or titanium alloys to produce parts for the final product. Each cast is used once and destroyed by blasting the cast from the newly formed part after it has been cooled. The blasting is accomplished by shooting water under extreme pressure at the cast-enveloped product.

You
have also stated that the parts are made according to government design and specification and must meet military standards.

You
further stated that the manufacturer cannot show that title vests in the government and that no government tag is placed on the casts and the casts are not listed on a government approved property record.

1. Code Section 59-12-104(17) provides an
   exemption for certain purchases of equipment etc., used in the performance of contracts with the United States government in the aerospace and electronics industries. Aerospace is defined in The American Heritage Dictionary as "designating the earth's atmosphere and the space beyond." Emphasis added. An aerospace vehicle is a "vehicle capable of flight both within and outside the earth's atmosphere." Emphasis added. Aircraft is defined as "any machine or device, including airplanes, helicopters, gliders and dirigibles, capable of atmospheric flight."

2. Your client is performing a contract in the
   aircraft industry, not in the aerospace industry; therefore, the exemption does not apply.

3. Although it is not necessary to address the
   other issues in your request, even if the aerospace industry were involved, the casts would not qualify for exemption because they are used only once and destroyed. They would not meet the code requirement that they have a government identification tag on them or that they are on a listing of government approved property.

Based
on the facts presented in your letter, we are in agreement with the Auditing Division's recommendations. Obviously, if there are deviations from these facts, this opinion may be negated.

For
the Commission,

Joe
B. Pacheco

Commissioner

Commissioner
Joe Pacheco

Utah
State Tax Commission

160
East 300 South

Salt
Lake City, Utah 84134

RE: Request for Advisory Opinion

Dear
Commissioner Pacheco:

I
am consulting with a client who Manufactures high-tech components. The nature of their product requires that very minimal tolerances be maintained in the manufacture of their products. In the course of our engagement with this client, we have discovered that they have been paying use taxes on calibration services provided by outside parties. My associates and I are of the opinion that these services are not taxable services because the services are of the nature of testing the equipment to ensure that contract-mandated standards are met and are not repairs, renovations or installations to the equipment which would be taxable under U.C.A. 59-12-103(1g). I'm writing to request an advisory opinion concerning the status of this service and the purchase transaction's taxability.

In
conversation with XXXXX of the Auditing Division, he indicated that this request should be directed to you. He also advised me that the identity of our client may remain undisclosed. An explanation of the issues and facts which we relied on to form our opinion follows. I would ask that if you have any questions or need additional facts or clarifications that you call me at XXXXX.

Statement
of Relevant Facts

Description of Calibration and Certification Services

The
calibration service is a series of tests that validate the accuracy of the measurements made by a gauge, height meter, validator, load cell, probe, sensitometer, thermometer or other measuring device.

For
example, A validator, a coordinate measuring machine that takes measurements of complex solids, is required by the client's contracts to be calibrated every six months. The machines are highly accurate. Calibration of a validator involves removing its probe head and inserting a reflector in its place. A laser is fixed in place and measures the distance the reflector travels. The validator is also recording the distance traveled by the reflector. The laser's measurements are compared with the machine's measurements, and then the calibration is certified if the laser's measurements and the validator's measurements agree within certain tolerances. A seal certifying the machine's accuracy is then placed on the validator and the service is complete.

If
the two devices' measurements vary by more than the allowable calibration tolerance, the validator is adjusted to agree with the laser's measurements. On the validator, this is accomplished by programming modifications into an error compensation formula in the software driving the validator. On other instruments, it may mean adjusting a dial or set screw. On yet other instruments it may mean pushing a button to reset a digital display much like one would reset a digital clock that was running a minute or two fast or slow.

The
calibration tolerances are very finite and more stringent than the actual measurement tolerances specified in the designs. They are expressed in a few ten-thousandths of an inch over a distance traveled of up to six feet. Changes in the ambient room temperature can vary the measurement reading over relatively long distances traveled by the reflector or the probe head by a few ten-thousandths of an inch from one moment to the next.

Other
Services Rendered and Invoicing Practices

From time to time, a device will cease to
function properly and it will be sent to one of the metrology vendors (calibrating services) for repairs, or the calibration technician will determine the instrument is not functioning properly and repair it on the spot. At times, these repairs mean filing a burr from a part and reseating it, in other instances the part is replaced.

If
the instrument was not functioning properly and repairs were made they were invoiced as repairs. Some invoices may reflect calibration & certification along with repairs on the same invoice with separate line items describing the type of instrument, the service performed and the charge for the service. If replacement parts were required, they may be billed in a lump sum or part by part.

Other
Relevant Facts

Typically,
when an instrument fails, it is shipped to the metrology vendor for repairs. When the technician visits the plant the purpose of the visit is to perform calibrations and attest to satisfactory results.

Essentially
all of the calibration and certification services are mandated by government and military contracts. The services are performed on a schedule that should ensure consistent conforming of the final product to design specifications and an extremely high degree of accuracy in product performance test results.

Basis
for Conclusion

Our
conclusion is based on U.C.A. 59-12-103(1g), Tax Commission Rule R865-19-78S, definitions of key verbs and their synonyms in this issue as found in the Merriam-Webster, Webster's Ninth New Collegiate Dictionary copyrighted 1988, and the nature of the calibration services as they are contrasted with services for repair or renovation.

U.C.A.
59-12-103(1g) provides for taxation of the sale of:

. . . services for repairs or renovations of
tangible personal property or services to install tangible personal property in connection with other tangible personal property. (U.C.A. 59-12-103(1g))

As
we read the law, rule and definitions of "repair," "renovate," install" and calibrate;" we understand that:

1. Charges for materials and services for
   repairs are taxable.

2. Charges for maintenance materials are
   taxable.

3. Charges for maintenance services are not
   taxable when those charges are separated from materials charges and identified as services.

4. The terms "repair" and
   "renovate" indicate prior state of dysfunction. We infer that a service rendered to tangible personal property must be in the nature of correcting some dysfunction in order to be a repair. We infer further that dysfunction or a state of obsolescence must be present to constitute a renovation.

5.
The term "install" means to set up for use or service.

Item
#1

We
recognize that charges for materials and labor associated with the repair of these devices are taxable.

Items
#2 and #3.

The
calibration and adjustments can be characterized as maintenance, much like the example provided in Tax Commission Rule R865-19-78S D.

Charges
made for lubrication of motor vehicles are taxable as sales of tangible personal property unless the vendor separates the charges for materials and services. (R865-19-78S D.)

The
calibration and adjustments occur on a regularly scheduled basis as does (or should) changing automotive oil. Each service is expected for the continuing reliable operation of the device serviced. In each case, the charges for labor should not be subject to the tax, while the tangible inputs should be taxed.

Item
#4

To
repair an article indicates that a prior state of dysfunction or inability to function properly existed. A reparation restores an article to working order or satisfactory performance. "Fix" and "mend" have meanings similar to that of "repair". Merriam-Webster defines "repair" as to restore by replacing a part or putting together what is torn or broken "FIX." (Page 998).

Renovation
indicates a prior state of obsolescence, diminished capacity or worth. Merriam Webster defines "renovate" as follows, "to restore to a former better state as by cleaning, repairing, or rebuilding."

Calibration
is testing, verifying, determining accuracy. In the case of these services, the calibration may be followed by adjustments and fine-tunings to reconcile the readings. These adjustments are expected to be necessary for these as any other sophisticated measuring device. They are expected to the point that simple, easily accessible adjustment wheels, dials & knobs are incorporated in the design of the instruments. When these adjustment devices are able to compensate for measurement discrepancies the device is considered functional even with the high degree of accuracy required of them.

One
tunes his radio and adjusts its antenna to optimize the signal received. A Highway Patrol trooper calibrates his radar gun by tapping a tuning fork and holding it in front of the cone to see if the display registers 55, and turns a knob or dial until 55 shows on the display. Would a prudent man consider these adjustments to be repairs? Our opinion is no. Calibration with its accompanying adjustments does not constitute a repair.

An
adjustment to tune an instrument does not indicate dysfunction or failure to meet accuracy requirements. It is a fact recognized by manufacturers, metrology technicians and knowledgeable users of these devices that ambient temperatures and humidity, even barometric pressure can affect the readings given by the devices. People experienced in the use and performance of these instruments also recognize that the devices used for calibration are highly accurate and with proper use more reliable than the instruments themselves. Therefore, the instrument is reconciled to the calibration device. This practice ensures that the instrument continues to perform within accepted accuracy tolerances that are not as stringent as the calibration tolerances. It would be wrong to view the event of a calibration adjustment in and of itself as an indication that the instrument was faulty or inaccurate before the adjustment was made.

Item
#5

The
calibration service is performed on equipment already in place and functioning. When the machines are purchased, the purchase includes initial calibration and certification.

Request

Our
conclusion is that the calibration services are not subject to sales & use taxes. The foregoing argument provides our rationale for this conclusion.

We
respectfully ask the Tax Commission to determine that the purchase of instrument calibration services are not subject to the sales and use taxes imposed by U.C.A. 59-12-103(1g).

One
final request, our client is expecting our full report on their ad valorem tax situation by June 1 for their planning purposes. I realize that you get requests to expedite so often that they have become the norm rather than the exception. But, could you please put this one at or near the top of the expedite pile?

Thank
You.

Sincerely,

XXXXX