Does an out-of-state manufacturer with no Utah offices or employees have Utah sales tax nexus just because it hires an independent contractor to install and service its products in Utah, and how are warranty repairs and installation taxed?

Plain-English summary

An out-of-state manufacturer sold products mainly through independent distributors and construction contractors, with no Utah offices, warehouses, inventory, sales personnel, or regular in-state solicitation -- it mailed catalogs to Utah distributors and shipped everything F.O.B. shipping point via common carrier. On rare occasions it took orders directly from end users. Distributors and contractors gave the manufacturer resale certificates; when a contractor incorporated the product into real property, though, the manufacturer treated the contractor as a vendor/retailer rather than a reseller, since the product retained its identity as tangible personal property. In some cases the distributor/contractor installed the product; in most cases the manufacturer arranged an independent third-party installer, who billed the manufacturer directly. The product carried a 15-month manufacturer's warranty; end users called the manufacturer directly for problems, and the manufacturer would ship free replacement parts, dispatch an independent repairman (who billed the manufacturer, not the customer) to evaluate and fix covered problems, and replace parts the repairman used -- all at no charge to the customer if covered under warranty. The manufacturer asked six questions about its collection obligations, nexus, installation taxability, warranty parts/labor taxability, and contractor sales.

The independent service contractor's presence created nexus for the manufacturer. Utah requires a vendor to collect and remit sales/use tax if it has or utilizes an office, warehouse, or other place of business in Utah; maintains a stock of goods; regularly delivers property other than by common carrier/mail; OR regularly engages in any activity connected with leasing or SERVICING property located in Utah (§ 59-12-107(1)(a)). The Commission found the manufacturer met that last test: even though the installer/repairman was legally an independent third party working for many other clients, that contractor was operating under contract to and on behalf of the manufacturer to service its equipment in Utah -- and "the agent's nexus creates nexus for" the manufacturer. Because of this, the manufacturer has Utah nexus and must collect and remit tax on its Utah sales, and may also be subject to Utah's corporate income tax.

Answering the six questions:

1. Because the manufacturer has nexus, it must collect and remit use tax on direct sales to Utah end users. When it sells to a distributor/reseller for resale, that third party (not the manufacturer) is the vendor responsible for collecting tax on its own resale -- the manufacturer should obtain an exemption certificate from that reseller.
2. Yes, the manufacturer has Utah sales tax nexus (via the service agent), and may separately be subject to Utah corporate income tax.
3. Installation labor's taxability depends on what's being installed onto: if the item is installed IN CONNECTION WITH real property, the installation labor is exempt -- even if the item doesn't technically get legally converted into real property itself. If the item is not installed in connection with real property, the installation charge is taxable, and must be separately stated on the invoice to be excluded when nontaxable. The vendor is responsible for collecting tax on any taxable installation.
4. Warranty replacement parts are not separately taxable: a warranty is treated as a prepayment for parts used in warranty service, and services (here, providing free replacement parts) given to the customer at no charge aren't taxed. (An extended warranty CONTRACT purchased separately, however, is taxable at time of sale -- though that wasn't this manufacturer's fact pattern, since it gave parts to the service provider at no charge with no transaction to tax.)
5. Warranty repair labor is likewise untaxed when there's no additional charge to the customer for the repair.
6. When the manufacturer sells to a contractor who incorporates the product into real property, the contractor is the final consumer (not a reseller), so that sale IS taxable, and because the manufacturer has Utah nexus, it is responsible for collecting and remitting that tax.

What this means for you

Out-of-state manufacturers and sellers using independent local contractors

Hiring even a legally independent, non-exclusive local contractor to install or service your products in a state can create sales tax nexus there, based on that contractor's activity alone -- having no offices, inventory, or employees in the state does not protect you if you regularly use an in-state agent for installation or service work.

Manufacturers handling warranty service programs

Structure warranty parts and labor as genuinely free-of-charge to the end customer (a "prepayment" baked into the original purchase price) to keep them untaxed -- but be aware that a separately SOLD extended warranty contract is taxable at the time you sell it.

Manufacturers selling both to resellers and to installing contractors

Track the difference carefully: a sale to a distributor who resells the item unchanged is a tax-free wholesale transaction (with a resale certificate), but a sale to a contractor who installs/incorporates the item into real property makes that contractor the FINAL CONSUMER -- meaning the sale to them is taxable, not exempt as a resale.

Common questions

Q: Can hiring an independent local contractor create sales tax nexus in a state where I have no offices or employees?
A: Yes, according to this ruling -- if you regularly use that contractor to install or service your products in the state, their activity there creates nexus for you, even though they're legally independent and mostly work for other companies.

Q: Is installation labor taxable in Utah?
A: It depends on what's being installed onto. Installation connected with real property is exempt labor; installation not connected with real property is taxable, and must be separately stated to exclude it from tax.

Q: Are free warranty replacement parts and repair labor taxable?
A: No, when provided to the customer at no additional charge -- a warranty is treated as a prepayment, and free services aren't taxed. A separately purchased extended warranty contract, however, is taxable when sold.

Q: If I sell to a contractor who installs my product into real property, is that a tax-free resale?
A: No. The contractor is treated as the final consumer of the property, not a reseller, so that sale is taxable.

Q: Does this ruling apply to my manufacturing or distribution business?
A: No. It binds the Commission only for the requesting taxpayer and the facts described, and can't be relied on by another taxpayer, though it illustrates how the Commission analyzes agent-created nexus and related installation/warranty taxability questions.

Citations and references

Statutes:

• § 59-12-107(1)(a)(i), (ii), (iv), (v) (vendor nexus tests, including servicing property in the state)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-004.pdf

Original ruling text

97-004

Response
January 16, 1997

December 19, 1996

Re:
Request for Ruling

Dear
Mr. XXXXX:

Company
A is writing on behalf of one of our clients who wishes to remain unnamed at
this time. The client wants to determine what, if any, obligations it has
for collecting Utah sales and use tax. The facts concerning our client's
activities follows. We would appreciate a written response based on the facts
as presented below.

FACTS:

Company
A is a manufacturer located in State. Company A has no physical locations such
as offices or warehouses in Utah; it maintains no inventory or stock of goods
in Utah; it does not lease tangible personal property in Utah; it does not
deliver its goods into Utah other than by common carrier; it has no personnel
in Utah, and it does not regularly solicit orders from customers in Utah
through a sales force. __ Company A
does__ send product catalogs by U.S. mail to independent distributors located
in Utah.

Company
A conducts its business largely through independent distributors and
construction contractors. It is important to note here that the independent
distributors and construction contractors work with multiple parties and that
Company A represents a very small portion of their business. On rare occasions, Company A will receive an
order directly from the end user or consumer.
Company A is contacted in Texas or at one of its regional offices (not
located in Utah) where orders are placed with Company A for its product. Company A invoices the distributor or
construction contractor directly for their orders. In this situation, construction contractors would be viewed as
vendors/retailers because Company A's product does not become incorporated into
real property. It retains its identity
as tangible personal property. Company
A will invoice the end user or customer only if it is working directly with
them. As indicated above, this occurs infrequently. Company A accepts valid resale certificates from the distributors
and construction contractors. Company A
ships its product directly to the end user or final consumer's location via
common carrier in all cases. The shipping terms are F.O.B. shipping point,
XXXXX. In some cases, the distributor or construction contractor is responsible
for installing Company A's product. In
most cases, Company A will arrange for an independent third party to install
its product. The installer will bill
Company A for its services.

Company
A's product comes with a manufacturer's warranty for a period of 15 months from
the shipping date or 12 months from the start up date, whichever occurs first.
The end user or final consumer in all cases will call Company A directly if
they are experiencing a problem with Company A's product. Company A's Product Support Group works with
the customer over the telephone to identify the problem. If the problem is identified, Company A will
send the required replacement part to the customer. The customer is required to send the broken part back to Company
A in STATE. If the customer does not
know how to install the replacement part, Company A will have an independent
third party install the replacement part.
The installer will bill Company A for its services. Company A will send an independent third
party to evaluate the problem if Company A is unable to help the customer over
the telephone. Once the independent third party has determined the problem, it
will call Company A to determine if the broken part is covered under the
warranty. If the item is covered under
warranty, the independent third party will repair the broken part and bill
Company A for its services. Company A
will also replace any parts used by the repairman in completing their
service. If the item is not covered
under the warranty, the customer will have to make its own arrangements for
repair. Please note that Company A
represents a very small portion of business for the independent installers and
repairmen.

QUESTION
1:

Would
Company A be responsible for collecting sales or use tax from its sales to the
end user or consumer when the end user or consumer orders directly from Company
A?

QUESTION
2:

Does
Company A have nexus with the State of Utah for sales and use tax such that it
would be required to collect use taxes?

QUESTION
3:

Are
installation services taxable in Utah? If yes, who is responsible for the tax
in this situation?

QUESTION
4:

Are
repair parts consumed by a repairman under a manufacturer's original warranty
subject to Utah use tax? If yes, who is responsible for the tax in this
situation?

QUESTION
5:

Is
repair labor performed by a repairman under a manufacturer's original warranty
subject to Utah sales or use tax? If yes, who is responsible for the tax in
this situation?

QUESTION
6:

Would
Company A be responsible for collecting use tax from its sales to construction
contractors if Company A's product were incorporated into real property or
would the construction contractor be liable for accruing and remitting the use
tax?

Please
provide explanations and the corresponding statutory support for your
conclusions. If you have any questions, please call me at ######. Your quick
response is greatly appreciated. Thank you.

Sincerely,

XXXXX

Director,
Research and Planning

January
16, 1997

NAME

ADDRESS

CITY,
ST, ZIP

Advisory
Opinion - Sales/use tax nexus

Dear
XXXXX,

We have received your request for sales
and use tax information pertaining to a manufacturer who sells its products to
customers in Utah. The answers to the
questions posed in your letter depend upon whether Company A has nexus in Utah,
so we begin by describing our nexus requirements.

Sales or use tax is a tax on the
storage, use or consumption of tangible personal property in Utah. When tangible personal property is sold in
interstate commerce for use or consumption in this state, the sale is subject
to Utah use tax. Although use tax is
the liability of the purchaser, the retail vendor is responsible for collecting
and remitting the tax to the State of Utah if the vendor has nexus in
Utah. Utah Code Section 59-12-107 (5)
states, in pertinent part:

(1) (a) Each vendor shall pay or collect and remit the
sales and use taxes imposed by this chapter if within this state the vendor:

(i) has or
utilizes an office, distribution house, sales house, warehouse, service
enterprise, or other place of business;

(ii) maintains a stock of goods;

. . .

(iv) regularly
engages in the delivery of property in this state other than by common carrier
or United States mail; or

(v) regularly
engages in any activity in connection with the leasing or servicing of property
located within this state.

Company A has nexus in Utah under
(v) above because Company A uses an in-state agent to install or service the
equipment. Although you describe the
installer or service provider as an independent third party, that party is
operating under contract to and on behalf of Company A. The agent�s nexus creates nexus for Company
A. Therefore, Company A must collect
and remit tax on its taxable sales in Utah.

In response to your questions, we
offer the following:

1. Because Company A has nexus in Utah, it
   must collect and remit use tax on its sales to end users in Utah. When Company A sells to a third party for
   resale, the third party is considered the vendor. Company A must request an exemption certificate from the third
   party. The third party vendor must
   collect and remit tax on its resale of the item.

2. Company A has nexus for sales tax
   purposes. Incidentally, Company A may
   also be subject to Utah�s corporate income tax provisions. If you have questions about corporate tax, please
   let us know.

3. Installation may or may not be taxable
   in Utah, depending upon the nature of the installation. When tangible personal property is installed
   in connection with real property, the installation labor is not taxable. In other words, if the item is affixed to
   real property, the installation labor is exempt, even if the item is not
   technically converted to real property.
   If the item is not installed in connection with real property,
   installation charges are taxable. Non-
   taxable charges must be separately stated on the invoice or receipt.

The vendor is responsible for
collecting and remitting the tax on taxable installations.

4. With regard to parts replaced under
   warranty, a warranty is considered a prepayment for any parts used for warranty
   service. Services provided to the
   customer at no charge are not taxable. However, if the customer purchases an
   extended warranty contract, the charge for the warranty contract is taxable at
   the time of sale.

You have described a situation in
which Company A provides parts to the service provider at no charge. There is no charge on this transaction
between Company A and the service provider.

5. Regarding labor to make repairs under
   warranty, we assume that there is no additional charge to the customer. In that case, there is no tax on the repair
   labor.

6. If Company A sells an item to a
   contractor who, in turn, incorporates it into real property, the contractor is
   considered the final consumer, and the transaction is not a resale
   transaction. The transaction between
   Company A and the contractor is taxable.
   Because Company A has nexus in Utah, it is responsible for collecting
   and remitting the tax.

Enclosed is a copy of a publication
describing nexus requirements and a form that Company A can use to apply for a
Utah sales tax license. Please let us
know if you have additional questions.

For
the Commission,

XXXXX,

Commissioner