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.
Based
upon 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.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
notice of appeal rights is attached.
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.
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. 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.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
notice of appeal rights is attached.
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