97-006

Response February 28, 1997

January 23, 1997

Dear Irene

As per my phone conversation with NAME. I am attaching a breakdown for a project which we are currently bidding on. The breakdown shows our costs for improvement to real property, tangible personal property and delivery, freight & labor. Will you please fill in the sales tax computation for each category as applicable?

The project as attached has a bid closing date on January 28, 1997, 2:00 p.m. As a sub- contractor and general contractor, the information we are requesting is very critical for our company to remain a viable business and tax payer in the state of Utah. We have previously requested the same on May 4, 1995 at which time NAME refused to comply with our request.

Thanks, in advance for your consideration and concern in providing written clarification for our use.

Sincerely,

NAME

February 28, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion - Sales tax on items sold and installed in conjunction with real property.

Dear NAME,

We have received your request for tax guidance concerning the application of sales tax to your company’s construction projects. From discussions with our staff, we understand that you enter into a variety of contracts. Your contracts may require you to install commercial kitchen fixtures or appliances, and may also require you to supply items of tangible personal property for use in operation of the kitchen. Depending upon the project, your contract may be with an exempt customer (such as a public school) or with a non-exempt customer. On that basis, we offer the following guidance.

Purchases of items that are converted to real property upon installation.

When an item of tangible personal property is converted to real property upon installation, the contractor is liable for the sales tax. As a general rule, construction materials and real property fixtures are converted to real property when they are installed or used to construct buildings or improvements on real property. Construction materials are bricks, lumbers, nails, cement and other items that typically lose their separate identity as personal property once incorporated into real property. Real property fixtures are items of tangible personal property such as built-in ovens, built-in appliances, and sinks. Although these items do not lose their separate identity upon installation, they become an integral, permanent, and perhaps necessary, part of the real property improvement.

The contractor who sells and installs construction materials and real property fixtures, as the final consumer of the items as tangible personal property, is liable for the tax. If your company sells and installs construction materials or real property fixtures that are converted to real property, your company is liable for the sales tax on its purchase of these items. If you haven’t paid sales tax on these items at the time of purchase, you must accrue and remit the tax directly to the Tax Commission.

Items that are unattached and items that are attached merely for stability, convenience or any other temporary purpose are considered tangible personal property. If, as a condition of your contracts, you supply your customer with free-standing or moveable kitchen or food service equipment that is not converted to real property upon installation, you must collect sales tax from your customer on these items unless the customer is exempt from sales tax. Charges for labor to install these items are not taxable if the items are installed in conjunction with (affixed to) real property and if the charges are separately stated on the invoice or receipt.

Regarding your contracts with exempt organizations such as schools (K-12) and qualified religious or charitable organizations, you may purchase construction materials and real property fixtures tax free on behalf of your exempt customer. You must give your supplier an exemption certificate that identifies your authority to make tax free purchases on behalf of the exempt entity. The materials must be identified to the contract, segregated and actually converted to real property owned by the exempt organization. You may not purchase items of tangible personal property that are not converted to real property tax free on behalf of the school or exempt organization. However, you may purchase the items tax free for resale by giving your supplier an exemption certificate. The school or exempt entity may purchase them tax free from you by giving you an exemption certificate.

To qualify for the exemption on transportation charges, delivery must be by common carrier, and it must take place after passage of title. (See Utah Administrative Rule R865-19S-71, enclosed.) As an example of taxable delivery charge, assume that your company purchases restaurant equipment from a vendor who delivers the items to your work site using its own delivery vehicle. The delivery charge, if any, is taxable as a part of the sales price.

Please let us know if you have additional questions.

For the Commission,

Joe B. Pacheco,

Commissioner