97-067
Response
October 29, 1997
Request
Advisory
Opinion- Sales tax base on items purchased for the purpose of fabricating
property
that will be installed and converted
to real property.
Dear
NAME,
Rod Marrelli has informed us that he
had a conversation with you concerning the sales tax treatment of fabrication
labor for items that are converted to real property. I am issuing this advisory opinion in response to your questions.
As I understand your discussion with
Mr. Marrelli, you outlined three scenarios as follows:
(1) Under
terms of a contract, a contractor manufactures or fabricates some of the
construction materials used in the project and also installs and converts the
materials to real property.
(2)
A manufacturer fabricates or
manufactures construction materials and sells them to the real property contractor,
who installs and converts the materials to real property.
(3) A general contractor purchases
fabricated construction materials directly from the manufacturer or
fabricator. The general contractor
enters a separate contract with another contractor to install and convert the
materials to real property.
As you know, the real property
contractor is liable for sales or use tax on his purchase of any item that he
converts to real property because he is the final consumer of that item in its
state as tangible personal property.
Therefore, under scenario 1 above, the contractor pays sales or use tax
on all construction materials that he purchases and converts to real
property. That includes the all items
that he purchases to fabricate construction materials that he will convert to
real property. The tax base is his
purchase price.
In the second scenario, the
manufacturer fabricates an item and sells that item to the real property
contractor. The manufacturer is
entitled to purchase the raw materials used to fabricate the item tax free
under Utah Code section 59-12-104(27).
The transaction between the manufacturer and the real property
contractor is taxable. The tax base is
the contractor’s purchase price.
In the third scenario, the manufacturer
fabricates an item and sells that item to the real property general
contractor. Under a separate contract,
the general contractor hires a third party to install and convert the item to
real property. As in the previous
scenario, the manufacturer is entitled to purchase the raw materials used to
fabricate the item tax free under Utah Code section 59-12-104(27). The transaction between the manufacturer and
the real property contractor is taxable.
The tax base is the contractor’s purchase price. Because charges for labor to install
tangible personal property in connection with real property are not taxable,
the amount paid by the general contractor to the installer is not taxable.
With that background, we move to
your main concern. The real property
contractor who manufactures or fabricates its own construction materials
(scenario 1) may have a sales tax
advantage when it bids against contractors who must purchase fabricated
construction materials from another party (scenarios 2 and 3) by avoiding the
cost of fabrication labor and other markups.
However, the real property contractor who also operates as a
manufacturer or fabricator presumably has additional overhead and taxes
associated with its manufacturing operation, and that overhead will be factored
into his bids. For that reason it is
difficult to determine the extent of this contractor’s overall advantage in the
bid process.
With regard to the sales tax issue,
our Auditing Division reviewed the approaches taken by some other states. They found that Arizona, Hawaii, New Mexico
and Washington impose sales tax on the entire real property contract, with
certain deductions. Nevada’s law is
similar to Utah’s in that sales tax applies only to the cost of materials under
scenario 1. The cost of fabrication
labor under scenarios 2 and 3 is taxable.
However, the Nevada law imposes tax on producing and fabricating
tangible personal property even if the consumer furnishes the materials. That is, if the contractor purchases the raw
materials, then gives the materials to an outside party who manufacturers the
fabricated item, the cost of the outside labor is taxable.
If you have other questions, please
let me know.
For
the Commission,
Joe
B. Pacheco,
Commissioner
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