Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 315.0606


315.0606 Modifying a Machine. A taxpayer has a contract to modify an offset type printer to operate in the manner for which it was designed. The machine malfunctioned from the day the taxpayer's customer received it. The taxpayer has been retained to perfect the logic of the pick and place system. In order to accomplish this, the taxpayer will need to spend considerable time learning about the functions the machine was designed to perform and then determine how to correct the machine so that it will operate as originally intended. The cost to repair the machine will be approximately one third of the original cost of the machine itself. About 80 to 90 percent of the labor will involve reworking the existing hardware. Approximately $10,000 will be spent on the project, with $1,000 or approximately 10 percent of the repair, attributable to replacement parts.

Based on the above information, any fabrication or manufacturing relative to the printer is to refit a used piece of equipment for the use it was originally intended. Accordingly, the taxpayer will be performing repairs within the meaning of Regulation 1546. As set forth in Regulation 1546, the taxpayer is regarded as the retailer of the parts and materials it furnishes in connection with its repairs if the retail value of that property is more than 10 percent of the taxpayer's total charge, or if the charge for the property is separately stated to the customer. When the repairer fabricates a part, the charge for the fabrication is part of the retail value of the part, and is not regarded as repair labor.

When the retail value of the parts and materials furnished (including any fabrication of parts) is 10 percent or less of the taxpayer's total charge and the taxpayer does not separately state a charge for that property, the taxpayer is considered the consumer of the parts and materials. When the repairer is regarded as consuming the parts, sales or use tax applies to the sales price of such property to the repairer. Whether a consumer or a retailer of parts, the repair charges for repair labor are not taxable. The taxpayer's charges for repair labor are not taxable. 6/14/95.