PS 94(7)
Fabrication and Installation of
Stock and Custom Cabinets
PURPOSE: There are a number of statutory provisions in the Sales and Use Taxes Act that affect persons who fabricate and/or install stock and custom cabinets. This Policy Statement is intended to provide guidance to cabinet fabricators and installers and to their customers as to the proper tax treatment of their purchases and sales.
EFFECTIVE DATE: Because this Policy Statement reiterates (rather than changes) the Department's position, it is applicable to all open periods.
STATUTORY AUTHORITY: Conn. Gen. Stat. § 12-407(2)(a); Conn. Gen. Stat. § 12-407(2)(i)(I); Conn. Gen. Stat. §§ 12-410 and 12-411; Conn. Gen. Stat. § 12-412(18) and (34); Conn. Gen. Stat. § 12-412i.
DEFINITIONS: The following definitions apply for purposes of this Policy Statement:
"Stock cabinets" are complete units of standard equipment which require no further fabrication but simply installation, assembling, applying or connecting services. Stock cabinets need little, if any, adjustment to fit into a customer's premises. Stock cabinets are generally made in large quantities in a number of styles.
"Custom cabinets" are units that are made to order, according to the specifications of a particular customer's needs and measurements taken at that customer's premises.
"Predominant" means more than 50 percent.
PURCHASES OF MATERIALS FABRICATED INTO STOCK CABINETS: Because Conn. Gen. Stat. § 12-412(18) exempts sales of materials "which become an ingredient or component part of tangible personal property to be sold," the materials that are fabricated into stock cabinets may be purchased by the fabricator without payment of tax. When stock cabinets are sold, a taxable sale of tangible personal property occurs.
INSTALLATION OF STOCK CABINETS: Conn. Gen. Stat. § 12-407(8)(e) and (9)(e) exclude from the measure of sales and use taxes "the amount charged for labor rendered in installing or applying the property sold, provided such charge is separately stated and exclusive of such charge for any service rendered within the purview of [Conn. Gen. Stat. § 12-407(2)(i)(I)]." Subsection (c) of Conn. Agencies Regs. § 12-426-18 excludes from the rules therein governing purchases and sales by contractors the installation of stock cabinets by a retailer (whether or not also a contractor) who sells a "complete unit of standard equipment" (such as a stock cabinet) in the same manner as other retailers of such equipment and installs such standard equipment, "where no further fabrication is required but simply installation, assembly, applying or connecting services." The charges for such installations are therefore treated in the manner set forth in Conn. Gen. Stat. §12-407(8)(e) and (9)(e), and, except as provided below, are excluded from tax if separately stated.
However, if the installation of cabinets is considered a service to industrial, commercial or income-producing real property under Conn. Gen. Stat. § 12-407(2)(i)(I), such as when a contractor (or subcontractor) installs stock cabinets in the course of performing renovations to an employee cafeteria or coffee room in an office building, the charges for such installation may not be excluded under subdivision (e) of Conn. Gen. Stat. §12-407(8) and (9) and are taxable.
PURCHASES OF MATERIALS BY CONTRACTORS WHO BOTH FABRICATE AND INSTALL CUSTOM CABINETS: Persons who both fabricate and install custom cabinets for a customer are considered to be contractors under Conn. Agencies Regs. § 12-426-18(a). Contractors are in most instances the consumers of materials used in providing their services. Contractors must pay tax on their purchase of materials used in fulfilling the following types of contracts:
Lump sum or fixed fee contracts providing for a single price for the total work to be performed on a construction project. Such contracts are generally not subject to adjustment because of higher than anticipated costs incurred by the contractor.
EXAMPLE: Contractor agrees to make and install custom cabinets in Customer's house for $5000. Contractor cannot charge extra even if more materials are used than expected or the job takes longer to complete than expected. Contractor cannot buy materials on a resale basis because Contractor and Customer have entered into a lump sum or fixed fee contract.
Cost-plus contracts: providing for reimbursement of allowable or otherwise defined costs incurred plus a fee representing profit. Cost-plus contracts usually require that the contractor use his best efforts to accomplish the scope of the work within a specified time and a stated dollar limitation.
EXAMPLE: Contractor agrees to make and install custom cabinets in Customer's house. The contract calls for Contractor to be reimbursed by Customer for the cost of materials used and labor costs plus 15% with the work to be performed by a specific date and a maximum number of hours allocated to labor. Contractor cannot purchase materials on a resale basis because Contractor and Customer have entered into a cost-plus contract.
Time and material contracts with an upset or guaranteed price which may not be exceeded providing for payments to the contractor on the basis of direct labor hours at fixed hourly rates (that cover the cost of direct labor and indirect expenses and profit) and the cost of materials and other specified costs. Such contracts compensate the contractor's performance on the basis of the effort expended in fulfilling the contract with guaranteed maximum costs.
EXAMPLE: Contractor agrees to make and install custom cabinets in Customer's house and to be reimbursed at a rate of $75 per hour plus the cost of materials, with the entire cost to Customer for time and materials not to exceed $2500. Contractor may not purchase the materials or supplies using a resale certificate because Contractor and Customer have entered into a time and materials contract with an upset or guaranteed price which may not be exceeded.
Even when purchases of materials incorporated into custom cabinets are made outside Connecticut, they are subject to the use tax, measured by the sales price paid by the contractor for the materials, if the cabinets are ultimately installed by their fabricator in Connecticut. See Conn. Gen. Stat. § 12-411(1).
If a contract for the fabrication and installation of custom cabinets is taxable as a service to existing industrial, commercial or income-producing real property, such that a contractor who both fabricates and installs the cabinets paid sales or use tax upon the purchase of materials used to fabricate the cabinets, the bill to the property owner must either (i) separately state the cost of the materials, expressly noting that tax has already been paid on such items, or (ii) state only the total charge, with the words "tax included," and the contractor must maintain records showing that tax was calculated on the total charge of the contract less the cost of the materials and the tax paid thereon.
There is an exception to this rule for contractors who are also retailers. Under Conn. Agencies Regs. § 12-426-18(b), a contractor may act as a retailer of materials, and may purchase those materials on a resale basis, in two extremely limited situations, only one of which is likely to be applicable to contractors fabricating and installing custom cabinets. This exception to the general rules of Conn. Agencies Regs. § 12-426-18(b) involves a contractor who is engaged as a permittee in the business of selling at retail materials used in the fabrication of custom cabinets. In order to be considered engaged as a permittee in the business of selling materials at retail, the contractor must be a person required to be issued a seller's permit for a place of business (e.g., a lumberyard) at which sales of such materials are made. The contractor will be held strictly accountable for the payment of use tax on any materials that are removed from inventory and are not sold at retail but, instead, are used in fulfilling a lump sum contract, a cost-plus contract or a time and material contract with an upset or a guaranteed price which may not be exceeded.
PURCHASES OF MATERIALS BY PERSONS WHO FABRICATE BUT DO NOT INSTALL CUSTOM CABINETS: If a subcontractor fabricates custom cabinets for a contractor who is required under a contract to install the cabinets, the subcontractor is selling tangible personal property and purchases materials in the same way as a fabricator of stock cabinets. Therefore, where such a subcontractor only fabricates the cabinets and does not install them, the subcontractor may purchase the materials used to fabricate the cabinets without payment of tax, under the exemption in Conn. Gen. Stat. § 12-412(18) for ingredient or component parts of tangible personal property to be sold. However, tax is due upon the sale of the fabricated custom cabinets by the subcontractor to the contractor.
When a fabricator of custom cabinets sometimes also installs them, such fabricator must follow the rules for contractors (discussed above), paying tax upon the purchase of materials but not charging tax to the customer on such materials. Such a fabricator may claim a refund of tax paid on the materials incorporated into any custom cabinets that the fabricator sells without installation.
ELIGIBILITY OF CABINET FABRICATORS FOR MANUFACTURING EXEMPTIONS: Fabricators of stock cabinets, and fabricators of custom cabinets who will not also install the cabinets, may be able to qualify for the exemptions for materials (other than ingredients or component parts of such cabinets, which are fully exempt (see above)), tools and fuel and for machinery under Conn. Gen. Stat. § 12-412(18), Conn. Gen. Stat. § 12-412(34) or Conn. Gen. Stat. § 12-412i (the Manufacturing Recovery Act of 1992) if such fabricators meet the requirements set forth in the respective statutes, in Conn. Agencies Regs. §§ 12-412(18)-1 and 12-412(34)-1, or in Special Notice 93(1.1). However, all three of the manufacturing exemptions require that the item being produced be tangible personal property. A fabricator of custom cabinets who also installs the cabinets is engaged in improving real property, not in the production of tangible personal property. Thus, for example, when a person fabricates custom cabinets under a contract to remodel a kitchen, and installs the cabinets fabricated under such contract, such person is not eligible for any of the manufacturing exemptions.
A fabricator of custom cabinets who installs the cabinets in some, but not in all, jobs can qualify for the manufacturing exemptions if the predominant use of the fabricator's establishment is to produce finished products to be sold, rather than to produce custom cabinets to be installed by the fabricator. The predominant use of the fabricator's establishment will be determined with criteria such as those listed for the definitions of "industrial plant" in Conn. Agencies Regs. § 12-412(18)-1(e). In addition, if a fabricator of custom cabinets who in some cases also installs the cabinets uses the same items of machinery, equipment or tools both to fabricate and install cabinets, only items that are used the predominant amount of time in fabrication, as opposed to installation, can qualify for the manufacturing exemptions.
EFFECT ON OTHER DOCUMENTS: None affected.
EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current Department policy or practice affecting the liability of taxpayers. Unlike a Letter Ruling, a Policy Statement does not apply a policy or practice to a specific set of facts but it may be referred to for general guidance by taxpayers. Unlike a Special Notice, it does not announce a new policy or practice in response to changes in state or federal laws or regulations or to judicial decisions.
PS 94(7)
Sales and use taxes
Issued: 12/12/94