Approved: April 15, 1993
Amended: September 17, 2002

USE TAX BASE OF TANGIBLE PERSONAL PROPERTY AFFIXED
TO REAL ESTATE BY A MANUFACTURER/CONTRACTOR

(Replaces Revenue Administrative Bulletin 1990-36)

RAB 1993-05. This bulletin explains the use tax liability of contractors who manufacture, fabricate or assemble tangible personal property before affixing it to real estate. It restates the discussion contained in Revenue Administrative Bulletin 1990-36 (RAB-90-36). The only change made from RAB-90-36 is the addition of a definition of "cost of materials" and a revision of Example 5. The revision addresses confusion that has arisen over the meaning of the example as originally written.

LAW
P.A. 506 of 1988 [MCL 205.92(f); MSA 7.555(2)(f)] which by its terms is to be considered effective April 1, 1983, essentially repealed 1982 legislation defining the use tax base of a manufacturer/contractor. The 1982 statutory language also had an effective date of April 1, 1983.

Expiration of Statutory Refund Procedure
1988 P.A. 376 provided a refund procedure for manufacturer/contractors who paid tax pursuant to the original 1982 legislation. Act 376 also provided that the refund procedure would expire on March 31, 1989. That refund procedure is, therefore, no longer available to manufacturers/contractors.

Use Tax Base
The Department of Treasury Sales and Use Tax Rule, 1979 AC, R 205.71(6), provides that when a manufacturer produces and affixes tangible personal property to the real estate of others, the manufacturer/contractor shall remit use tax on the inventory value of the property at the time the property is converted to the contract. This value shall include all costs of manufacturing, fabricating, and processing.

1988 P.A. 506 establishes two periods and methods for purposes of calculating a use tax base for property affixed by a manufacturer/contractor to the real estate of others:

1. For Contracts Entered Into Before April 1, 1989

1. Manufacturer/contractor who maintains an inventory available for sale to others or makes available for sale to others tangible personal property through publication or price list:
    
2. A manufacturer/contractor who maintains an inventory of its product available for sale to others and uses that product on a construction contract will use as its tax base the finished goods inventory value of the property. Likewise, a manufacturer/contractor making available a product for sale as a finished product through a price list or publication must use the finished goods inventory value of the property as the use tax base when it affixes the product to the real estate of another. This manufacturer/contractor would be entitled to an industrial processing exemption, as allowed by law, to manufacture the tangible personal property.
    
3. Manufacturer/contractor who does not maintain an inventory available for sale to others or does not make available for sale to others tangible personal property through publication or price list:
    
4. The use tax base of a manufacturer/contractor affixing property to the real estate of another is the cost of materials. This manufacturer/contractor is not entitled to an industrial processing exemption to fabricate or assemble the tangible personal property.

2. For Contracts Entered Into After March 31, 1989

1. Manufacturer/contractor who maintains an inventory available for sale to others or makes available tangible personal property for sale to others through publication or price list will have a tax base identical to that of a manufacturer/contractor entering into a contract prior to April 1, 1989. (See l.A. above.)
    
2. Manufacturer/contractor who does not maintain an inventory available for sale to others or does not make available for sale to others tangible personal property through publication or price list:

Manufacturers who make their products available for sale to others may claim exemption from sales and use tax on property used or consumed in industrial processing. Such manufacturers are entitled to an industrial processing exemption on property used or consumed when transforming, altering, or modifying tangible personal property by changing the form, composition, or character of the property for ultimate sale at retail to others. If the product is available for sale to others, the exemption applies even if the manufacturer/contractor removes the product from inventory and affixes it to the real estate of another.

However, property used or consumed in industrial processing does not include tangible personal property permanently affixed and becoming a structural part of real estate; office furniture, office supplies, and administrative office equipment; or vehicles licensed and titled for use on public highways. [MCL 205.54a(g)(i); MSA 7.525(g)(i) and MCL 205.94(g)(1)(i); MSA 7.555(4)(g)(1)(i). See also Department of Treasury Specific Sales and Use Tax Rule 1979 AC, R 205.90.]

Whether or not an industrial processing exemption is claimed, the manufacturer/ contractor must pay sales tax on the retail price of products sold at retail. When the product is withdrawn from inventory and affixed to the real estate of another, the manufacturer/contractor must pay use tax on finished goods inventory value of the product.

Example:

A siding manufacturer purchases a new press for forming siding, a stake truck for deliveries, a computer printer for invoices, and scaffolding to be used at the job site. The new press would be exempt from use tax under an industrial processing exemption because it is used to change the form of the metal sheets into siding panels, which are placed into an inventory intended for eventual sale to others. The stake truck, printer and scaffolding are all taxable because they are not used in changing the form, composition or character of the metal for ultimate sale at retail. The manufacturer/contractor will owe sales tax on the retail price of any siding sold at retail. The manufacturer/contractor will owe use tax on the finished goods inventory value of any siding withdrawn from inventory and affixed to the real estate of another.

RETAIL SALES
All contractors and manufacturer/contractors who make retail sales of tangible personal property, as opposed to affixing tangible personal property to the realty of others, are liable for sales tax. The sales tax base on these retail sales is the entire gross proceeds received from the transaction. [MCL 205.52; MSA 7.522]

DEFINITIONS
"Manufacture," as defined by MCL 205.92(f); MSA 7.555(2)(f), means to convert or condition tangible personal property by changing the form, composition, quality, combination, or character of the property.

"Fabricate," as defined by MCL 205.92(f); MSA 7.555(2)(f), means to modify or prepare tangible personal property for affixation or assembly.

"Cost of materials" or "materials cost," as used in MCL 205.92(f); MSA 7.555(2)(f), means the invoice price of raw materials and supplies entering into or consumed in connection with the contract, including transportation (e.g., freight-in) or other necessary charges incurred in acquiring possession of the goods). The inclusion of transportation charges follows the "cost" definition under U.S. Treasury Regulation 1.471-3.

"Cost of labor," as used in MCL 205.92(f); MSA 7.555(2)(f), means salaries, wages, fees, bonuses, commissions and other payments. It also includes payroll taxes, allocable cost of employee insurance plans, pension, retirement, profit sharing, workers compensation, unemployment insurance and any other payments made on behalf of or for the benefit of employees or the self-employed. The cost of labor does not include transporting the product to the job site.

"Finished goods inventory value," as used in MCL 205.92(f); MSA 7.555(2)(f), is given the same interpretation as that given inventory valuation in U.S. Treasury Regulation 1.471-11. This regulation adopts a full absorption method of inventory valuation for manufacturers.

In general this valuation method includes all direct production costs defined as components of either direct material or direct labor. The following list illustrates those items included as direct cost:

1. Direct material, including, but not limited to:
   1. Raw material
   2. Supplies entering into the product
   3. Supplies consumed in connection with the product.

2. Direct labor, including, but not limited to:
   1. Basic wages
   2. Overtime wages
   3. Vacation and holiday pay
   4. Sick leave pay
   5. Shift differential
   6. Payroll taxes
   7. Payments to a supplemental unemployment benefit plan
   8. Any other payment incurred on behalf of employees directly engaged in production.

1. Expenses for maintenance
    
2. Repair costs
    
3. Utility costs
    
4. Rent and taxes on buildings and machinery necessary for production.
    
5. Indirect labor and production supervisory wages, including, but not limited to:
    
   1. Basic wages
   2. Overtime wages
   3. Vacation and holiday pay
   4. Sick leave pay
   5. Shift differential
   6. Payroll taxes
   7. Payments to a supplemental unemployment benefit plan
   8. Any other payment incurred on behalf of employees whose labor is incident to and necessary for production or manufacturing operations or processes.

6. Miscellaneous indirect costs such as:

1. Indirect materials and supplies
2. Tools and equipment not capitalized
3. Costs of quality control and inspection
4. Depreciation and depletion incident to production or manufacturing operations or processes (including buildings, machinery, and equipment)
5. Employee benefits
6. Costs attributable to strikes
7. Rework labor
8. Scrap and spoilage
9. Administrative costs of production
10. Officers' salaries incident to production
11. Insurance costs incident to production.

1. Marketing, advertising, or selling expenses
    
2. Other distribution expenses
    
3. Interest
    
4. Research and experimental expenses including engineering and product development
    
5. General and administrative expenses incident to and necessary for the taxpayer's activities taken as a whole rather than to production or manufacturing operations or processes
    
6. Salaries paid to officers attributable to the performance of services which are incident to and necessary for the taxpayer's activities taken as a whole rather than to production or manufacturing operations or processes.

"Publication," as used in MCL 205.92(f); MSA 7.555(2)(f), means printed material the purpose of which is to offer tangible personal property for sale to others. Printed material includes, but is not limited to, a catalog, sales pamphlet, or sales handbill.

"Catalog" means a bound, stitched, sewed, or stapled book or pamphlet, containing a list and description of goods, wares, or merchandise with specific information, with or without a price.

"Sales pamphlet" means a printed work concerning goods, wares, or merchandise, consisting of two or more sheets of paper, stapled, sewed, or stitched, with or without price.

"Sales handbill," also called a circular or dodger, is a printed single sheet of paper intended to be circulated and concerning goods, wares, or merchandise.

EXAMPLES

Finished Goods Inventory Value a Factor in Determining Use Tax Base

Examples 1 through 6 assume that the product being affixed to the real estate of others is withdrawn from the contractor's inventory available for sale to others or made available by publication or price list as a finished product for sale to others. In these situations the use tax base of the property being affixed to realty will be the finished goods inventory value as defined in this bulletin.

1. A custom cabinetmaker enters into a contract to build and install cabinets for an office building. The cabinetmaker maintains a price list for the cabinets even though the cabinetmaker has no ready inventory. The use tax base of the cabinets is the finished goods inventory value as defined in this bulletin, regardless of when the contract was entered into.
    
2. A manufacturer/contractor of heating and cooling devices enters into a contract to install new thermostats for an apartment complex. The manufacturer/contractor takes the thermostats from its inventory available for sale to others for affixation. The use tax base of the thermostats is the finished goods inventory value as defined in this bulletin, regardless of when the contract was entered into.
    
3. A manufacturer/contractor of window glass contracts to supply and install glass in a commercial building. The manufacturer/contractor maintains a sales brochure publication describing the product (with or without a price list). The use tax base of the glass is the finished goods inventory value as defined in this bulletin, regardless of when the contract was entered into.
    
4. Cabinetmaker advertises that the firm sells cabinets. A separate publication advertises specific styles and sizes of cabinets for retail sale. The cabinetmaker also advertises in the publication that he or she will make and sell other sizes and styles of cabinets upon special order. Where the cabinetmaker removes the advertised cabinets from his/her inventory and installs them for a customer, the use tax base of the cabinets is the finished goods inventory value as defined in this bulletin. Where the cabinetmaker makes and installs custom-order cabinets upon special order, the use tax base of these cabinets is also the finished goods inventory value as defined in this bulletin, because the custom cabinets are made available for sale to others by publication.
    
5. A cabinetmaker advertises that the firm sells cabinets. A separate publication advertises kitchen style cabinets for retail sale. Where the cabinetmaker removes the advertised cabinets from his/her inventory and installs them for a customer, the use tax base of the cabinets is the finished goods inventory value as defined in this bulletin.

6. A window manufacturer maintains a price list noting the price per square inch of custom-made windows. The manufacturer installs custom-made windows in an office building. The use tax base for the custom- made windows installed by the manufacturer is the finished goods inventory value as defined in this bulletin. Sales of windows, where the windows are not installed by the manufacturer, are taxable on the full gross proceeds of the sale.

Examples 7 through 22 below assume that the product being affixed to the real estate of others is not from the contractor's inventory available for sale to others or made available by publication or price list as a finished product for sale to others. In these situations finished goods inventory value as defined in this bulletin will not be used in determining the use tax base

7. A custom cabinetmaker entered into a contract before April 1, 1989, to build and install cabinets for an office building. None of the cabinets was available from inventory or through publication or price list. The use tax base of the cabinets is the cost of materials.
    
8. Same facts as in example 7 except the contract was entered into after March 31, 1989. The use tax base of the product is equal to the cost of materials and all off-site direct cost of labor to construct the cabinets. Any direct cost of labor applicable to cutting, assembling or affixing the cabinets to the real estate at the job site are not included in the use tax base.
    
9. A furnace and heating contractor entered into a contract before April 1, 1989, to build and install heating and cooling ducts for an apartment complex. He bent, cut, and formed the sheet metal in the shop before transporting the product to the job site. The use tax base of the ducts is the cost of materials.
    
10. Same facts as example 9 except the contractor entered into the con- tract after March 31, 1989. The use tax base of the ducts is the cost of materials and the direct cost of labor in the shop to bend, cut and form the sheet metal.
     
11. A glazer entered into a contract before April 1, 1989, to install special windows in a commercial building. The glass requires pre-installation shop preparation, tinting and cutting. The use tax base of the windows is the cost of materials.
     
12. Same facts as example 11 except the glazer entered into the contract after March 31, 1989. The use tax base of the windows is equal to the sum of the cost of materials and the direct cost of labor in the shop to prepare, tint and cut the glass.
     
13. A road builder enters into a contract prior to April 1, 1989, to build an asphalt or concrete highway. The contractor set up a batch plant at the job site to manufacture the asphalt or concrete. The use tax base of the asphalt or concrete is the cost of materials.
     
14. Same facts as example 13 except the road builder entered into the contract after March 31, 1989. The use tax base of the asphalt or concrete is equal to the sum of the cost of materials and the direct cost of labor at the job site batch plant to manufacture the asphalt or concrete. The direct cost of labor at a job site to modify the asphalt or concrete by the use of additives is not included in the tax base.
     
15. A carpenter/contractor entered into a contract prior to April 1, 1989, to build a house. In the shop, the contractor cut 10-foot long 2-inch by 4-inch studs to 8-foot lengths. The use tax base is the cost of the 10-foot 2-inch by 4-inch studs.
     
16. Same facts as example 15 except the carpenter/contractor entered into the contract after March 31, 1989. The use tax base is equal to the sum of the cost of the 10-foot long 2-inch by 4-inch studs and the direct cost of labor in the shop to cut the lumber to 8-foot lengths.
     
17. A steel fabricator entered into a contract prior to April 1, 1989, to build a parking ramp. The fabricator cut, drilled and painted steel I-beams for this project in the steel yard (off-site). The use tax base of the steel I-beams is the cost of materials.
     
18. Same facts as example 17 except the fabricator entered into the contract after March 31, 1989. The use tax base is equal to the sum of the cost of raw materials and the direct-cost of labor in the steel yard to cut, drill and paint the I-beams.
     
19. A carpenter/contractor entered into a contract prior to April 1, 1989, to build a house. In the shop, the carpenter/contractor cut and assembled roof trusses. These trusses were later transported to the job site and affixed to real estate. The use tax base of the trusses is t he cost of materials.
     
20. Same facts as example 19 except the contract was entered into after March 31, 1989. The use tax base of the trusses is equal to the sum of the cost of materials plus the direct cost of labor to cut and assemble them in the shop.
     
21. A contractor entered into a construction contract before April 1, 1989. The contractor made his own bricks which were not available for sale to others. These bricks were used on the construction job. Mortar was mixed at the job site to construct the building. The use tax base for the bricks is the cost of materials. The use tax base for the mortar is the cost of materials, and would not include the cost of labor for mixing at the job site.
     
22. Same facts as in example 21 except the contract was enter ed into after March 31, 1989. The use tax base for the bricks is the cost of materials plus the cost of labor to manufacture the bricks. The use tax base for the mortar is the cost of materials, and would not include the cost of labor for mixing at the job site.

The following are commonly asked questions and their answers. All answers assume that the contractor/taxpayer does not maintain an inventory available for sale to others, or make tangible personal property available by publication or price list as a finished product for sale to others. In these situations, finished goods inventory value as defined in this bulletin will not be used in determining the use tax base.

1. Is the time allowed for coffee breaks part of the cost of labor for manufacturing/fabricating tangible personal property?

   Answer: For contracts entered into before April 1, 1989, no. For contracts entered into after March 31, 1989, yes. All labor costs for those preparing the tangible personal property by manufacturing/fabricating are part of the cost of labor for the tax base.
    

2. Is my scrap material part of the tax base in addition to the material that is actually incorporated into the manufactured/fabricated material that is affixed to real estate?

Answer: Yes, all materials used or consumed in the manufacture/fabrication of the tangible personal property affixed to real estate are part of the tax base. This would include all materials that are used/consumed by scrapping.
 
3. A county road commission has issued a purchase order to us to do a roof repair job on one of its buildings. The road commission has indicated on its purchase order that it is "completely exempt from all federal and state sales, use and fuel taxes." What is the proper taxable status for this job.
   
   Answer: You as a contractor working on real property are the consumer of any tangible personal property you affix to the roof of the county road commission building. Therefore you owe the use tax on those materials. The road commission's statement only applies to sales of tangible personal property made to the road commission.
   
   
4. We are a subcontractor. Our prime contractor received a job from a manufacturing company to do sheet metal work. The contractor subcontracted the work to us, and has furnished us with its use tax registration number and has stated that it will pay the use tax. We are supplying all of the materials and will be doing the actual work. Who is responsible for paying the tax on the job?
   
   Answer: The contractor actually affixing the tangible personal property to the real estate is the taxpayer. The prime contractor in this case cannot assume the tax liability. The sales/use tax number is for the purchase of tangible personal property for resale or release. After you have affixed the tangible personal property to real estate it is no longer tangible personal property, it is real property.

5. Does direct cost of labor include shop supervision?
   
   Answer: No, only the production staff direct cost of labor is included in the computation of the tax base for use tax purposes.

6. How do you compute the direct cost of labor for a self-employed person in determining the use tax base?
   
   Answer: An imputed (calculated estimate) wage and fringe benefit amount, using industry standards, or the amount included in the bid would be required, whichever may be readily available as long as it represents a reasonable valuation.

7. If the material portion of my contract is subcontracted to another supplier, what is the tax base for sales and use tax purposes?
   
   Answer: The person who is furnishing the materials as subcontractor for you to install will be subject to sales tax on the selling price of the materials to you. If the supplier is not in Michigan, you must report the full purchase price for use tax.

8. What if I subcontract the entire contract to another party?

   Answer: To the extent another contractor furnishes and installs, the tax will be based on raw materials and direct cost of labor for con- tracts entered into after March 31, 1989, and would b e paid by the subcontractor. This assumes that the subcontractor has no inventory available for sale to others and does not make tangible personal property available for sale to others through publication or price list.
    

9. What if I supply materials to a subcontractor to produce the property that I will affix to real estate for others?
   

   Answer: Your tax base would be the cost of materials you supplied to the subcontractor plus the cost of labor and any additional charges billed to you by the subcontractor.
   

10. If I perform all of my modifications to property at the job site, what is my tax base?
    
    Answer: Raw material cost plus the cost of labor for mixing (except minor incidental mixing) combining, or blending prior to affixation. The statute specifically exempts from the tax base the cost of direct labor to cut, bend, assemble, or attach property at the job site.
     
11. When do I pay tax on the raw material and direct cost of labor base?

    Answer: The use tax is paid on the monthly or quarterly combined sales, use and withholding tax return, and is computed on the basis of the raw materials and cost of labor committed to contracts for the particular month or quarter.

This statute applies to diverse business activities. If a business has any questions concerning a specific situation, a letter ruling may be obtained by writing:

All pertinent facts must accompany a request for a letter ruling.

RAB-93-5. This bulletin explains the use tax liability of contractors who manufacture, fabricate or assemble tangible personal property before affixing it to real estate. It restates the discussion contained in Revenue Administrative Bulletin 1990-36 (RAB-90-36). The only change made from RAB-90-36 is the addition of a definition of "cost of materials" and a revision of Example 5. The revision addresses confusion that has arisen over the meaning of the example as originally written.

LAW

P.A. 506 of 1988 [MCL 205.92(f); MSA 7.555(2)(f)] which by its terms is to be considered effective April 1, 1983, essentially repealed 1982 legislation defining the use tax base of a manufacturer/contractor. The 1982 statutory language also had an effective date of April 1, 1983.

Expiration of Statutory Refund Procedure

1988 P.A. 376 provided a refund procedure for manufacturer/contractors who paid tax pursuant to the original 1982 legislation. Act 376 also provided that the refund procedure would expire on March 31, 1989. That refund procedure is, therefore, no longer available to manufacturers/contractors.

Use Tax Base

The Department of Treasury Sales and Use Tax Rule, 1979 AC, R 205.71(6), provides that when a manufacturer produces and affixes tangible personal property to the real estate of others, the manufacturer/contractor shall remit use tax on the inventory value of the property at the time the property is converted to the contract. This value shall include all costs of manufacturing, fabricating, and processing.

1988 P.A. 506 establishes two periods and methods for purposes of calculating a use tax base for property affixed by a manufacturer/contractor to the real estate of others:

1. For Contracts Entered Into Before April 1, 1989

1. Manufacturer/contractor who maintains an inventory available for sale to others or makes available for sale to others tangible personal property through publication or price list:
   
   
2. A manufacturer/contractor who maintains an inventory of its product available for sale to others and uses that product on a construction contract will use as its tax base the finished goods inventory value of the property. Likewise, a manufacturer/contractor making available a product for sale as a finished product through a price list or publication must use the finished goods inventory value of the property as the use tax base when it affixes the product to the real estate of another. This manufacturer/contractor would be entitled to an industrial processing exemption, as allowed by law, to manufacture the tangible personal property.
    
3. Manufacturer/contractor who does not maintain an inventory available for sale to others or does not make available for sale to others tangible personal property through publication or price list:
   
   
4. The use tax base of a manufacturer/contractor affixing property to the real estate of another is the cost of materials. This manufacturer/contractor is not entitled to an industrial processing exemption to fabricate or assemble the tangible personal property.

2. For Contracts Entered Into After March 31, 1989

1. Manufacturer/contractor who maintains an inventory available for sale to others or makes available tangible personal property for sale to others through publication or price list will have a tax base identical to that of a manufacturer/contractor entering into a contract prior to April 1, 1989. (See l.A. above.)
    
2. Manufacturer/contractor who does not maintain an inventory available for sale to others or does not make available for sale to others tangible personal property through publication or price list: 

   For construction contractors that manufacture, fabricate, or assemble tangible personal property prior to affixing it to real estate, but do not withdraw the property from inventory for sale to others or make the property available by publication or price list as a finished product for sale to others, the use tax base of the property is equal to the sum of the materials cost and the cost of labor to manufacture, fabricate, or assemble the property. The statute specifically exempts from the tax base the cost of direct labor to cut, bend, assemble, or attach property at the job site. Costs of labor at the job site for mixing, combining or blending prior to affixation of property will be included in the use tax base. Minor incidental mixing such as the mixing of mortar and tinting of paint at the job site need not be included in the use tax base. This manufacturer/contractor is not entitled to an industrial processing exemption to fabricate or assemble the tangible personal property.

INDUSTRIAL PROCESSING EXEMPTION

Manufacturers who make their products available for sale to others may claim exemption from sales and use tax on property used or consumed in industrial processing. Such manufacturers are entitled to an industrial processing exemption on property used or consumed when transforming, altering, or modifying tangible personal property by changing the form, composition, or character of the property for ultimate sale at retail to others. If the product is available for sale to others, the exemption applies even if the manufacturer/contractor removes the product from inventory and affixes it to the real estate of another.

However, property used or consumed in industrial processing does not include tangible personal property permanently affixed and becoming a structural part of real estate; office furniture, office supplies, and administrative office equipment; or vehicles licensed and titled for use on public highways. [MCL 205.54a(g)(i); MSA 7.525(g)(i) and MCL 205.94(g)(1)(i); MSA 7.555(4)(g)(1)(i). See also Department of Treasury Specific Sales and Use Tax Rule 1979 AC, R 205.90.]

Whether or not an industrial processing exemption is claimed, the manufacturer/ contractor must pay sales tax on the retail price of products sold at retail. When the product is withdrawn from inventory and affixed to the real estate of another, the manufacturer/contractor must pay use tax on finished goods inventory value of the product.

Example:

A siding manufacturer purchases a new press for forming siding, a stake truck for deliveries, a computer printer for invoices, and scaffolding to be used at the job site. The new press would be exempt from use tax under an industrial processing exemption because it is used to change the form of the metal sheets into siding panels, which are placed into an inventory intended for eventual sale to others. The stake truck, printer and scaffolding are all taxable because they are not used in changing the form, composition or character of the metal for ultimate sale at retail. The manufacturer/contractor will owe sales tax on the retail price of any siding sold at retail. The manufacturer/contractor will owe use tax on the finished goods inventory value of any siding withdrawn from inventory and affixed to the real estate of another.

RETAIL SALES

All contractors and manufacturer/contractors who make retail sales of tangible personal property, as opposed to affixing tangible personal property to the realty of others, are liable for sales tax. The sales tax base on these retail sales is the entire gross proceeds received from the transaction. [MCL 205.52; MSA 7.522]

DEFINITIONS

"Manufacture," as defined by MCL 205.92(f); MSA 7.555(2)(f), means to convert or condition tangible personal property by changing the form, composition, quality, combination, or character of the property.

"Fabricate," as defined by MCL 205.92(f); MSA 7.555(2)(f), means to modify or prepare tangible personal property for affixation or assembly.

"Cost of materials" or "materials cost," as used in MCL 205.92(f); MSA 7.555(2)(f), means the invoice price of raw materials and supplies entering into or consumed in connection with the contract, including transportation (e.g., freight-in) or other necessary charges incurred in acquiring possession of the goods). The inclusion of transportation charges follows the "cost" definition under U.S. Treasury Regulation 1.471-3.

"Cost of labor," as used in MCL 205.92(f); MSA 7.555(2)(f), means salaries, wages, fees, bonuses, commissions and other payments. It also includes payroll taxes, allocable cost of employee insurance plans, pension, retirement, profit sharing, workers compensation, unemployment insurance and any other payments made on behalf of or for the benefit of employees or the self-employed. The cost of labor does not include transporting the product to the job site.

"Finished goods inventory value," as used in MCL 205.92(f); MSA 7.555(2)(f), is given the same interpretation as that given inventory valuation in U.S. Treasury Regulation 1.471-11. This regulation adopts a full absorption method of inventory valuation for manufacturers.

In general this valuation method includes all direct production costs defined as components of either direct material or direct labor. The following list illustrates those items included as direct cost:

1. Direct material, including, but not limited to:

1. Raw material
2. Supplies entering into the product
3. Supplies consumed in connection with the product.

2. Direct labor, including, but not limited to:

1. Basic wages
2. Overtime wages
3. Vacation and holiday pay
4. Sick leave pay
5. Shift differential
6. Payroll taxes
7. Payments to a supplemental unemployment benefit plan
8. Any other payment incurred on behalf of employees directly engaged in production.

This valuation method also includes indirect production costs. Indirect production costs are to be included only to the extent that such costs are incident to and necessary for production or manufacturing operations or processes. The following list illustrates items includable as indirect production costs:

1. Expenses for maintenance
    
2. Repair costs
    
3. Utility costs
    
4. Rent and taxes on buildings and machinery necessary for production.
    
5. Indirect labor and production supervisory wages, including, but not limited to:

1. Basic wages
2. Overtime wages
3. Vacation and holiday pay
4. Sick leave pay
5. Shift differential
6. Payroll taxes
7. Payments to a supplemental unemployment benefit plan
8. Any other payment incurred on behalf of employees whose labor is incident to and necessary for production or manufacturing operations or processes.

6. Miscellaneous indirect costs such as:

1. Indirect materials and supplies
2. Tools and equipment not capitalized
3. Costs of quality control and inspection
4. Depreciation and depletion incident to production or manufacturing operations or processes (including buildings, machinery, and equipment)
5. Employee benefits
6. Costs attributable to strikes
7. Rework labor
8. Scrap and spoilage
9. Administrative costs of production
10. Officers' salaries incident to production
11. Insurance costs incident to production.

The following list illustrates those costs that should not be included in finished goods inventory value:

1. Marketing, advertising, or selling expenses
    
2. Other distribution expenses
    
3. Interest
    
4. Research and experimental expenses including engineering and product development
    
5. General and administrative expenses incident to and necessary for the taxpayer's activities taken as a whole rather than to production or manufacturing operations or processes
    
6. Salaries paid to officers attributable to the performance of services which are incident to and necessary for the taxpayer's activities taken as a whole rather than to production or manufacturing operations or processes.

"Price list," as used in MCL 205.92(f); MSA 7.555(2)(f), means a numerical or alphabetical enumeration of goods, wares, or merchandise items, quoting wholesale and/or retail prices and printed on cards or sheets of paper, presented in loose-leaf form, stapled, stitched, or bound, or available on computer database, disk, or tape, the purpose of which is to offer tangible personal property for sale to others.

"Publication," as used in MCL 205.92(f); MSA 7.555(2)(f), means printed material the purpose of which is to offer tangible personal property for sale to others. Printed material includes, but is not limited to, a catalog, sales pamphlet, or sales handbill.

• "Catalog" means a bound, stitched, sewed, or stapled book or pamphlet, containing a list and description of goods, wares, or merchandise with specific information, with or without a price.
   
• "Sales pamphlet" means a printed work concerning goods, wares, or merchandise, consisting of two or more sheets of paper, stapled, sewed, or stitched, with or without price.
   
• "Sales handbill," also called a circular or dodger, is a printed single sheet of paper intended to be circulated and concerning goods, wares, or merchandise.

EXAMPLES

Finished Goods Inventory Value a Factor in Determining Use Tax Base

Examples 1 through 6 assume that the product being affixed to the real estate of others is withdrawn from the contractor's inventory available for sale to others or made available by publication or price list as a finished product for sale to others. In these situations the use tax base of the property being affixed to realty will be the finished goods inventory value as defined in this bulletin.

1. A custom cabinetmaker enters into a contract to build and install cabinets for an office building. The cabinetmaker maintains a price list for the cabinets even though the cabinetmaker has no ready inventory. The use tax base of the cabinets is the finished goods inventory value as defined in this bulletin, regardless of when the contract was entered into
    
2. A manufacturer/contractor of heating and cooling devices enters into a contract to install new thermostats for an apartment complex. The manufacturer/contractor takes the thermostats from its inventory available for sale to others for affixation. The use tax base of the thermostats is the finished goods inventory value as defined in this bulletin, regardless of when the contract was entered into.
    
3. A manufacturer/contractor of window glass contracts to supply and install glass in a commercial building. The manufacturer/contractor maintains a sales brochure publication describing the product (with or without a price list). The use tax base of the glass is the finished goods inventory value as defined in this bulletin, regardless of when the contract was entered into.
    
4. Cabinetmaker advertises that the firm sells cabinets. A separate publication advertises specific styles and sizes of cabinets for retail sale. The cabinetmaker also advertises in the publication that he or she will make and sell other sizes and styles of cabinets upon special order. Where the cabinetmaker removes the advertised cabinets from his/her inventory and installs them for a customer, the use tax base of the cabinets is the finished goods inventory value as defined in this bulletin. Where the cabinetmaker makes and installs custom-order cabinets upon special order, the use tax base of these cabinets is also the finished goods inventory value as defined in this bulletin, because the custom cabinets are made available for sale to others by publication.
    
5. A cabinetmaker advertises that the firm sells cabinets. A separate publication advertises kitchen style cabinets for retail sale. Where the cabinetmaker removes the advertised cabinets from his/her inventory and installs them for a customer, the use tax base of the cabinets is the finished goods inventory value as defined in this bulletin. 

   Where the cabinetmaker will custom make a bath cabinet, similar to a kitchen cabinet, to specifications of the customer, his/her use tax base of the cabinet is the finished goods inventory value as defined in this bulletin. The cabinetmaker has made cabinets, as a general class of product, available for sale to others through his/her publication and inventory.
   
   

6. A window manufacturer maintains a price list noting the price per square inch of custom-made windows. The manufacturer installs custom-made windows in an office building. The use tax base for the custom- made windows installed by the manufacturer is the finished goods inventory value as defined in this bulletin. Sales of windows, where the windows are not installed by the manufacturer, are taxable on the full gross proceeds of the sale.

Product Not Available From Inventory or by Publication or Price List

Examples 7 through 22 below assume that the product being affixed to the real estate of others is not from the contractor's inventory available for sale to others or made available by publication or price list as a finished product for sale to others. In these situations finished goods inventory value as defined in this bulletin will not be used in determining the use tax base.

7. A custom cabinetmaker entered into a contract before April 1, 1989, to build and install cabinets for an office building. None of the cabinets was available from inventory or through publication or price list. The use tax base of the cabinets is the cost of materials.
    
8. Same facts as in example 7 except the contract was entered into after March 31, 1989. The use tax base of the product is equal to the cost of materials and all off-site direct cost of labor to construct the cabinets. Any direct cost of labor applicable to cutting, assembling or affixing the cabinets to the real estate at the job site are not included in the use tax base.
    
9. A furnace and heating contractor entered into a contract before April 1, 1989, to build and install heating and cooling ducts for an apartment complex. He bent, cut, and formed the sheet metal in the shop before transporting the product to the job site. The use tax base of the ducts is the cost of materials.
    
10. Same facts as example 9 except the contractor entered into the con- tract after March 31, 1989. The use tax base of the ducts is the cost of materials and the direct cost of labor in the shop to bend, cut and form the sheet metal.
     
11. A glazer entered into a contract before April 1, 1989, to install special windows in a commercial building. The glass requires pre-installation shop preparation, tinting and cutting. The use tax base of the windows is the cost of materials.
     
12. Same facts as example 11 except the glazer entered into the contract after March 31, 1989. The use tax base of the windows is equal to the sum of the cost of materials and the direct cost of labor in the shop to prepare, tint and cut the glass.
     
13. A road builder enters into a contract prior to April 1, 1989, to build an asphalt or concrete highway. The contractor set up a batch plant at the job site to manufacture the asphalt or concrete. The use tax base of the asphalt or concrete is the cost of materials.
     
14. Same facts as example 13 except the road builder entered into the contract after March 31, 1989. The use tax base of the asphalt or concrete is equal to the sum of the cost of materials and the direct cost of labor at the job site batch plant to manufacture the asphalt or concrete. The direct cost of labor at a job site to modify the asphalt or concrete by the use of additives is not included in the tax base.
     
15. A carpenter/contractor entered into a contract prior to April 1, 1989, to build a house. In the shop, the contractor cut 10-foot long 2-inch by 4-inch studs to 8-foot lengths. The use tax base is the cost of the 10-foot 2-inch by 4-inch studs.
     
16. Same facts as example 15 except the carpenter/contractor entered into the contract after March 31, 1989. The use tax base is equal to the sum of the cost of the 10-foot long 2-inch by 4-inch studs and the direct cost of labor in the shop to cut the lumber to 8-foot lengths.
     
17. A steel fabricator entered into a contract prior to April 1, 1989, to build a parking ramp. The fabricator cut, drilled and painted steel I-beams for this project in the steel yard (off-site). The use tax base of the steel I-beams is the cost of materials.
     
18. Same facts as example 17 except the fabricator entered into the contract after March 31, 1989. The use tax base is equal to the sum of the cost of raw materials and the direct-cost of labor in the steel yard to cut, drill and paint the I-beams.
     
19. A carpenter/contractor entered into a contract prior to April 1, 1989, to build a house. In the shop, the carpenter/contractor cut and assembled roof trusses. These trusses were later transported to the job site and affixed to real estate. The use tax base of the trusses is t he cost of materials.
     
20. Same facts as example 19 except the contract was entered into after March 31, 1989. The use tax base of the trusses is equal to the sum of the cost of materials plus the direct cost of labor to cut and assemble them in the shop.
     
21. A contractor entered into a construction contract before April 1, 1989. The contractor made his own bricks which were not available for sale to others. These bricks were used on the construction job. Mortar was mixed at the job site to construct the building. The use tax base for the bricks is the cost of materials. The use tax base for the mortar is the cost of materials, and would not include the cost of labor for mixing at the job site.
     
22. Same facts as in example 21 except the contract was enter ed into after March 31, 1989. The use tax base for the bricks is the cost of materials plus the cost of labor to manufacture the bricks. The use tax base for the mortar is the cost of materials, and would not include the cost of labor for mixing at the job site.

Miscellaneous Questions and Answers

The following are commonly asked questions and their answers. All answers assume that the contractor/taxpayer does not maintain an inventory available for sale to others, or make tangible personal property available by publication or price list as a finished product for sale to others. In these situations, finished goods inventory value as defined in this bulletin will not be used in determining the use tax base.

1. Is the time allowed for coffee breaks part of the cost of labor for manufacturing/fabricating tangible personal property? 

   Answer: For contracts entered into before April 1, 1989, no. For contracts entered into after March 31, 1989, yes. All labor costs for those preparing the tangible personal property by manufacturing/fabricating are part of the cost of labor for the tax base.  

2. Is my scrap material part of the tax base in addition to the material that is actually incorporated into the manufactured/fabricated material that is affixed to real estate? 

   Answer: Yes, all materials used or consumed in the manufacture/fabrication of the tangible personal property affixed to real estate are part of the tax base. This would include all materials that are used/consumed by scrapping.  

3. A county road commission has issued a purchase order to us to do a roof repair job on one of its buildings. The road commission has indicated on its purchase order that it is "completely exempt from all federal and state sales, use and fuel taxes." What is the proper taxable status for this job?
   
   Answer: You as a contractor working on real property are the consumer of any tangible personal property you affix to the roof of the county road commission building. Therefore you owe the use tax on those materials. The road commission's statement only applies to sales of tangible personal property made to the road commission. 
   
   
4. We are a subcontractor. Our prime contractor received a job from a manufacturing company to do sheet metal work. The contractor subcontracted the work to us, and has furnished us with its use tax registration number and has stated that it will pay the use tax. We are supplying all of the materials and will be doing the actual work. Who is responsible for paying the tax on the job? 

   Answer: The contractor actually affixing the tangible personal property to the real estate is the taxpayer. The prime contractor in this case cannot assume the tax liability. The sales/use tax number is for the purchase of tangible personal property for resale or release. After you have affixed the tangible personal property to real estate it is no longer tangible personal property, it is real property. 

5. Does direct cost of labor include shop supervision? 

   Answer: No, only the production staff direct cost of labor is included in the computation of the tax base for use tax purposes.  

6. How do you compute the direct cost of labor for a self-employed person in determining the use tax base? 

   Answer: An imputed (calculated estimate) wage and fringe benefit amount, using industry standards, or the amount included in the bid would be required, whichever may be readily available as long as it represents a reasonable valuation. 

7. If the material portion of my contract is subcontracted to another supplier, what is the tax base for sales and use tax purposes? 

   Answer: The person who is furnishing the materials as subcontractor for you to install will be subject to sales tax on the selling price of the materials to you. If the supplier is not in Michigan, you must report the full purchase price for use tax. 

8. What if I subcontract the entire contract to another party? 

   Answer: To the extent another contractor furnishes and installs, the tax will be based on raw materials and direct cost of labor for con- tracts entered into after March 31, 1989, and would b e paid by the subcontractor. This assumes that the subcontractor has no inventory available for sale to others and does not make tangible personal property available for sale to others through publication or price list. 

9. What if I supply materials to a subcontractor to produce the property that I will affix to real estate for others? 

   Answer: Your tax base would be the cost of materials you supplied to the subcontractor plus the cost of labor and any additional charges billed to you by the subcontractor.

10. If I perform all of my modifications to property at the job site, what is my tax base? 

    Answer: Raw material cost plus the cost of labor for mixing (except minor incidental mixing) combining, or blending prior to affixation. The statute specifically exempts from the tax base the cost of direct labor to cut, bend, assemble, or attach property at the job site. 

11. When do I pay tax on the raw material and direct cost of labor base? 

    Answer: The use tax is paid on the monthly or quarterly combined sales, use and withholding tax return, and is computed on the basis of the raw materials and cost of labor committed to contracts for the particular month or quarter.

INFORMATION

This statute applies to diverse business activities. If a business has any questions concerning a specific situation, a letter ruling may be obtained by writing:

Michigan Department of Treasury
Bureau of Revenue
Sales, Use and Withholding Taxes Division
2nd Floor, Treasury Building
Lansing, Michigan 48922