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Sales and Use Tax Memorandum Opinions

Challenge Equipment Corporation

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A mail handling, sorting and conveyor system designed for and installed in a post office constitutes a fixture, not machinery and equipment. The system is firmly attached to the building by a method of bolting that includes firing studs into a concrete floor. If the system were removed, the studs would still remain and before the floor could be used for other purposes the studs would have to be cut off or otherwise removed and the holes filled in. It is also concluded that the system is not one that could be readily removed as a unit. The fact that the system includes moving parts and performs a mechanical mail handling function does not, in and of itself, dictate the conclusion that it is "machinery and equipment".

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition of CHALLENGE EQUIPMENT CORPORATION for Redetermination of Liability Determined under the Sales and Use Tax Law

Appearances:

MEMORANDUM OPINION

This petition was filed to protest the assertion of use tax on the Petitioner's cost of a mail handling, sorting and conveyor system, hereinafter "system", which was designed for, and installed in Building 415, Cheli Terminal, Los Angeles Post Office, under a contract with the United States Government.

The issue presented by the petition is whether the system is a "fixture" or "machinery and equipment" within the meaning of the two terms as used in regulation 1615, formerly ruling 12 (18 Cal. Admin. Code, § 1615).

Petitioner, Challenge Equipment Corporation, is a corporation that engages in the sale and installation of industrial equipment. Some of Petitioner's construction contracts are with private industry entities while others are with instrumentalities of the United States Government.

This controversy arises as a result of a contract to furnish and install a system to be used for handling, sorting and conveying mail from the outside to within, within, and from within to the outside of a building that was to be used as a United States Post Office facility.

Mr. Robert W. Kinser, Director, Industrial Engineering Division, United States Postal Service supervised the design and planning of the system which was designed especially for the building in which it was installed.

Counsel for the Staff contended the system is a fixture under regulation 1615, United States Contractors. Mr. Chaitin contends the system constitutes machinery and equipment under regulation 1615. If it is a fixture, the Petitioner is the consumer thereof under the government contract and the use tax applies to the cost of it to Petitioner. On the other hand, if it is machinery and equipment, the Petitioner is the retailer thereof and the sale would be an exempt retail sale to the United States Government.

The system consists of numerous conveyors, rollers, belts, ladders, work platforms, etc., that are connected and affixed to the floor of the building or to the roof trusses so that they will not move or shift when in use. The conveyor portions of the system vary in length from as short as eight feet to as long as 210 feet and are installed horizontally at varied heights off of the floor and at varied angles so as to achieve the lifting of mail as high as nine to 10 feet off of the floor level.

The units were manufactured in varied lengths, generally about 10 feet. Some were constructed at angles to achieve turns around corners, etc.

A general description of the type of units making up the system is listed on the blue print drawing of the system and includes such things as:

1. Conveyor, roller bed/return, 22 inches high, 42 inches wide and 72 feet long.

2. Conveyor, roller bed/return, 42 inches wide, and 210 feet long, that starts at a height of one foot off the floor, rises to a height of 10 feet and descends to another area and to a height of 30 inches off the floor.

3. Conveyor, roller bed/return, 30 inches to nine and one-half feet high, 42 inches wide and 200 feet long.

4. Work platforms, elevated with ladder and guard rails which make up part of the conveyor support.

5. Gravity conveyor rollers in 10 and 12 foot sections, linked together to move mail over distances of up to 100 feet.

In all there was over 1,700 feet of belts, rollers, etc., varying in width from 30 to 42 inches wide and from one foot to 10 feet off the floor. They were integrated and connected in various ways and were affixed to the floor by studs driven (fired) into the floor and to roof trusses by bolts. Some belts were powered by motors, while mail moved along others by gravity.

Section 6384 of the Revenue and Taxation Code provides:

Notwithstanding any other provision of the law the tax imposed under this part shall apply to the gross receipts from the sale of any tangible personal property to contractors purchasing such property either as the agents of the United States or for their own account and subsequent resale to the United States for the construction of improvements on or to real property in this State.

Regulation 1615 (18 Cal. Admin. Code, § 1615) was adopted under the authority given the board of equalization by the Legislature under section 7051 of the Revenue and Taxation Code. Section 7051 reads:

The board shall enforce the provisions of this part and may prescribe, adopt, and enforce rules and regulations relating to the administration and enforcement of this part. The board may prescribe the extent to which any ruling or regulation shall be applied without retroactive effect.

Regulation 1615 relates to United States Contractors and is applicable to Petitioner's case. It provides in part as follows:

Either the sales tax or the use tax applies with respect to sales of tangible personal property (including materials, fixtures, supplies, and equipment) to contractors or subcontractors for use in the performance of contracts with the United States for the construction of improvements on or to real property in this State.

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Tax does not apply to sales of "machinery and equipment" to contractors or subcontractors. As used herein, the term "machinery and equipment" means property to which each of the following conditions applies:

1. It is not used by the contractor in making the improvements. …

2. It either is not attached to the realty or, if attached, is readily removable as a unit (as distinguished from "fixtures"). …

3. It is installed for the purpose of performing a manufacturing operation or some other function not essential to the structure itself.

4. Title to the property passes to the United States before the contractor makes any use of it.

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"Fixtures" as distinguished from "machinery and equipment" are things which are necessary to a structure and so firmly attached to the realty as to constitute a part of the structure. They are essential to the use of the building or other structure, and include such things as:

* * *

Elevators, hoists and conveying units

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There is no doubt about the fact that the system is a large and complex conveying unit. It is essential to the use of the building as a post office mail handling facility even though, if the system were completely dismantled and moved out of the building, the building would still stand and could be used for general storage of property. The system is firmly attached to the building by a method of bolting that includes firing studs into the concrete floor. If the system were removed, the studs would still remain and before the floor could be used for other purposes the studs would have to be cut off or otherwise removed and the holes filled in. It is also concluded that the system is not one that could be readily removed as a unit. The fact that the system includes moving parts and performs a mechanical mail handling function does not, in and of itself, dictate the conclusion that it is "machinery and equipment" within the meaning of the term as used in regulation 1615.

Considering all of the facts, it is our view the system is a "fixture" and under regulation 1615 Petitioner is the consumer and not the retailer thereof. Accordingly, a redetermination is ordered without any adjustment to the item representing tax on the cost of the fixture.

Done at Sacramento, California, this 25th day of October, 1972.

John W. Lynch, Chairman

Richard Nevins, Member

William M. Bennett, Member

George R. Reilly, Member

Attested by: W. W. Dunlop, Executive Secretary