Q: I was one of those who didn’t worry about a sales tax audit until right now. Here’s my question: is the labor to assemble a rack in our shop subject to sales, or does it need to be taxed separately on the invoice as if we were selling an entire assembly?
A: Join the club, my friend. You are now amongst the ranks of many very confused systems contractors and integrators who can’t get a straight answer on charging sales tax on fabrication labor. Sadly, you won’t get one from me, either.
Here’s the deal: we are all very confused over billing and remitting sales tax on labor. What makes it especially confusing is the difference between a finished good (something manufactured and sold) and what we do by assembling finished goods into a larger system. We purchase items for resale that are, in many cases, a finished product. The challenge is explaining to the tax auditor that you take finished products and then assemble them into what you consider a different finished product made of many individual items considered finished goods.
The question then becomes, “What is the finished assembly that you are selling?” And, “Should/can you assemble a rack full of finished goods and bill the sales tax on the completed?” Well, nine times out of 10, labor is tax-exempt, except in certain states. But, only about half the time is sales tax-exempt when the labor was used to complete a finished product. Some states now have neighboring state reciprocity; others have a simplified sales tax program. And, by simplified, they mean only slightly less confusing than states without that.
As you can see, none of this makes any sense. So, we strongly suggest your billing clerk/business manager/CPA contact a sales tax expert in your state and the states you work in to give you their opinion on this matter. –CW