Idaho – Taxability of Design and Assembly Labor Charges

SALT Report 1932 – The Idaho State Tax Commission ruled that a Taxpayer was liable for Idaho sales tax on certain design and assembly charges.  The Taxpayer in this case designs, sells, and assembles office cubicle systems.  The Taxpayer provides two types of services, a new custom designed space or a reconfiguration of an existing space.  In either case, the Taxpayer orders and prepares all of the parts and materials necessary to complete the onsite installation.

If a customer reconfigures an existing space the Taxpayer works with the parts and materials already owned by the customer.  If additional parts and materials are required the Taxpayer will provide them.  Upon completion of an installation, the Taxpayer prepares several invoices with separate charges for the parts, materials, and labor that were necessary to complete the project.

The issue in this case was whether the design and assembly labor fees that were charged along with the sale of a new or reconfigured cubicle system were taxable.  Over a five year period the Taxpayer did not charge sales tax on either type of labor.  As a result, the Idaho Sales Tax Audit Bureau found the Taxpayer liable for sales tax.  The Taxpayer protested the sales tax assessment.

In their assessment the Bureau argued that the Taxpayer sells fully fabricated systems, not individual parts and materials.  Therefore, any charges associated with the sale of the fabricated system were considered part of the sales price and subject to tax.

During the appeal process the Commissioner determined the taxability of the Taxpayer’s services as follows:

  • Design and assembly labor is not taxable when the customer reconfigures an existing cubicle system because the Taxpayer’s sale of tangible personal property in this type of sale is minimal.
  • When the Taxpayer sells a new cubicle system, the initial design work is considered an integral part of the sale, as the final product could not be completed without it.  Therefore, this type of service is taxable.
  • Assembling wall panels and attachments into the cubicles should be included in the total sales price as it is considered fabrication labor necessary to bring a product into a finished state, which is a taxable charge.  The Commissioner notes that, although the Taxpayer did not manufacture the parts and materials, it performed the necessary steps to create a new product, which Idaho law considers fabrication.
  • Sales of parts and materials for new systems and reconfigurations are taxable.
  • Design labor is not taxable when the customer decides to purchase a cubicle system from a competing vendor rather than the Taxpayer.

For Further Information:

Idaho State Tax Commission – Decision Number 24067