Introduction:  This directive clarifies the sales/use tax treatment of commercial cabinetmakers making sales to customers in Massachusetts, including sales to home improvement contractors and homeowners.  DOR Letter Ruling 88-8 is superseded to the extent it is inconsistent with this directive.

Issue:  How does sales and use tax apply to the Massachusetts sales of a commercial manufacturer or fabricator[1] of cabinets?

Directive:  A commercial manufacturer or fabricator of cabinets will generally be treated as a vendor and must collect and remit sales/use tax on the sales price of all cabinets sold to customers in Massachusetts, whether described as stock, semicustom, or custom cabinets[2], and whether the sale is to a home improvement contractor or to a homeowner directly.  A commercial manufacturer or fabricator of cabinets generally may not use “the contractor rule”, described in the discussion below, to pay tax on materials only[3], and may not be designated a subcontractor of the purchaser, even if the purchaser qualifies for treatment as a home improvement contractor.

Discussion:

Massachusetts imposes an excise upon sales at retail of tangible personal property by a vendor, unless expressly exempt, at the rate of 6.25 percent of the gross receipts of the vendor from all sales of such property.  G.L. c. 64H, § 2.  The term "sale" includes any transfer of title or possession, or both, exchange, barter, lease, rental, conditional or otherwise, of tangible personal property for a consideration, in any manner or by any means whatsoever, including the producing or fabricating tangible personal property for a consideration for consumers.  G.L. c. 64H, § 1.  A sale at retail is a sale of tangible personal property for any purpose other than resale in the regular course of business.  Id.

Massachusetts case law holds that "construction contracts. . . are not contracts for the sale of goods. . . .  [Such] contracts . . . [are] not contracts for the sale of bricks or window frames or caulking material but contracts for the construction and sale of a building."  White v. Peabody Construction Co., Inc., 386 Mass. 121, 132-133 (1982).  The rules governing the Massachusetts sales/use tax treatment of construction contractors were originally published by the Commissioner in Emergency Regulation No. 12 in 1966, when the sales tax was first enacted.  Emergency Regulation 12 lapsed without promulgation.  Nevertheless, various Massachusetts authorities have cited it in analyzing various scenarios involving contractors and installers of tangible personal property.

The general rule for contractors and subcontractors who construct, reconstruct, alter, improve and remodel and repair real property (“the contractor rule”) is that the contractors are the consumers of tangible personal property purchased by them for the performance of their contracts.  See e.g., Ace Heating Service, Inc. v. State Tax Commission, 371 Mass. 254, 256 (1976); PPC Constructors, Inc. v. Commissioner of Revenue, ATB Docket No. F251047 (May 7, 2001) Lawrence-Lynch Corp. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 245, 254 (1997); LR 88-8; LR 86-4.  Such contractors must pay sales or use tax to their suppliers on purchases of tangible personal property to be used in their business.  PPC Constructors at 320.

However, there is an exception to the contractor rule described above.  The general sales tax rule for construction contractors does not apply to sales in which contractors act as retailers selling tangible personal property in the same manner as other retailers, and install a complete unit of a standard item of tangible personal property, which requires no further fabrication other than installing, applying or connecting services.  Persons acting as retailers of tangible personal property are not construction contractors and must collect tax on the sales price of the item from the buyer.  See Letter Rulings 06-3, 85-68, 88-5.  See also, generally, Letter Ruling 82-45 (governing sales of HVAC equipment to a construction contractor), Technical Information Release 98-10.  Any separately stated charges for installation of the item are not taxable.  See G.L. c. 64H, § 1; Letter Rulings 94-5; 94-6, 85-25, 88-8.

The fact that a standard item of tangible personal property may become a fixture to real property does not alter the operation of the rule for complete units of standard items of tangible personal property.  See Letter Ruling 94-6.  Examples of complete units of standard equipment include water softeners to be affixed to real property, Letter Ruling 85-25; wireless alarm systems to be affixed to real property, Letter Ruling 85-68; awnings or blinds and electrical fixtures to be installed. 

In a 2004 case, the Massachusetts Appellate Tax Board (A.T.B.) applied the contractor rules in the context of kitchen cabinets.  See Classic Kitchens, Inc. v. Commissioner of Revenue, A.T.B. Docket No. C262393 (March 15, 2004).  In that case, the taxpayer (Classic Kitchens, Inc.) specialized in the construction and remodeling of kitchens; it charged its customers on a lump sum basis and did not collect or remit sales tax on those charges.  In the course of its business, it purchased partially finished cabinets and countertops and paid a sales tax to the vendors of those items.  Under the facts presented, the A.T.B. held that the taxpayer was a construction contractor, concluding that the taxpayer did not sell kitchen cabinets and countertops to its customers, but rather sold construction services to design and build a remodeled kitchen.  The decision focused on the transaction between the taxpayer and its customer, including the labor and skills required to integrate the cabinets into the finished kitchen, and not the earlier transaction between the commercial manufacturer or fabricator of the cabinets and the taxpayer.  While the Board’s decision noted that the taxpayer had paid tax on the cabinets purchased from its vendors, it did not elaborate on the proper basis for calculating that tax. 

The purpose of this directive is to clarify that a cabinet manufacturer or fabricator must charge tax to the contractor or homeowner, as the case may be, based on the total sales price charged by that manufacturer.  Such a cabinet manufacturer or fabricator will be treated as a vendor with respect to such sales and may not characterize itself as either a contractor or subcontractor for sales or use tax purposes.


/s/Amy Pitter
Amy Pitter
Commissioner of Revenue


AP:MTF:wrd

May 8, 2014

DD 14-2



[1] As described in this Directive, a commercial manufacturer or fabricator of cabinets generally produces cabinets in a factory setting for multiple customers and to the customer’s specifications, but does not itself provide installation.  The cabinets are sold through retailers, kitchen designers or at the manufacturer’s showroom. However, the absence of any of these factors will not be determinative in the application of this Directive.
 

[2]  While these terms do not have precise definitions, stock cabinets are generally understood to be “in stock” at a home improvement store or available for quick delivery.  Semicustom cabinets allow the purchaser to make some adjustments to the stock cabinet line, such as a taller or shorter cabinet than offered as stock at a higher cost and with a longer delay.  Custom cabinets are made to the customer’s specifications and may be built in a factory (the most common situation) or at a cabinetmaker’s shop.
 

[3] A limited exception applies to the carpenter/cabinetmaker described in LR 88-8 who “typically does not sell ready-made, freestanding cabinets or prefabricated cabinet components, which can be easily assembled into finished cabinets, and does not maintain a showroom or other display of cabinets as part of the cabinetmaker's business. A custom cabinetmaker does not work from standard designs. Each custom cabinet is individually and specially designed.”  Such a carpenter/cabinetmaker may continue to rely on LR 88-8 in situations where the carpenter/cabinetmaker both builds and installs the cabinets.