This Technical Information Release (TIR) replaces and revokes in part TIR 98-10. The TIR explains the sales and use tax obligations of taxpayers that produce asphalt and concrete, and then sell it to customers either (i) without additional services or (ii) as part of a contract pursuant to which the asphalt or concrete is installed, affixed or otherwise physically incorporated into real property owned by the customers. This TIR also explains the sales tax obligations of installers of asphalt and concrete. As used in this TIR, the term "producers" means those who manufacture asphalt or concrete in an industrial plant; the term "installers" refers to all others; the terms "asphalt" and "concrete" include any related paving materials such as sand or stone products that are installed, affixed or otherwise physically incorporated into real property along with the asphalt or concrete.

I. Producers of Asphalt and Concrete.

A. The Lawrence-Lynch Decision.

In Lawrence-Lynch Corporation v. Commissioner, ATB Docket No. 195193 (September 30, 1997), the Appellate Tax Board determined that raw materials and equipment purchased by the taxpayer and used to produce asphalt were exempt from the sales tax. The taxpayer sold some of the asphalt that it produced to certain customers without any accompanying service. The taxpayer used the remainder of the asphalt to pave roads, parking lots, driveways, tennis courts and other similar projects pursuant to contracts that it entered into with its other customers.

The Board ruled that the raw materials that the taxpayer used to produce the asphalt were exempt under G.L. c. 64H, § 6(r), because they became "an ingredient or component part of tangible personal property to be sold...." Specifically, the Board determined that the raw materials were an ingredient or component part of the asphalt, and that the taxpayer sold all of the asphalt that it produced. In reaching this conclusion, the Board rejected the Commissioner's contention that the asphalt the taxpayer used in the performance of the paving contracts was used by the taxpayer in the performance of construction contracts and, therefore, was not sold. Instead, the Board concluded that the taxpayer had sold and installed the paving materials that it had incorporated into, or affixed to, its customers' real property. The Board concluded that the taxpayer transferred title to, or possession of, the paving materials to its customers when it installed, affixed or incorporated the paving materials into the customers' real property, and that the transfer occurred at the same time as, or immediately before, such installation, affixation or incorporation.

Likewise, the Board concluded that the equipment used to produce the asphalt was exempt under G.L. c. 64H, § 6(s), because it was used "directly and exclusively...in an industrial plant in the actual manufacture of tangible personal property to be sold." Again, the Board concluded that the taxpayer had sold the paving materials to its customers and then installed, affixed or incorporated the paving materials into the customers' real property. (1)

B. Effect of Lawrence Lynch.

Exemption of Manufacturing Equipment and Raw Materials: In accord with the Lawrence-Lynch decision, the Commissioner will treat asphalt and concrete as tangible personal property that is sold within the meaning of G.L. c 64H, §§ (r) and (s) where the producer of the asphalt or concrete produces it in an industrial plant and either (i) sells the asphalt or concrete without any additional services related to installing, affixing or otherwise physically incorporating those materials into real property or (ii) installs, affixes or otherwise physically incorporates the asphalt or concrete into real property pursuant to any contract or sales agreement with a customer. Thus, raw materials that are used to produce the asphalt or concrete under these circumstances are an ingredient or component part of tangible personal property to be sold. Equipment used in an industrial plant to produce the asphalt or concrete under these circumstances is used in the manufacture of tangible personal property to be sold. Therefore, the producer's purchases of such raw materials are eligible for the sales tax exemption under G.L. c. 64H, § 6(r) and the producer's purchases of such equipment are eligible for the exemption under G.L. c. 64, § 6(s), if all of the other requirements for the exemptions are met.

Transfers of Asphalt or Concrete by Producers: Also in accord with the Lawrence Lynch decision, the Commissioner will treat taxpayers that produce asphalt or concrete in an industrial plant as the vendors of the asphalt and concrete that they either (i) sell to customers (including installers) without any additional services related to installing, affixing or otherwise physically incorporating those materials into real property or (ii) install, affix or otherwise physically incorporate into real property, pursuant to any contract or sales agreement with a customer. In either case, the sale of the asphalt or concrete takes place at the earlier of (i) the time at which title to the asphalt or concrete passes from the vendor to the customer or (ii) the time at which the vendor transfers possession of the asphalt or concrete by installing, affixing or otherwise physically incorporating it into the real property.

With respect to all such sales that are sales at retail, the vendor may separately state the sales price of the asphalt or concrete on the bill to the customer. (2) Such sales price must reflect the fair retail selling price of the asphalt or concrete. The fair retail selling price must include the vendor's entire cost of producing the asphalt and any markup. The cost of producing the asphalt or concrete includes, but is not limited to, raw materials costs, labor costs, power and fuel costs, the cost of transportation of the asphalt or concrete before the sale to the customer, overhead expenses, and other production inputs. Unless an exemption applies, the vendor must collect the sales tax on the amount of the separately stated sales price of the asphalt or concrete, but need not collect the sales tax on any separately stated charge for installing, affixing or otherwise physically incorporating the asphalt or concrete into the real property. If the vendor does not state the sales price of the asphalt or concrete on the bill to the customer separately from any service charges for installing, affixing or otherwise physically incorporating the asphalt or concrete into the real property, then, unless an exemption applies, the vendor must collect the sales tax from the customer based on the entire amount that it charges the customer for the asphalt or concrete and the installation, affixation or other physical incorporation of the asphalt or concrete into the real property.

II. Installers of Asphalt or Concrete.

A taxpayer that (i) does not produce asphalt or concrete in an industrial plant and (ii) purchases asphalt, concrete, or their ingredients from another person and (iii) mixes, installs, affixes or otherwise physically incorporates the asphalt or concrete into real property pursuant to any contract or sales agreement with a customer is an installer of asphalt or concrete within the meaning of this TIR. In accord with the Department's long-standing rule and Emergency Regulation No. 12, (3) the Department will treat such installers as contractors, not as vendors. As such, the installers will be considered the consumers of the asphalt and concrete they use in the performance of their contracts, and must pay sales or use tax on their purchases of asphalt or concrete, unless an exemption applies. Any charges for delivery of the property before the sale are included in the sales price subject to tax. No additional sales or use tax is due from customers on the asphalt or concrete.

III. Effective Dates.

- The rule with respect to producers of asphalt and concrete, set out in section I(B) of this TIR, remains essentially the same as that set out in TIR 98-10. For producers, this TIR therefore relates back and applies to transactions that occur on or after October 24, 1998, i.e., 60 days after issuance of TIR 98-10 (August 25, 1998). Producers of asphalt and concrete are treated as vendors.

- Installers who have acted as vendors of asphalt and concrete pursuant to TIR 98-10 have sixty days after the issuance of this TIR to convert to using the rule stated in section II, above. Installers will not be treated as vendors for transactions that occur after that effective date, but will be treated as consumers of the asphalt and concrete they install.

- For Installers who, despite TIR 98-10, may have acted as contractors during the period TIR 98-10 was in force, this TIR applies retroactively; the Department will not seek to collect sales taxes from installers who should have collected taxes from their customers under TIR 98-10. Installers who acted as contractors but failed to pay tax on their purchases of concrete or asphalt remain liable for use tax.

Footnotes:

1. The Board also ruled in favor of the taxpayer with respect to several factual issues relating to the eligibility of certain specific equipment for the exemption afforded by G.L. c. 64H, s. 6(s). This TIR does not address the portion of the Lawrence-Lynch decision concerning the eligibility of specific equipment for the manufacturing exemption afforded by G.L. c. 64H, s. 6(s). Because the application of the exemption under section 6(s) depends on how the equipment is actually used, the Commissioner must continue to determine the applicability of the exemption in light of the specific facts and circumstances in each case. ( return to text)

2. The sales price of related paving materials such as sand or stone products may be included in the sales price of the asphalt or concrete or may be stated separately. In either case, the transfer of related paving materials is subject to the sales or use tax in the manner described in this TIR. ( return to text)

3. Emergency Regulation No. 12, dated July 7, 1966, was never promulgated as a final regulation, but has been cited as authority by the Supreme Judicial Court, among others. See e.g., Ace Heating Service Inc. v. State Tax Commission, 371 Mass. 254 (1976). ( return to text)

/s/Alan L. LeBovidge
Alan L. LeBovidge
Commissioner of Revenue

ALL:DMS:lr:bm
138773
August 01, 2002

TIR 02-12