Does a manufacturer collect Missouri sales tax on a structure that becomes real property once installed, or does the manufacturer pay tax on its own materials instead?

Plain-English summary

The Missouri Department of Revenue addressed a manufacturer that builds a large, free-standing structure -- separate from any main building -- that is installed on a concrete foundation with anchor bolts. Applicant manufactures the structure and hires a third-party installer, then invoices dealers directly for the supply, freight, and installation.

The Department ruled on four connected issues:

1. Does the structure stay tangible personal property once it's in the ground? No. Once permanently affixed to the ground, the structure converts from tangible personal property into real property.

2. How is the sale of the structure taxed? This depends entirely on when title to the structure passes from Applicant to the purchaser, under the general rule in 12 CSR 10-112.010. If title passes before installation, the transaction is a sale of tangible personal property: Applicant doesn't pay tax on its own purchase of materials, but must collect sales tax on the price charged to the purchaser. If title passes after installation, Applicant is instead subject to tax on its own purchase of the tangible personal property (as a contractor using materials to improve real estate) and does not collect sales tax on the transfer of the finished, now-real-property structure. As a default rule, title passes after installation is complete unless the contractor and purchaser expressly agree otherwise.

3. How is the installation itself taxed? Also governed by the same title-passage timing. If title passes after installation, there's no separate taxable sale of tangible personal property tied to the installation -- it's simply a non-taxable service. If title passes while the structure is still tangible personal property, the installation service is likely taxable too, because the installation and the sale of the structure are "non-separable" -- the installation service couldn't happen without the sale of the property, so the whole bundled transaction is treated as taxable.

4. How are repairs to the structure taxed? This uses a different framework -- the "true object" test. If the true object of the repair transaction is the tangible personal property involved (parts), the entire sale price is taxable. If the true object is the repair service itself, it is not taxable, even if some parts are involved.

What this means for you

Manufacturers and contractors of site-built structures and equipment

If you manufacture large structures, equipment, or fixtures that get permanently attached to real estate -- and especially if you also arrange for installation -- this ruling shows that your sales tax treatment turns on the timing of title transfer, not on how the item is described or invoiced. Determine, ideally in a written contract, whether title to the structure passes to the buyer before or after installation. If you intend to be treated as a retailer collecting sales tax on the full sale price (rather than paying tax yourself on materials), you likely need to expressly document that title passes before installation, since the default assumption is that title passes only after installation is complete.

Contractors who both sell and install tangible personal property that becomes real property

Because installation charges are taxed the same way the underlying sale is taxed, you cannot treat installation as automatically non-taxable. If title to the item passes before you install it, the installation is likely bundled into the taxable sale as a "non-separable" service. Only when title passes after installation -- the default -- does the installation escape sales tax as a standalone service.

Accountants and tax professionals advising manufacturers or contractors

When evaluating a transaction involving a structure or fixture that becomes real property upon installation, first pin down (1) when title passes under the contract or, absent an agreement, under the default rule in 12 CSR 10-112.010, and (2) separately, for any repair work, what the "true object" of that specific transaction is (parts versus service). These are two distinct analyses -- don't apply the title-passage timing rule to repair transactions, which instead hinge on true object.

Common questions

Q: Does a large structure stay taxable as tangible personal property forever once Applicant builds it?
A: No. Once the structure is permanently affixed to the ground, it converts from tangible personal property to real property. That conversion is what triggers the need to analyze title-passage timing for sales tax purposes.

Q: Who pays sales tax on the structure -- Applicant or the purchaser?
A: It depends on when title passes. If title passes to the purchaser before installation, Applicant collects sales tax from the purchaser on the sale price (and doesn't pay tax on its own material purchases). If title passes after installation -- the default rule absent an express agreement otherwise -- Applicant instead pays tax on its own purchase of the materials and does not collect sales tax from the purchaser on the finished structure.

Q: Is the installation charge separately taxed from the structure itself?
A: Not really -- it follows the same title-timing rule as the sale. If title passes after installation, the installation is a non-taxable service. If title passes before installation, the installation is likely taxable because it is "non-separable" from the taxable sale of the structure (the installation service couldn't occur without the property sale).

Q: How can Applicant (or a similar manufacturer) control whether it collects sales tax or pays tax on materials?
A: By controlling when title passes, generally through the contract terms. The default rule is that title passes after installation is complete, so a manufacturer that wants to instead collect sales tax on the full sale price would need to expressly agree with the purchaser that title passes before installation.

Q: Are repairs to the structure taxed the same way as the original sale?
A: No -- repairs use a separate "true object" test, unrelated to title-passage timing. If the true object of the repair transaction is the tangible personal property (parts) included with the service, the entire sale price is taxable. If the true object is the repair service itself, it is not taxable, even if some parts are involved.

Q: Can another manufacturer rely on this ruling?
A: Not automatically. A Missouri letter ruling binds the Department only as to the requesting Applicant, only for three years from its date, and only so long as the facts and law remain unchanged. A similarly situated manufacturer should confirm its facts match those described here and consult a tax professional before relying on this result.

Citations and references

Statutes and regulations:

• Section 144.020.1(1), RSMo (imposing the 4% state sales tax rate on retail sales of tangible personal property)
• Section 144.610.1, RSMo (imposing the parallel use tax on tangible personal property)
• 12 CSR 10-112.010 (general rule on title passage for contractors installing tangible personal property into real property)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8260

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated May 22, 2023.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is manufacturing a large structure. It is free standing and stands proud of the main building. It is installed to a concrete foundation on a series of anchor bolts, and Applicant has provided several drawings of the structure for clarification.

Applicant is manufacturing the structure and is hiring a 3 rd party to install. They then invoice the dealers directly for the supply, freight, and invoice.

ISSUE 1 :

Does Applicant's structure retain its character as tangible personal property when it is embedded in the ground?

RESPONSE 1 :

No. Applicant's structure changes from tangible personal property to real property when it becomes permanently affixed to the ground.

ISSUE 2:

What are the sales and use tax consequences on the sale of the structure?

RESPONSE 2 :

Section 144.020.1(1) RSMo, provides:

Upon every retail sale in this state of tangible personal property, excluding motor vehicles, trailers, motorcycles, mopeds, motortricycles, boats and outboard motors required to be titled under the laws of the state of Missouri and subject to tax under subdivision (9) of this subsection, a tax equivalent to four percent of the purchase price paid or charged, or in case such sale involves the exchange of property, a tax equivalent to four percent of the consideration paid or charged, including the fair market value of the property exchanged at the time and place of the exchange, except as otherwise provided in section 144.025.

Section 144.610.1, RSMo, provides:

A tax is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property, excluding motor vehicles, trailers, motorcycles, mopeds, motortricycles, boats, and outboard motors required to be titled under the laws of the state of Missouri and subject to tax under subdivision (9) of subsection 1 of section 144.020, purchased on or after the effective date of sections 144.600 to 144.745 in an amount equivalent to the percentage imposed on the sales price in the sales tax law in section 144.020.

The sales and use tax consequences on the sale of the structure will depend on when title to the structure is transferred from Applicant to the purchaser. The general rule is explained by regulation 12 CSR 10-112.010. If title passes from the contractor to the purchaser before attachment of the tangible personal property, the contractor does not pay tax on its purchase, but must collect tax on the sale price of the item. If title passes after the attachment, the contractor is subject to tax on its purchase of the tangible personal property and does not collect tax on its transfer of ownership or title of the item. In general, title passes after installation is complete, unless the contractor and purchaser expressly agree otherwise.

If title to the structure passes from Applicant to the purchaser, or the 3 rd party, before installation into real property, this is treated as a sale of tangible personal property and subject to tax when sold to the purchaser. If title to the structure remains with Applicant until after the structure has been affixed to real property, then Applicant should not charge sales tax to the purchaser, but should accrue use tax on any items stored, used, or consumed within the state.

ISSUE 3:

What are the sales and use tax consequences on the installation of the structure?

RESPONSE 3:

In general, the sale of tangible personal property is subject to tax unless a specific statute exempts. The sale of a service is not subject to tax unless a specific statute authorizes the taxation of the service.

Whether or not sales tax is charged on the installation of the structure will similarly depend on whether or not title passes from Applicant to the purchaser before or after the installation as real property. If title passes after the property is installed, then there is no sale of tangible personal property and only the sale of a service. If title passes when the structure is still considered tangible personal property, then the installation services will likely be subject to tax. When a sale involves both tangible personal property and a nontaxable service, the sale of the tangible personal property will be subject to tax, and the service will not be subject to tax, if the sale of each is separate. Here, the sale of the service would not be possible without the sale of the tangible personal property, so they are non-separable.

ISSUE 4:

What are the sales and use tax consequences on the repair of the structure?

RESPONSE 4:

The sales and use tax consequences on the repair of the structure will depend on the true object of the repair transaction. Generally speaking, repair services are not one of the specifically enumerated services taxed under chapter 144. However, repair services can also include the sale of tangible personal property. If the true object of the repair transaction is for the tangible personal property included with the service, then the entire sale price is taxable. If the true object of the repair transaction is for the repair service, than it is not subject to tax.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford