Can a manufactured-housing contractor pay Utah use tax on just the raw-material percentage of prefabricated home panels shipped in from out of state, the same way a site-built home is only taxed on materials?

Plain-English summary

A Utah representative of a Georgia-headquartered manufactured/panelized housing company (with manufacturing in South Carolina, operating in 40 states and 17 countries) asked the Commission how to compute Utah use tax on homes built from factory-fabricated 8-foot panels shipped to the Utah job site and quickly assembled. The company argued that because a traditional site-built home is taxed only on raw materials (labor, contractor profit, and overhead are untaxed, and subcontractors like plumbers and electricians are taxed only on the materials they buy), and because only about 30% of the panelized home's retail price (or 37.5% of wholesale price) represented actual material cost -- the remaining 70%/62.5% being factory labor and profit -- Utah should compute use tax using only that material-cost percentage, to keep the tax burden comparable to a site-built home.

The full purchase price is taxable, not just the material percentage. The Commission rejected the proposed materials-only formula. Utah imposes use tax on tangible personal property purchased out of state for use/consumption in Utah, and for construction materials, that liability falls on the real property contractor as the last consumer of the property before it's converted into real property (Utah Admin. Rule R865-19S-78) -- there's no sales tax on the sale of the finished real property to the ultimate homeowner. But the KEY distinction the Commission drew: under Utah Admin. Rule R865-19S-51, charges for labor to FABRICATE a finished article of tangible personal property must be included in the taxable amount. The prefabricated wall panels remain tangible personal property (not yet real property) until the contractor installs and converts them at the job site -- so the entire price paid for the assembled panels, including the factory assembly labor baked into that price, is taxable use tax base, not just the raw lumber/fasteners/windows/doors cost.

Why this differs from a site-built home. In a conventional site-built home, subcontractors (plumbers, electricians, cabinet makers) are taxed only on the materials they buy, because their labor is performed on-site as part of directly converting those materials into real property -- there's no separate "fabrication into a finished article of personal property" step before installation. In panelized construction, by contrast, the factory-assembly step happens BEFORE the property reaches Utah and BEFORE it's converted to real property, so that fabrication labor is captured in the taxable price of the personal property itself, just as it would be for any manufactured product.

Nexus and reporting mechanics. The out-of-state Georgia supplier is only responsible for collecting and remitting Utah use tax if it has sufficient Utah presence to create nexus (e.g., maintaining a stock of goods in Utah, per § 59-12-107(1)(a)(ii)). If the supplier hasn't collected use tax on the panels, the contractor itself must self-accrue and report the use tax on its next tax return -- covering both the construction materials/panels incorporated into the home and any other out-of-state purchases (like hand tools) used on the job.

What this means for you

Manufactured and panelized/modular housing companies

Expect Utah use tax to apply to the full price you pay for factory-fabricated components, including the assembly/fabrication labor built into that price -- not just a pro-rated raw-material percentage. This is a materially different tax base than a comparable site-built home, where subcontractor labor performed after materials arrive isn't separately taxed.

Real property contractors buying prefabricated components from out of state

If your out-of-state supplier doesn't have Utah nexus and doesn't collect use tax at the time of sale, you're responsible for self-accruing and reporting the use tax yourself on your next return -- track both your prefabricated component purchases and any other out-of-state equipment/supply purchases used on the job.

Accountants and tax professionals

This ruling is a clean illustration of the fabrication-labor rule (R865-19S-51) applied to distinguish factory-prefabricated construction from traditional site-built construction, and a reminder that "materials only" taxation for real property contractors applies specifically to raw construction materials, not to purchased components that already embed finishing/assembly labor.

Common questions

Q: Is use tax on prefabricated home panels based only on the raw material cost?
A: No. The Commission requires use tax on the full purchase price of the assembled panels, including the factory labor used to fabricate them, not just the material percentage.

Q: Why are panelized homes taxed differently than site-built homes on the labor question?
A: Because the fabrication of panels into a finished article of personal property happens in the factory, before the materials reach Utah or get converted to real property -- fabrication labor for finished personal property is taxable, unlike on-site installation labor that occurs as materials are being converted directly into real property.

Q: Who owes the use tax if an out-of-state supplier doesn't collect it?
A: The Utah real property contractor, as the last consumer of the property before conversion to real property, must self-accrue and report the use tax on its own return.

Q: Is the finished home taxable to the homeowner who buys it?
A: No. There's no sales tax on the sale of the finished real property to the ultimate homeowner; the tax falls on the contractor's purchase of the materials/components.

Q: Does this ruling apply to my manufactured housing or modular construction business?
A: No. It binds the Commission only for the requesting taxpayer and the facts described, and can't be relied on by another taxpayer, though it illustrates how the Commission applies the fabrication-labor rule to prefabricated construction.

Citations and references

Statutes and rules:

• § 59-12-107(1)(a)(ii) (out-of-state vendor nexus via stock of goods)
• Utah Admin. Rule R865-19S-78 (real property contractor liable for use tax on materials converted to real property)
• Utah Admin. Rule R865-19S-51 (fabrication labor included in taxable amount for finished tangible personal property)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-097.pdf

Original ruling text

96-097

Response
June 17, 1996

Request

XXXXX

Utah
State Tax Commission

210
N. 1950 W.

Salt
Lake City, UT 84134

I
am writing to request a special ruling on a question of use tax as it may
pertain to manufactured �panelized� homes which are partially fabricated in a
factory and assembled on the job site. In discussing this matter with members
of the tax commission staff, no one had a clear answer so I was advised to
write to you.

I
represent XXXXX in the state of Utah. XXXXX is a company headquartered in
Atlanta, Georgia, with manufacturing facilities in South Carolina. The company
is represented in 40 states and 17 foreign countries. The product in question
is manufactured housing. Manufactured housing comes in various forms, but with
respect to this company, homes are fabricated into panels approximately 8 feet
square in the factory. The panels are labeled and shipped to the job site where
they are quickly assembled into the finished home.

The
question is what is a fair formula for computing use tax. Homes which are
entirely site built pay sales or use tax on materials only. Labor, contractor
profit and overhead are not taxed. The same applies to cabinets, plumbing,
electrical, etc. The home buyer is not charged sales tax on the work done by
these subcontractors. As I understand it, anything fully installed and
converted to real property is not subject to sales tax. Only the materials
purchased by the cabinet shop, plumber or electrician are taxed.

In
the case of panelized construction, only about 30% of the retail cost is
comprised of purchased materials. These materials are precisely the same as
those purchased for any site-built home, i.e. lumber, fasteners, windows,
doors, etc. The remaining 70% consists of labor and profit (please see enclosed
letter from XXXXX). If use tax were paid on the full price of the home, it
would be unfair relative to the comparable site built home.

I
intend to comply with the requirement to pay use tax on items purchased out of state
such as these panelized homes, but would respectfully request that the
percentage of actual material content be used in order to compute the use tax.
Only in this way will it be consistent and fair relative to existing practice
by contractors and subcontractors in the State of Utah.

Thank
you for your time and attention to this request. I look forward to your reply.

Sincerely,

XXXXX

XXXXX

Dear
XXXXX

This
will acknowledge our recent conversation regarding your request for a breakdown
of the material and labor costs for our house packages.

Based
on the suggested retail price, the materials account for approximately 30% of
costs. The remaining 70% consists of labor and profit. Using the wholesale
price, the materials cost is approximately 37.5% and labor and profit is 62.5%.

Please
contact me if you have any further questions.

Sincerely,

XXXXX

XXXXX

Advisory
Opinion - Use tax on construction materials shipped into Utah.

Dear
XXXXX,

We have received your request for
guidance concerning your company�s responsibility to pay or collect and remit
use tax on construction materials shipped into Utah from a Georgia
supplier. From the description provided
in your request letter, we cannot determine the exact nature of your
transactions with the Georgia supplier and the ultimate homeowner. However, for purposes of this opinion, we
assume that you purchase the construction materials (some of them may be
assembled in some fashion prior to shipment) from an out-of-state supplier, you
build the home, then you sell the finished home to your end customer. On that basis, we find as follows:

Utah imposes a use tax on the
storage, use or consumption of tangible personal property purchased from out-of-state
for use or consumption in this state.
With regard to construction materials, the liability for the use tax
falls on the real property contractor as the last consumer of the property
before it is converted to real property.
(See Utah Administrative Rule R865-19S-78, copy enclosed.) There is no sales tax due on the sale of
real property to the eventual homeowner.

XXXXX, as the real property
contractor is liable for use tax on items purchased for incorporation into the
finished home. Normally, your supplier
is responsible for collecting the sales tax and remitting it to the Tax
Commission. However, an out-of-state
supplier is not responsible for collecting and reporting Utah use tax unless it
has a presence in Utah sufficient to create nexus. Utah Code Section 59-12-107 (1) states, in pertinent part:

(ii) maintains a stock of goods;

. . .

We cannot determine from your
description whether your supplier has such a
presence in Utah that it should be collecting and remitting use
tax. If your supplier has not collected
use tax on the materials, you must accrue the use tax and report it on your
next income tax return. The use tax due is based on your cost of any equipment
or supplies that you purchase from an out-of- state vendor for use on the job
(such as hand tools) and on your cost of construction materials purchased for
incorporation into the finished home.
The cost of the finished home and the labor to construct the home is not
taxable to the final home buyer.

You enclosed a copy of a letter from
your supplier which indicates an approximate break down of costs associated
with supplies, labor and profit. We are
not sure how this information is relevant unless you are concerned about
charges for labor to assemble the prefabricated parts. Under Utah Administrative Rule R865-19S-51,
charges for labor to fabricate a finished article of tangible personal property
must be included in the amount upon which the tax is collected. The prefabricated panels remain tangible
personal property until you, as the real property contractor, convert them to
real property. The entire charge for
assembled panels is taxable.

Please contact us again if you have
other questions.

For
the Commission,

Alice
Shearer,

Commissioner