When a company sells an item but hires an independent contractor to deliver and install it from the contractor's own inventory, who collects sales tax, and does the contractor owe use tax on the inventory it uses?

Plain-English summary

A tax consulting firm, on behalf of a multi-state company that sells, installs, and rents tangible personal property, asked the Commission to resolve a "double-tax" concern: the company sells items to Utah customers but often has an unrelated, independent contractor deliver and install them — sometimes pulling the item from the contractor's own inventory rather than the company's. The company worried it might end up both paying tax to the contractor for the item AND separately collecting/remitting tax from the end customer on the same transaction, and was considering shifting all sales/use tax compliance to its independent contractors by contract.

On installation labor generally: Utah Admin. Code R865-19S-78(A) taxes labor to install tangible personal property onto other tangible personal property, but installation onto real property is nontaxable (even if the installed item never technically becomes part of the real property) — and a single job can be split into taxable and nontaxable portions if it involves both. This rule applies the same way whether the company or its independent contractor does the billing. Nontaxable installation charges must be separately stated on the invoice, or the entire charge (goods plus installation) becomes taxable.

On who collects sales tax:

• If the company sells AND installs an item itself, it's simply the vendor responsible for collecting/remitting tax on the whole charge.
• If the company sells an item but hires an unrelated independent contractor to deliver/install it (out of the contractor's own inventory), and the company bills the customer for the item, the company remains the vendor — defined under Utah Code Ann. § 59-12-102(29) as whoever receives or is owed payment on the sale — responsible for collecting and remitting the full tax, regardless of who actually delivers the goods.
• If instead the company bills the customer only for the item while the independent contractor separately bills the customer for its own delivery/installation charge, then both parties independently owe tax on their own respective charges.
• A company MAY contract with its independent contractor to act as the company's agent for collecting and reporting sales tax — but this doesn't change who's ultimately liable: the company remains responsible to the Tax Commission regardless of any private agency arrangement; a contractor's failure to collect properly only gives the company a contract claim against the contractor, not a defense against the Commission.

On the contractor's own use tax exposure (the core "double tax" worry): The Commission held the independent contractor does NOT owe use tax on inventory it pulls to fulfill the company's sale, as long as the company (not the contractor) is the one who actually sold the item to the end customer. In that structure, the company's reimbursement payment to the contractor for the item is treated as the company buying the item from the contractor for resale — exempt from sales tax if the company gives the contractor a TC-721 resale exemption certificate at the time of purchase. The contractor should not self-accrue use tax on that item, and sales tax is charged to the end customer based only on what the company charges — even if the contractor physically collects it as the company's agent.

What this means for you

Companies selling items installed by an unrelated independent contractor

If you're the one who sold the item to the customer (you bill them, you receive payment), you remain the legally responsible vendor for sales tax purposes — you can't fully offload that responsibility to your installer by contract, though you CAN make the installer your tax-collection agent. Give your installer a TC-721 resale exemption certificate when reimbursing them for inventory they used to fulfill your sale, to avoid a real double-tax problem.

Independent contractors and installers using their own inventory to fulfill someone else's sale

You generally don't owe use tax on inventory you supply this way, as long as you receive a valid resale exemption certificate (TC-721) from the company reimbursing you and the company — not you — made the actual retail sale to the end customer.

Accountants and tax professionals

This ruling is a clean template for any "who's the vendor" question involving drop-shipment-style installed sales through independent contractors: trace who bills the end customer (that party is the vendor), confirm exemption-certificate documentation flows properly between the seller and its supplying contractor, and remember the taxable-vs-real-property installation-labor fork applies identically regardless of which party bills for the labor.

Common questions

Q: If I sell an item but my independent contractor installs it from their own stock, do I still owe the sales tax?
A: Yes, if you're the one billing/receiving payment from the customer — you're the vendor regardless of who physically delivers and installs.

Q: Does my independent contractor owe use tax on the inventory they pull to fulfill my sale?
A: No, as long as you give them a TC-721 resale exemption certificate when you reimburse them and you (not the contractor) made the retail sale to the customer.

Q: Is installation labor always taxable?
A: No — it's taxable when installing personal property onto other personal property, but exempt when installing onto real property (as long as separately stated).

Citations and references

Statutes and rules:

• Utah Admin. Code R865-19S-78(A) (installation labor taxability)
• Utah Code Ann. § 59-12-102(29) (vendor definition)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/99-017.htm

Original ruling text

99-017

Response
May 2, 2000

REQUEST LETTER

99‑017

Re: Request
for Ruling Concerning Installed Sales

Dear NAME:

COMPANY (ACOMPANY@) has been engaged by our client (hereinafter, the ACompany") to perform a limited multi‑state and
local tax compliance review. As part of this review, we are seeking to
determine how the Utah State Tax Commission ("Commission") applies
sales and use tax to certain "installed sale" transactions. In this
letter, the term "installed
sale" refers to any sales in which the Company (sometimes through its
unrelated agent or authorized contractor) sells delivers, and installs tangible
personal property on its customer's behalf.

The purpose of this letter is to describe the
Company's facts and to request the state's position concerning the issues set
forth herein. After you have considered the facts and issues, please provide
COMPANY with a ruling determination, complete with any citations to authorities
supporting the state's position.

Facts

The Company is a STATE corporation. The Company sells,
installs and rents tangible personal property at wholesale and retail in
Utah. A portion of the Company's sales
in Utah are made to customers that will have the tangible personal property
installed by the Company. Most installed sales are actually installed by
independent and unrelated contractors authorized by the Company.

Tangible personal property used to perform a
particular "installed sales" contract is often pulled from an
independent installer's inventory for use. The Company is concerned that it may
be collecting and/or paying two levels of sales and/or use tax on such sales.
For example, if the independent installer uses inventory from their own stock
to perform the installation, the Company is concerned that it may be both, (I)
paying sales or use tax to the installer (either by virtue of the installer's
billing of sales tax to the Company, or on account of the installer's own
payment of use tax then passed through to the Company), and (ii) collecting and
remitting sales

tax received from the end customer or accruing and
remitting use tax on the installation of the tangible personal property.

To resolve this double-tax dilemma, the Company is
contemplating the inclusion of a provision in its contracts with independent
installers that would contractually place all sales and use tax compliance
burdens on the independent installers. In such event, the Company would cease
collecting and remitting sales tax from its retail customers, and the independent
installers would accrue and pay use tax
at the time of installation.

The Company is aware that sales tax should generally
be collected on all sales of tangible personal property unless statutory law
specifically exempts the sale of such property. Some states specifically exempt
installation from sales and use tax. On
both a single- and multi-state basis, the applicable of sales and use taxes in
this context (involving independent contractors, retail stores, and end
customers) is quite confusing, particularly in light of the special rules that
many states apply to contractors. For clarity purposes, we respectfully request
your response to the questions listed after the following fact pattern:

Scenario

A customer enters the Company's retail establishment
and purchases the installation of tangible personal property. The customer
requests that the Company install the tangible personal property. The Company
contracts with an independent contractor or agent to complete the installation.
The independent contractor or agent maintains their own stock of this type of
tangible personal property, removes the tangible personal property from their
personal inventory, and installs it for the customer. The Company prepares a
sales invoice to bill the end customer. The independent contractor or agent
prepares a sales invoice to bill the Company. Both invoices reference the
tangible personal property purchased, as well as the installation services.

$ Is the
independent contractor or agent responsible for paying use tax on tangible
personal property removed from their inventory for use in completing the
installation?

$ Is the
end customer required to pay sales tax to the Company on the tangible

personal property installed?

$ Is the installation
service subject to sales tax?

$ Should
the installation cost be separately stated on the various invoices?

$ Can the
Company contract with the independent contractor or agent to transfer all sales
and use tax compliance requirements to the independent contractor or agent?

Please forward your response to the following address:

NAME

ADDRESS

Thank you in advance for your prompt attention to our
request for ruling. If you need any additional information or have any questions
or comments, please contact me at #####.

Very truly yours,

NAME

RESPONSE
LETTER

May 2, 2000

NAME

ADDRESS

RE: Taxation
of Installation Sales

Dear NAME,

We have received your request for an advisory opinion concerning
the application of sales tax on sales made by your client (the ACompany@). We understand that you are asking how the
sales tax is to be collected and reported when the Company makes the sale, but
an independent contractor is hired by the Company to deliver and install the
item. Let us first address when sales
tax is due on installation charges, then address the specific questions that
concern sales tax collection and reporting.

Sales Tax on Installation Charges. Utah Admin.
Code R865-19S-78(A) provides that charges for labor to install tangible
personal property to other tangible personal property are taxable. However, if the tangible personal property
is installed to real property, the labor charges are nontaxable even if the
personal property does not become part of the real property. There may even be circumstances where the
installation should be broken out into a taxable portion (part of the
installation was to personal property) and a nontaxable portion (part of the
installation was to real property). The
results are the same whether it is the Company or the independent contractor
that is charging or collecting taxes.

Should the installation charge be nontaxable, it
should be separately stated on the customer=s
invoice. Otherwise, the entire amount
charged for tangible personal property and its installation is subject to
tax. You have not described the type of
property installed by the Company nor the circumstances under which it is
installed. Accordingly, we can not
assess whether the installation of property sold by the Company is taxable or
not.

Collecting and Reporting Sales Tax. You have
stated that the Company will make two types of sales in Utah. First, the Company will sell or lease an
item of personal property and install it itself. On this type of sale or lease, the Company is the vendor and
would be responsible to collect and report the sales tax on the price charged
the client.

Second, and most commonly, the Company will sell an
item of personal property, but contract with an independent and unrelated
contractor to deliver and install the item that was sold by the Company. In this circumstance, the independent
contractor provides the item directly to the consumer out of its own
inventory. In Utah, it is the vendor, defined
in Utah Code Ann. '59-12-102(29) as any person receiving any payment or
consideration upon a sale of tangible personal property or to whom such payment
or consideration is payable, who is responsible for collecting sales tax from
the purchaser. Sales tax is due on the
purchase price paid by or charged to the customer. Thus, if the customer has bought the item from the Company, which
may be evidenced by the Company either billing the customer or receiving payment
from the customer, the Company is responsible for collecting and remitting the
sales tax. If the Company only charges
the customer for the item of personal property while the independent contractor
separately charges the customer for its delivery and installation of the item,
then both the Company and the independent contractor have duties to collect and
remit sales tax on their respective charges to the customer.

Generally, the vendor (the Company) is responsible for
collecting and reporting sales tax on the charges made to its customers. However, by terms of their contract, the
independent contractor may act as an agent for the Company with regard to sales
tax reporting, even though the Company is ultimately responsible for reporting
sales tax. In any transaction in which
the Company has the independent contractor collect sales tax on its behalf, we
suggest that you clearly delineate each party=s responsibilities for collecting and reporting sales tax. A breach by the party who is acting as an
agent for the vendor may give rise to a cause of action between the two
parties, but from the Tax Commission=s
perspective, the vendor, in this case the Company, is ultimately responsible
for collecting and remitting the tax on those charges for which it is
considered the vendor.

You have also asked whether the independent contractor
is responsible for paying use tax when it delivers and installs out of its own
inventory an item sold by the Company.
Under the following circumstances, the answer is no: If the Company has made a retail sale to the
customer, then hires the independent contractor to deliver and install the
item, the Company, not the independent
contractor, has sold the item to the customer. Accordingly, when the Company reimburses the independent
contractor for the item that was delivered to Company=s customer, the Company has bought the item from the
independent contractor to resell to its customer. The transaction between the Company and the independent
contractor is exempt from sales tax because of the resale exemption if the
Company provides the independent contractor with a TC-721 exemption certificate
at the time of purchase. Under these
circumstances, the independent contractor should not be self-accruing any use
tax on this item. Sales tax should be
charged to the customer based on the price the Company charges the customer,
even if the independent contractor collects the sales tax as the agent of the
Company.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

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