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Idaho: Is a Reconfiguration a Repair or Something New?


When is a reconfiguration of existing tangible personal property really a fabrication of something new? The distinction matters, at least to the Idaho State Tax Commission, because it impacts the taxation of these items. It also matters to at least one Idaho taxpayer -- a retailer who sells office furniture and equipment and who has been handed a bill in the amount of $11,519 for additional sales and use tax, penalties and interest.

The taxpayer designs office systems for customers who are then at liberty to purchase the office systems from either the taxpayer or a competitor. If the customer opts to go with a competitor, he is charged for the design of the system, which is not taxed because it does not involve the transfer of tangible personal property. The design may never be realized. The Sales Tax Audit Bureau (Bureau) does not dispute this.

If the customer opts to have the taxpayer reconfigure or assemble the system "according to the design specifications set forth in the blueprints," the taxpayer "properly charged sales tax on sales of the parts and materials… ."

There is, however, a point of contention between the Bureau and the taxpayer. The dispute regards the "taxability of design or assembly labor charged alongside the sale of a new or reconfigured system." Pursuant to Idaho law, installation charges are exempt from sales tax but "service and labor costs underlying a sale of tangible personal property are part of the taxable sales price."

Based on all the evidence, the State Tax Commission finds the following:

  • Labor required to assemble the cubicles is not installation labor because "assembly and fabrication labor necessary to bring a product into a finished state are, by rule, specifically included in the sales price subject to tax (IDAP 35.01.02.044.02.a). The Commission argues without the assembly and fabrication, the product is not finished.
  • The "fully fabricated system … seems like a fundamentally different product than the individual pieces prior to assembly."
  • In reconfiguring existing systems the "sale of tangible personal property is minimal, [and] it seems unreasonable to treat the design labor as a service agreed to be rendered as part of the sale."
  • "…[T]he labor to reconfigure a small part of an existing system seems more akin to a repair of an existing tangible personal property rather than fabrication of something new." The Idaho State Tax Commission points out that "[r]epair labor is excluded from the sales price subject to tax." (IDAPA 35.01.02.062.02).

The Tax Commission therefore "reduces the Notice" for the portion of jobs that are reconfiguration jobs -- more like a repair than the creation of something new. As a result of the findings, instead of being charged $11,519, the taxpayer is hereby charged $10,197.

It's pity for the taxpayer that more transactions were not like repairs.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.