Labor Charges (Publication 108)
Taxable Labor

Fabrication labor is taxable

Fabrication is considered to be work done in creating, producing, processing, or assembling a product. Modifying an item or system as part of a sale is also considered fabrication. Charges for fabrication labor are generally taxable, whether you itemize your labor charges or include them in the price of the product. This is true whether you supply the materials for the job or your customer supplies the materials.

Examples of fabrication labor include:

• Manufacturing a new piece of machinery.
• Sizing and engraving a new ring you are selling to a customer.
• Altering a customer's cutting die so that it will produce a new and different item.
• Cutting metal or lumber provided by a customer.
• Assembling a customer's new barbecue or new bicycle that came in parts.
• Altering a new suit to better fit the buyer (unless you are considered a clothes cleaner or dyer establishment [see below]).

Alteration of new items includes any work performed upon new items of tangible personal property (merchandise) to meet your customer's specific needs. Your work may involve adding or removing material from the item, rearranging, restyling, or otherwise altering the item. Alterations such as these result in the creation or production of a new item or constitute a step in the creation or production of a new item for your customer and charges for such labor are subject to tax.

Please see Regulation 1506, Miscellaneous Service Enterprises, and publication 125, Dry Cleaners, for information concerning clothes cleaner or dyer establishments. If an establishment is not considered a clothes cleaner or dyer as described in Regulation 1506, Miscellaneous Service Enterprises, tax applies to the charges for altering garments as explained in Regulation 1524, Manufacturers of Personal Property.

Reconditioning and rebuilding parts

The application of tax to charges for reconditioning or rebuilding a part will depend on whether you:

• Return to the customer the same part brought in for repair, or
• Substitute a different part.

If you repair and return the customer's original part, tax generally applies only to the charge for parts and materials furnished in reconditioning or repairing the part. Repair labor is not taxable. For example, you charge $2,800 to rebuild a transmission: $2,000 for parts and $800 for the repair labor. Tax would apply to the $2,000 charge for the parts.

If a different part is returned to the customer, you are considered the retailer of the rebuilt part and tax applies to the entire charge. Using the above example, sales tax is due on the entire $2,800 charge if the transmission returned to the customer was not the same one brought in for repair. If a credit for a core charge is given, you should subtract the core charge credit from the $2,800 before calculating sales tax.

For additional information on labor charges, please see Regulation 1546, Installing, Repairing, Reconditioning in General, and publication 25, Auto Repair Garages and Service Stations.

Services related to a taxable sale

Your charges for services related to a taxable sale are generally taxable. This is true whether you itemize the charges or include them in the price of the product. For example, suppose your taxable sale of a computer program includes 20 hours of training, and the customer cannot buy the program without the training services. The training is taxable as part of the sale whether you show a separate charge for it on your invoice or charge one amount for the program and training together.

Another example of a taxable service charge would be a "trip charge" you make in association with a taxable sale. Please note that if your bill includes taxable and nontaxable charges along with an itemized service charge, part of the service charge may not be taxable. For help determining how tax applies to charges by locksmiths, please see publication 62, Locksmiths.