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project and to provide additional services to the companies
contracting for the installation of the flooring materials. In
particular, Smith Floors takes delivery of flooring materials at
its warehouse, inspects the materials to ensure that they conform
in both quality and quantity with the specifications for the
particular job, inspects the job site to verify that installation
may proceed, and delivers the flooring materials to the job site
in advance of the installation date to allow the materials to
“acclimate” to the environment. Smith Floors charges its
customers for those services as a percentage markup on the cost
of the flooring materials.
Smith Floors frequently installs either proprietary or
custom-designed flooring materials. Normally, the companies
contracting with Smith Floors negotiate the price of such
flooring materials in advance directly with the manufacturer of
the flooring materials. Smith Floors is neither a manufacturer
of merchandise nor a retail seller of flooring materials.
Based on the foregoing, we hold that Smith Floors does not
produce, purchase, or sell merchandise within the meaning of
section 1.471-1, Income Tax Regs. Smith Floors’ practice of
purchasing the flooring materials for a particular job is
incidental and secondary to Smith Floors’ provision of flooring
installation services. Accordingly, considering all of the facts
and circumstances of the instant case, we hold that respondent’s
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