Was a Florida-built vessel used only outside Florida in interstate commerce subject to use tax?

Plain-English summary

Florida found no use tax due on the self-built vessel because its interstate-commerce apportionment produced no Florida mileage. The company built the vessel in Florida, then immediately placed it in service carrying materials and personnel to Gulf oil rigs from Louisiana and Texas.

Self-fabrication ordinarily would trigger use tax on full fabricated cost. But vessels transporting persons or property in interstate or foreign commerce were taxed under the special mileage-apportionment rule. Because this vessel did not operate in Florida canals or inland waterways and had no qualifying Florida mileage, the tax ratio was zero.

What this means for you

Building property for your own use can create tax even if the property later leaves Florida. This result depended on the vessel-specific interstate-commerce rule and zero Florida mileage, not merely on out-of-state use.

Common questions

Q: Was the vessel exempt simply because it left Florida after construction? No. The ruling relied on its interstate-commerce use and zero Florida mileage.

Q: What if the vessel were not used in interstate or foreign commerce? The ruling says use tax would apply to full fabricated cost even if the vessel were used outside Florida.

Citations and references

• Fla. Stat. § 212.06(1)(b) — self-fabricated property
• Fla. Stat. § 212.08(8) — vessels in interstate or foreign commerce
• Fla. Admin. Code r. 12A-1.043 — fabricated cost
• Fla. Admin. Code r. 12A-1.064(5)(c) — Florida mileage
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-054

Original ruling text

SUMMARY

QUESTION: Does sales/use tax apply to a vessel manufactured
in Florida for use outside Florida to transport persons or
property in interstate or foreign commerce?

ANSWER - Based on Facts Below: No. The taxpayer is eligible
for the exemption provided in s. 212.08(8), F.S. As
provided in paragraph 212.06(1)(b), F.S., equalizes the
taxpayer with a taxpayer that purchases and takes
possession of similar tangible personal property at retail
in this state or that imports tangible personal property
into this state. It is clear that the vessel manufactured
in this state will be used in interstate and foreign
commerce to transport persons and property in interstate
and foreign commerce and is subject to sales and use tax to
the extent provided in s. 212.08(8), F.S. Since the vessel
will not operate in the canals or inland waterways of
Florida, the vessel will not have any Florida mileage for
calculation of the apportionment ration; no tax will be
due.

Dec 26, 2002

Re: Technical Assistance Advisement 02A-054
XXX ("Client")
Sales and Use Tax
Purchase of Vessel
Sections 212.02(20), 212.06(1)(b), 212.08(8), F.S.
Rules 12A-1.043, 12A-1.064(5)(c), F.A.C.

Dear :

This is in response to your letter of September 6, 2002, in
which you requested the issuance of a Technical Assistance
Advisement (TAA) pursuant to s. 213.22, F.S., and Ch. 12-11,
F.A.C., regarding the referenced matter. The Department has
carefully examined your request and supporting documents and

finds them to be in order.

Statement of Facts

Your letter of September 6, 2002 states in part:

[Client], a Florida corporation, with its primary offices
located in XXX. The vessel XXX ("Vessel") was not purchased
by [Client], but was actually built by [Client]for use in
its marine transportation business. The [Vessel] was
completed and placed in service in July 2001. It was built
at [Client's] facility in ..., Florida. Immediately upon
the completion of its construction, the [Vessel] left
Florida's coastal waters. At all times pertinent hereto, it
has been registered in New Orleans, Louisiana, and docks in
Louisiana and Texas. The [Vessel] is used to haul materials
and personnel to oil rigs in the Gulf of Mexico.

[Client] did not pay Florida sales tax on the materials
used to construct the [Vessel], which were purchased from
various suppliers located within and without the State of
Florida. It will likely be drydocked approximately every
two years for repairs in ..., Florida. Based on [Client's]
past experience, the period of time it will be in Florida's
waters for repairs will not exceed two weeks every two
years. Otherwise, the only connection the [Vessel] has with
Florida is that it was constructed in Florida, and its
owner, [Client], is a Florida corporation with its primary
business offices located here. [Client] is not actively
engaged in the business of manufacturing vessels for itself
or for resale. The construction of the [Vessel] (and any
other vessels now or in the future) would likely qualify as
isolated transactions, and would qualify as a very small
part of [Client's] overall business activities.

The Department of Revenue issued an inquiry to the taxpayer on
May 25, 2001, questioning the taxability of the [Vessel].
Through its representatives, Client has engaged in
correspondence and discussions with the Department's Senior Tax
Specialist, Randal Dalton, but no agreement has been reached.
Client and Mr. Dalton have agreed that Client may seek

resolution of this question by seeking a Technical Assistance
Advisement. Client is not under audit and has not received a
formal notice or bill from the Department relating to the
transactions and activities described herein.

In addition to the statements of fact contained in your letter
dated September 6, 2002, you have identified the following
inaccuracies in your letter of September 24, 2002:

1. The original request states, in the second full paragraph
   on page 2, that [Client] is not actively engaged in the
   business of manufacturing vessels for itself or for resale,
   and that such activities constitute "isolated
   transactions." However, [Client] does desire to manufacture
   additional vessels for its own use, and to make repairs to
   such vessels.
2. Although [Client] does not presently manufacture vessels
   for resale, it does maintain a current dealer's license.
   [Client] may desire to manufacture or purchase vessels for
   resale in the future.
3. There is a typographical error in the third full paragraph
   on page 3. The fourth sentence of that paragraph states
   that the subject vessel has operated in Florida's waters.
   It should state that it has not operated in Florida's
   waters. In fact, my client has pointed out that Florida law
   prohibits the particular drilling activities in which
   [Client] engages in Florida's coastal waters.

Your letter of October 30, 2002 provides the following
information as it relates to the vessels now owned by Client and
its affiliate, XXX ("Affiliate"):

1. All of [Client's] vessels are registered with the National
   Vessel Document Center, located in XXX Enclosed is a copy
   of the Certificate of Inspection issued by the United
   States Coast Guard for XXX ("Vessel 2"). All other vessels
   are similarly registered.
2. [Client] is the registered owner of all of the vessels in
   question.
3. All of the vessels have been built by [Client]. XXX
   ("Division"), which has been a division of [Client] (not a

separate entity or subsidiary of [Client]) since 1982.
Prior to 1982, [Client] and [Division] were separate
corporations, which were owned, 100 percent, by the same
shareholders.

4. Enclosed are complete specification sheets, describing the
   size and type of each of the vessels. None of the vessels
   are designed or used for "cruising" or recreational
   purposes. The specification sheets also document the dates
   each of the vessels were completed and placed into service.
5. [Client] operates the eleven vessels built and owned by it.
   [Client] employs the captains and crews for each of the
   vessels. [Affiliate], is a separate corporation affiliated
   with [Client], which operates two vessels, which it also
   owns (including the employment of the captains and crews).
   [Affiliate] does not operate [Client's] vessels.
6. [Client] files tax returns for the following states:
   Alabama, Florida, Louisiana, Mississippi and Texas.
   Enclosed are the tax returns filed for 2001. (Because there
   was no Mississippi income for 2001, no return was filed for
   that state for 2001.) Also enclosed are copies of the
   Foreign Corporation Annual Reports for those states. In
   addition to the [aforementioned taxes], [Client] [paid] the
   parish taxes required by Louisiana for any vessel which is
   docked in its parish as of December 31 of any calendar
   year.
7. Each [Client] vessel is required to keep a "Vessel Daily
   Log", detailing all of its activities for each day. This
   serves as the basis for determining the nexus of each
   vessel for state income tax purposes. The proration of
   state income taxes for [Client] is determined based on this
   document.
8. Of the eleven vessels now owned by [Client], eight were
   built by its [Division], and three were purchased
   separately.
9. [Client] occasionally (but rarely) contracts to do repairs
   for vessels owned by other parties. Such work is generally
   performed under contracts for less than three months.
10. When [Client] purchases materials used to build a vessel,
    the vendor is shown [Client's] sales tax certificate.
    [Client] has sales tax certificates for Florida, Louisiana
    and Texas.

Requested Ruling

Client requests that the Department issue a ruling finding that,
under the facts and circumstances stated herein, the subject
vessel, [Vessel], is not subject to Florida sales and use tax.

Discussion & Determination

Section 212.02(20), F.S., states, in part that "[u]se" means and
includes the exercise of any right or power over tangible
personal property incident to the ownership thereof, or interest
therein...." As the Florida Supreme Court observed in U.S.
Gypsum Co. v. Green, 110 So.2d 409, 412 (Fla. 1959), the
"primary function of the use tax is to complement the sales
tax." See also, Scripto, Inc. v. Carson, 104 So.2d 775, 779
(Fla. 1958), aff'd 362 U.S. 207 (1960) (referring to the sales
and use tax as "two complementary forms of taxation," and noting
that the primary objective of the taxes "is to produce revenues
for the operation of the government," by taxing "the exercise of
the privilege of making the purchase in one instance and of
using, storing or consuming the property purchased in the other
instance"). The fabrication of tangible personal property is
clearly the exercise of control over that tangible personal
property. Paragraph 212.06(1)(b), F.S., provides that when a
person "manufactures, produces, compounds, processes, or
fabricates" tangible personal property for that person's own
use, the tax is based on the full fabricated cost of that
property, without any deduction on account of the cost of
material used, labor or service costs, or transportation
charges, notwithstanding the provisions of section 212.02, F.S.,
defining "cost price."

The Florida legislature added paragraph 212.06(1)(b), F.S., in
1969, providing for a tax on the fabrication costs of those
fabricating in Florida for their own use (Chapter 69-383, s. 1,
Laws of Florida), in response to Halliburton Oil Well Cementing
Company v. Reily, 374 U.S. 858 (1962). In that case the United
Supreme Court examined Louisiana's use tax statute, which is
similar to that of Florida. Taxpayer fabricated special
equipment in XXX for use in XXX. The Court held that XXX use

tax, which applied to the imported equipment's full fabricated
costs, including labor, discriminated against interstate
commerce, in violation of the Commerce Clause of the Federal
constitution, because a similarly situated in-state taxpayer
would only have had to pay tax on materials used. The United
States Supreme Court, in declaring the taxing scheme
unconstitutional, held that "equal treatment for in-state and
out-of-state taxpayers similarly situated is a condition
precedent for a valid use tax on goods imported from out-ofstate."

In 1972, in U.S. Steel Corp. v. Dickinson, 272 So.2d 497 (Fla.
1972), the Florida Supreme Court upheld taxation of fabrication
costs of an out-of-state structural steel fabricator, noting
that there was similar taxation of the costs of those who
fabricated structural steel in Florida. Paragraph 212.06(1(b),
F.S., was also upheld in Gore Newspaper Co. v. Department of
Revenue, 398 So.2d 945 (Fla. 4th DCA 1981). In that case, the
taxpayer was an in-house shop for letterhead, memo pads and
other forms. That case dealt with equalizing the in-state selffabricator with a taxpayer that has to buy at retail.

Here, the taxpayer manufactures vessels for its own use.
Paragraph 212.06(1)(b), F.S., equalizes the taxpayer with a
taxpayer that purchases and takes possession of similar tangible
personal property at retail in this state or that imports
tangible personal property into this state. Had this
manufactured vessel been purchased in Florida or imported into
Florida by an out-of-state manufacturer, for its own use, then
it is undisputed that the full use tax would be due. When the
taxpayer manufactured the vessel for its own use, taxpayer
became the ultimate consumer of the vessel and pursuant to
paragraph 212.06(1)(b), F.S., taxpayer should have paid use tax
based on the full-fabricated cost of the vessel, whether
taxpayer used the manufactured vessel in Florida or outside the
state. See Rule 12A-1.043, F.A.C., for further guidance on the
elements included in the taxable cost of each item.

However, it is understood by the facts outlined above that the
vessels are never used in Florida waters but are used to
transport persons or property in interstate or foreign commerce.

The taxpayer stated that the vessels will be used outside this
state to haul materials and personnel to oil rigs in the Gulf of
Mexico.

Section 212.08(8), F.S., provides that the sale or use of
vessels engaged in interstate or foreign commerce may only be
taxed as provided therein. Paragraph 212.08(8)(a), F.S., reads
in part as follows:

...The basis for the tax shall be the ratio of intrastate
mileage to interstate or foreign mileage traveled by the
carrier's vessels which were used in interstate or foreign
commerce and which had at least some Florida mileage during
the previous fiscal year.... Items, appropriate to carry
out the purposes for which a vessel is designed or equipped
and used, purchased by the owner, operator, or agent of a
vessel for use on board such vessel shall be deemed to be
parts of vessel upon which the same are used or consumed.
Vessels and parts thereof used to transport persons or
property in interstate and foreign commerce are hereby
determined to be susceptible to a distinct and separate
classification for taxation under the provisions of this
chapter....

With regard to the definition of "Florida mileage" as specified
in the above statute, rule 12A-1.064(5)(c), F.A.C., excludes as
Florida mileage any mileage from the territorial limit to port
dockside and return into international waters.

The question here is, had the taxpayer purchased the vessel in
Florida, rather than manufactured it, would the taxpayer would
be eligible for the exemption provided in s. 212.08(8), F.S.?
As provided above, paragraph 212.06(1)(b), F.S., equalizes the
taxpayer with a taxpayer that purchases and takes possession of
similar tangible personal property at retail in this state or
that imports tangible personal property into this state. It is
clear that the vessels are used in interstate and foreign
commerce to transport persons and property in interstate and
foreign commerce and are subject to sales and use tax to the
extent provided in s. 212.08(8), F.S. The vessels do not
operate in the canals or inland waterways of Florida, but rather

they travel from international waters to port dockside in
Louisiana, and then from port dockside in Louisiana back to
international waters.

Conclusion

Based on the provisions of s. 212.08(8), F.S., these vessels
fall within a distinct and separate classification for taxation
and are eligible for the exemption provided therein. Since the
vessels will not have any Florida mileage for calculation of the
apportionment ratio, no tax will be due.

It should be noted, however, that if the vessels were not used
for this purpose, use tax would apply to total full-fabricated
cost, regardless of whether the vessels will be used in Florida
or outside Florida, pursuant to s. 212.06(1)(b), F.S.

This response constitutes a Technical Assistant Advisement under
Section 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the requests for
this advice, as specified in Section 213.22, F.S. Our response
is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules, upon which this advice is based, may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. The Department acknowledges
receipt of your edited copy of your request for Technical
Assistant Advisement, deleting names, addresses and any other
details which might lead to identification of the taxpayer.

Sincerely,

Vicki Allen
Tax Law Specialist
Technical Assistance & Dispute Resolution

(850) 922-4846

Control #51759