Which dinner-cruise meal costs had to be included when computing Florida use tax?

Plain-English summary

Florida required the dinner-cruise operator to pay use tax on the costs attributable to producing the meals. The taxable cost included food, paper products, and kitchen-personnel labor, measured from the operator's books under generally accepted cost-accounting standards.

The Department excluded indirect electricity, gas, and water overhead. It explained that those indirect costs had been removed from Rule 12A-1.043's fabricated-cost calculation in July 1999.

What this means for you

Businesses that produce tangible personal property for their own use should separate direct production costs from indirect overhead and retain records supporting the allocation. Direct materials on which tax was already paid are handled under the rule's separate provision.

Common questions

Q: Was use tax based only on the food ingredients? No. Paper products and kitchen labor attributable to producing the meals were also included.

Q: Were kitchen utility costs included? No. The ruling excluded the indirect electricity, gas, and water overhead described in the request.

Citations and references

• Fla. Stat. § 212.02(4) — cost price
• Fla. Stat. § 212.05(1)(b) — use tax on cost price
• Fla. Admin. Code r. 12A-1.043 — property produced for one's own use
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-011

Original ruling text

SUMMARY

QUESTION: What is the proper method of computation of use
tax on meals served on a dinner cruise?

ANSWER - Based on the Facts Below: Pursuant to Rule 12A1.043, F.A.C., any person who produces tangible personal
property for his own use shall pay a tax upon the cost of
the property produced, without any deduction therefrom on
account of the cost of material used, labor or service
costs, or transportation charges. The elements of cost
will include materials, labor, service, or transportation
costs that are attributable to producing the tangible
personal property for one's own use, and which are properly
chargeable to the cost of the product under generally
accepted cost accounting standards. In this situation,
cost price would include materials such as food and paper
products, and labor costs attributable to kitchen
personnel. These elements should be ascertained from books
and records, and use tax should be computed according to
generally accepted accounting standards.

Mar 07, 2003

Subject: Technical Assistance Advisement 03A-011
Use Tax on Meals Served During Dinner Cruises
Sales and Use Tax
Sections 212.02, 212.05, and 212.06, F.S.
Rule 12A-1.043, F.A.C.
XXX ("Company")
Taxpayer Identification Number: XX

Dear :

This is in response to your letter dated XX, regarding the
proper method of computation of use tax on meals served on
dinner cruises.

ISSUE

What is the proper method of computation of use tax on meals
served on a dinner cruise?

FACTS

Your letter provides in part:

... Taxpayer operates daily cruises and evening dinner cruises
that transport passengers to various locations, where they
disembark for a period of up to two (2) hours and then transport
them back to the original point of embarkation. The Taxpayer
offers 10:00 a.m. and 2:00 p.m. cruises for $XX that [drop] off
passengers at a tropical location where they disembark to shop
for souvenirs, purchase food, and see alligators, birds, and
monkeys. The Taxpayer also offers a daytime cruise for $XX that
delivers passengers to another city for a 2 1/2-hour stopover
for shopping and eating. In the evening the Taxpayer offers a
Dinner Cruise for $XX that cruises to a tropical island-type
restaurant where passengers disembark for two (2) hours for
dinner and a show ashore and then return to the original point
for embarkation. The dinner is included in the price of
transportation.

The Day Cruise offers the same cruise of [River], and the
opportunity to disembark at and enjoy a tour of the Island. The
tour of the Island allows each participant to view an alligator
exhibition, tropical birds, and other natural scenes. Each
participant of the Day Cruise purchases one ticket, which
entitles such participant to the river cruise, and the Island
tour. Any purchases by a participant of food, beverage, or
souvenirs while on the island are borne separately and are not
part of the benefit of the ticket purchase.

[Day Cruise] occurs on the [River] with a single scheduled
passenger disembarkation at the [Day Cruise]. Each participant
of the [Day Cruise] purchases one ticket. The ticket entitles
each participant to the cruise and the enjoyment of visiting
[Shopping Center]. Any purchase by the participant of any food,
beverage, or other merchandise is separately borne by the

participant and [is] not a benefit of the ticket purchase.

COMPUTATION OF THE COST OF MEALS

The Auditor assessed use tax based on the cost of the food
products purchased and the preparation of food products to
be served as dinners as part of the Dinner Cruise. The
Assessment compromised was based on this calculation....
The Taxpayer and Auditor first determined the total number
of passengers that purchased tickets on the Dinner Cruises
for the year. They then took the total kitchen personnel
wages and divided that number by the total of passengers on
the Dinner Cruises to arrive at a cost per passenger. The
kitchen personnel are only used for the preparation of the
dinners associated with the Dinner Cruises.

Then they took the overhead expenses of electricity, gas,
and water. They arrived at a percentage of 20, 100, and 20
respectively for those overhead cost[s]. The 100% of the
cost of gas was used because the gas is only used for the
preparation of the dinners on the Dinner Cruises.
Electricity and water are used for many other operations of
the Taxpayer[,] and thus they arrived at a 20% figure for
the operation of the kitchen. They then added the three
cost figures for electricity, gas, and water and divided
that number by the same total number of passengers on the
Dinner Cruises to arrive at a cost per passenger of the
overhead expenses.

Finally, they took the total cost of the food products and
the paper goods used in the preparation and serving of the
dinners on the Dinner Cruises and multiplied that figure by
the same total number of passengers on the Dinner Cruises
to arrive at a cost per passenger for the food products and
paper goods used in preparation and serving of the dinners.

They then took each cost per passenger for each element,
kitchen personnel wages, overhead and food products and
paper goods, added them together and multiplied that cost
factor by the tax to arrive at a total tax per passenger.
They then took the total tax per passenger, multiplied that

by the total number of passengers to arrive at a total tax
for the year.

Upon discussion with the auditor Taxpayer refers to above, it
was learned that the auditor was not involved in formulating the
method described above. Rather, it was indicated that the
Taxpayer came up with the formula, and Taxpayer's figures were
accepted to help determine the use tax assessment.

REQUESTED ADVISEMENT

Taxpayer seeks confirmation that the above-described method for
computing use tax is correct.

APPLICABLE STATUTES AND RULES

Section 212.02, F.S., provides in pertinent part:

(4) "Cost price" means the actual cost of articles of
tangible personal property without any deductions therefrom
on account of the cost of materials used, labor or service
costs, transportation charges, or any expenses whatsoever.
(Emphasis Supplied.)

Section 212.05, F.S., provides in part:

It is hereby declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of selling tangible personal property at
retail in this state, including the business of making mail
order sales, or who rents or furnishes any of the things or
services taxable under this chapter, or who stores for use
or consumption in this state any item or article of
tangible personal property as defined herein and who leases
or rents such property within the state.

(1) For the exercise of such privilege, a tax is levied on
each taxable transaction or incident, which tax is due and
payable as follows:

(b) At the rate of 6 percent of the cost price of each item

or article of tangible personal property when the same is
not sold but is used, consumed, distributed, or stored for
use or consumption in this state.... (Emphasis Supplied.)

Rule 12A-1.043, F.A.C., provides in part:

(1)(a) Any person who manufactures, produces, compounds,
processes, or fabricates in any manner an article of
tangible personal property for his own use shall pay a tax
upon the cost of the property manufactured, produced,
compounded, processed, or fabricated without any deduction
therefrom on account of the cost of material used, labor or
service costs, or transportation charges.

(b) Elements of cost will include the following materials,
labor, service, or transportation costs that are
attributable to manufacturing, producing, compounding,
processing, or fabricating an article of tangible personal
property for one's own use and which are properly
chargeable to the cost of the product under generally
accepted cost accounting standards.

1. Material costs include the following:

a. All direct materials and related freight costs that are
physically observable as being identified to the finished
tangible personal property, that are consumed in producing
the property, or that become a component or ingredient of
the finished property. See paragraphs (c) and (d), below,
for calculating the tax on the cost of the finished product
when sales tax has or has not been paid on direct
materials.

b. Material handling and warehousing of direct materials
and goods in process.

c. Manufacturer's excise taxes on materials.

2. Labor costs include the following:

a. The total direct labor costs for employees or contract

labor that are allocable to the production of the finished
property, including the entire amount of payroll burden,
which includes but is not limited to overtime premium,
vacation and holiday pay, sick leave pay, shift
differential, payroll taxes, payments to a supplemental
unemployment benefit plan, and employee fringe benefits.

b. Compensation of officers, to the extent it is allocated
to production and not administrative functions.

c. Costs of service, engineering, design or other support
employees allocated to production.

3. Service costs include the costs of non-employee services
   that are allocated to the production of the tangible
   personal property, such as engineering, design or similar
   consulting or professional services.

(c) Direct materials on which the tax has been paid shall
not be included when computing the tax on the cost of items
of tangible personal property manufactured, produced,
compounded, processed, or fabricated.

(d) Persons who manufacture, produce, compound, process, or
fabricate items of tangible personal property for resale or
for their own use or consumption may purchase direct
materials tax exempt but shall include the cost of the
direct materials when computing tax on the cost of the
items so manufactured, produced, compounded, processed, or
fabricated for such persons' own use or consumption. If tax
has been paid on the direct materials, the method described
in paragraph (c) should be used when computing the tax on
the cost of the items so manufactured, produced,
compounded, processed, or fabricated.

(6)(b) For the purpose of this rule:

2. The term "cost" means cost price as defined in s.
   212.02(4), F.S. (Emphasis Supplied.)

RESPONSE

Pursuant to Rule 12A-1.043, F.A.C., any person who produces
tangible personal property for his own use shall pay a tax upon
the cost of the property produced, without any deduction
therefrom on account of the cost of material used, labor or
service costs, or transportation charges. Further, elements of
cost will include materials, labor, service, or transportation
costs that are attributable to producing the tangible personal
property for one's own use, and which are properly chargeable to
the cost of the product under generally accepted cost accounting
standards. Rule 12A-1.043, F.A.C., outlines material, labor,
and service costs that must be included in the cost price of
tangible personal property that is produced for one's own use or
consumption. Costs attributable to indirect overhead, such as
electricity, gas, and water costs, were removed from Rule 12A1.043, F.A.C.'s computation of fabricated costs in July of 1999.
Therefore, the only factors that must be included in the
computation of use tax on the meals served on the dinner cruise
are materials, labor, service, and transportation costs that are
attributable to producing them. This would include materials
such as food and paper products, and labor costs attributable to
kitchen personnel. These elements should be ascertained from
books and records, and use tax should be computed according to
generally accepted accounting standards.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
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 advise 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. Confidential information must be
deleted before public disclosure. In an effort to protect

confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Kelley Cramer
Attorney
Technical Assistance and Dispute Resolution
(850) 922-4835

KC/
Ctrl# 52423
Enclosure