Should a water-submeter installer charge customers sales tax when meters became permanent plumbing improvements under a mixed lump-sum and cost-plus contract?

Plain-English summary

Florida treated the installed water-submeter systems as improvements to real property, so the contractor did not charge customers sales tax under its described contracts. The meters became part of the plumbing system, were difficult to remove without damage, and would leave the plumbing inoperable if removed.

Contract classification controlled who paid tax

The agreement combined lump-sum and cost-plus features. It listed a cost per meter but did not identify and price every installation material before work began, so it did not qualify as a retail-sale-plus-installation contract.

Florida therefore treated the contractor as the consumer of the meters and installation materials. It owed tax on its material costs and use tax on the cost price of materials it fabricated for its own use, but it charged no tax to customers even if invoices separately showed equipment and labor.

What this means for you

Real-property contractors should classify the installed item and the contract pricing structure together. Separately stating equipment and labor on an invoice did not create a retail sale when the contract lacked the rule's complete advance itemization and title-and-risk features.

Common questions

Q: Why were the meters real property?
A: They were permanently plumbed in and could not be removed without disabling or damaging the system and realty.

Q: Did the contractor charge sales tax to customers?
A: No, under the described mixed lump-sum and cost-plus agreement.

Q: Who paid tax on the materials?
A: The contractor paid tax as the consumer of materials used in the work.

Q: What about self-fabricated components?
A: The contractor owed use tax on their cost price.

Citations and references

• Fla. Stat. § 212.06(14) — real property and fixtures
• Fla. Admin. Code r. 12A-1.051 — real-property contractor contract categories and tax treatment
• Fla. Admin. Code r. 12A-1.043(1) — fabrication for own use
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-041

Original ruling text

SUMMARY

QUESTION: What is the taxability of the sale and
installation of water submetering systems, and what the
proper classification of its contracts pursuant to Rule
12A-1.051(3), F.A.C.

ANSWER - Based on Facts Below: The water submetering
systems are classed as improvements to real property.
Since Taxpayer does not utilize a retail sale plus
installation contract, it should charge no tax to its
customers, but it owes tax on its cost of materials used in
its contracts.

Taxpayer is also advised that, to the extent it fabricates
materials for its own use, it owes use tax on the cost
price of those materials, as outlined in Rule 12A-1.043(1),
F.A.C.

Taxpayer's agreement is an amalgamation of a lump sum
contract as described in paragraph (a) and a cost plus
contract as described in paragraph (b).

Aug 11, 2003

Re: Technical Assistance Advisement 03A-041
Sales and Use Tax - Water Meters
Section 212.06, F.S.
Rule 12A-1.051, F.A.C.
Petitioner: XXX (herein "Taxpayer")
FEI: XX

Dear :

This letter is a response to your petition dated June 19, 2003,
for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the

Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

FACTS

The petition sets forth the following facts:

[Taxpayer] ... is incorporated in [a state other than
Florida. Taxpayer's] headquarter is located in [another
state] with another business location in... Florida. In
the state of Florida, [Taxpayer] sells and installs water
submetering devices to commercial customers. [Taxpayer]
does not offer these devices in stores. The customer is
invoiced for the water submetering device and installation
labor. However, the equipment sale and the labor component
are separated on the invoice....

Water submeters are in-fact a part of the plumbing system.
Once water submeters are installed, they cannot be removed
without rendering the plumbing system inoperable. For
example, a typical water meter may measure 5 inches in
length. If the meter was removed from the plumbing system,
there would be a five inch gap that would somehow have to
be repaired and/or replaced. Moreover, in many
situations[,] the portion of the water meter connected to
the plumbing system (referred to as a single pipe
connector) [cannot] be manually removed without cutting
apart the plumbing system. In other words, it is extremely
difficult and time consuming to remove a water submeter
[from] a plumbing system, and once removed, the system
would be inoperable.

It is quite often the case that the water submeters are
located behind drywall or other permanent fixtures. Thus,
to remove the meters would require cutting into drywall,
which will result in considerable/significant damage to
realty.

[Taxpayer] has installed several hundred thousand water

meters in the United States (including over 50,000 last
year), and has never removed a single water submetering
system.

To [Taxpayer's] knowledge, water submetering systems are
never removed when the property is sold. This is for
several reasons, including the fact that the submetering
system is considered a valuable asset that is sold as part
of the property[,] as well as the fact that it is
impracticable[,] if not impossible[,] to remove a water
submetering system from an apartment complex.

Property owners that purchase water submetering systems
fully intend to treat the systems as a permanent
improvement to [realty]. This is evidenced by their
financial classification of the systems[,] as well as the
effect the billing has on their income statements.
Specifically, almost all property owners classify the
investment as an addition to their capitalized assets on
their balance sheets and as such, it represents an
improvement to the originally acquired and capitalized
asset itself. Moreover, the income generated by the
submetering system is classified as revenue and certainly
has a dramatic [effect] on the value of the property (cash
flow increases, etc.)[.]

Taxpayer included a copy of its Hardware and Installation
Agreement.

REQUESTED ADVISEMENT

Taxpayer requests advice on the taxability of its sales and
installation of the water submetering systems, as well as the
proper classification of its contracts pursuant to Rule 12A1.051(3), F.A.C.

LAW AND DISCUSSION

Section 212.06(14), F.S., provides guidance in determining
whether a person is performing improvements to real property by
defining relevant terms, and it states in pertinent part as

follows:

(14) For the purpose of determining whether a person is
improving real property, the term:

(a) "Real property" means the land and improvements thereto
and fixtures and is synonymous with the terms "realty" and
"real estate."

(b) "Fixtures" means items that are an accessory to a
building, other structure, or land and that do not lose
their identity as accessories when installed but that do
become permanently attached to realty. However, the term
does not include the following items, whether or not such
items are attached to real property in a permanent manner:
property of a type that is required to be registered,
licensed, titled, or documented by this state or by the
United States Government, including, but not limited to,
mobile homes, except mobile homes assessed as real
property, or industrial machinery or equipment. For
purposes of this paragraph, industrial machinery or
equipment is not limited to machinery and equipment used to
manufacture, process, compound, or produce tangible
personal property. For an item to be considered a fixture,
it is not necessary that the owner of the item also own the
real property to which it is attached.... (Emphasis
Supplied)

Rule 12A-1.051(17)(aa), F.A.C., specifically classes "plumbing
work" as an improvement to real property.

Water submetering systems that are plumbed into a building's
plumbing system are classified as an improvement to real
property.

Rule 12A-1.051, F.A.C., discusses the various types of contracts
that may be used, and the taxation of each. It states in
pertinent part as follows:

(3) Classification of contracts by pricing. The taxability
of purchases and sales by real property contractors is

determined by the pricing arrangement in the contract.
Contracts generally fall into one of the following
categories:

(a) Lump sum contracts. These are contracts in which a
contractor or subcontractor agrees to furnish materials and
supplies and necessary services for a single stated lump
sum price.

(b) Cost plus or fixed fee contracts. These are contracts
in which the contractor or subcontractor agrees to furnish
the materials and supplies and necessary services in
exchange for reimbursement of costs plus a fee that is
fixed in advance or calculated as a percentage of the
costs.

(c) Upset or guaranteed price contracts. These are
contracts in which the contractor or subcontractor agrees
to furnish materials and supplies and necessary services
based on costs plus fees but with an upset or guaranteed
maximum price which may not be exceeded.

(d) Retail sale plus installation contracts. These are
contracts for improvements to real property in which the
contractor or subcontractor agrees to sell specifically
described and itemized materials and supplies at an agreed
price or at the regular retail price and to complete the
work either for an additional agreed price or on the basis
of time consumed. In order for a contract to fit in this
category, all the materials that will be incorporated into
the work must be itemized and priced in the contract before
work begins. If a contract itemizes some materials but does
not itemize other materials that will be incorporated into
the work, the contract is not included in this category.
Because the sale of the materials is a separable
transaction from the installation, the purchaser must
assume title to and risk of loss of the materials and
supplies as they are delivered, rather than accepting title
only to the completed work. The contractor may remain
liable for negligence in handling and installing the items.

(e) Time and materials contracts. These are contracts in
which the contractor or subcontractor agrees to furnish
materials and supplies and necessary services for a price
that will be calculated as the sum of the contractor's cost
or a marked up cost for materials to be used plus an amount
for services to be based on the time spent performing the
contract. These contracts are similar to cost plus or fixed
fee contracts, because the final price to the property
holder will be determined based on the cost of performance.
A time and materials contract may or may not also have a
guaranteed or upset price clause. Time and materials
contracts differ from contracts described in paragraph (d),
because the materials are not completely identified,
itemized, and priced in the contract in advance and because
the property owner is contracting for a finished job rather
than the purchase of materials.

(4) General rule of taxability of real property
contractors. Contractors are the ultimate consumers of
materials and supplies they use to perform real property
contracts and must pay tax on their costs of those
materials and supplies, unless the contractor has entered a
retail sale plus installation contract. Contractors
performing only contracts described in paragraphs (3)(a),
(b), (c), or (e) do not resell the tangible personal
property used to the real property owner but instead use
the property themselves to provide the completed real
property improvement. Such contractors should pay tax to
their suppliers on all purchases. They should also pay tax
on all materials they fabricate for their own use in
performing such contracts, as discussed in subsection (10).
They should charge no tax to their customers, regardless of
whether they itemize charges for materials and labor in
their proposals or invoices, because they are not engaged
in selling tangible personal property. Such contractors
should not register as dealers unless they are required to
remit tax on the fabricated cost of items they fabricate to
use in performing contracts.

(5) Rule for (3)(d) contractors. Contractors who perform
retail sale plus installation contracts described in

paragraph (3)(d) do sell tangible personal property. They
should register as dealers and provide a copy of their
Annual Resale Certificate (form DR-13) to the selling
dealer to purchase tax exempt materials that are itemized
and resold under paragraph (3)(d) contracts. They should
not provide the certificate to purchase tax exempt items
that they use themselves rather than reselling, such as
hand tools, shop equipment, or office supplies. They must
charge their customers tax on the price paid for tangible
personal property but not on the charges for installation
labor. See Rule 12A-1.038, F.A.C., for tax exempt sales
made to entities that hold a valid Consumer's Certificate
of Exemption.

Taxpayer's agreement is an amalgamation of a lump sum contract
as described in paragraph (a) and a cost plus contract as
described in paragraph (b). The level of detail that is
required for a retail sale plus installation contract as
described in paragraph (d) is not met, since it appears the
contract only gives a cost per meter, and it does not
specifically itemize all materials that will be required for
installation.

As such, Taxpayer should follow the taxability of the contracts
as described in Rule 12A-1.051(4), F.A.C. Taxpayer should not
charge tax in any amount to its customers, since it is not
considered to be selling meters to its customers. It owes tax
on its cost of materials used in the performance of these
contracts.

CONCLUSION

The water submetering systems are classed as improvements to
real property. Since Taxpayer does not utilize a retail sale
plus installation contract, it should charge no tax to its
customers, but it owes tax on its cost of materials used in its
contracts.

Taxpayer is also advised that, to the extent it fabricates
materials for its own use, it owes use tax on the cost price of
those materials, as outlined in Rule 12A-1.043(1), F.A.C.

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 upon 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 from that which is 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,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution

Control #55825