Was a supermarket refrigeration contractor's lump-sum installation of customer-purchased systems a Florida real property improvement?

Plain-English summary

A supermarket refrigeration contractor installed systems and fixtures that its customers had purchased directly from manufacturers. The contractor's lump-sum construction work included all labor, equipment, refrigerant piping, wiring, reinforcement, and other materials needed to complete the installation.

Florida classified the work as a real property improvement contract. The refrigeration systems were installed under mechanical code and hard-wired and piped into the building like electrical, plumbing, and HVAC systems. Tubing, wiring, and conduits became incorporated into walls and structural systems and could not be removed without damaging the building.

That meant the contractor was the ultimate consumer of what it furnished. It had to pay sales tax to suppliers on piping, wiring, refrigerant, and other incorporated tangible property. It did not collect sales tax from customers on the lump-sum installation contract.

The ruling addressed the submitted construction-project contracts. The taxpayer also performed emergency service, maintenance, and management programs, but the Department did not classify those separate offerings in this advisement.

What this means for you

Customer ownership of the equipment did not change the installation

The supermarket bought the major refrigeration units elsewhere, but the contractor's work still produced a permanent building improvement.

Integration into building systems is decisive

Hard wiring, piping, and damage on removal strongly supported real-property treatment.

Lump-sum contractors pay tax upstream

The contractor consumes its own materials in delivering the completed improvement, so tax is paid on supplier purchases rather than added to the customer's contract price.

Contract classification matters

Rule 12A-1.051 treats lump-sum, cost-plus, guaranteed-price, retail-sale-plus-installation, and time-and-materials arrangements differently. The reviewed agreements were lump-sum contracts.

Common questions

Q: Was the installation contract taxable to the supermarket?
A: No. It was a lump-sum real property improvement contract.

Q: Who paid tax on piping, wiring, and refrigerant?
A: The refrigeration contractor paid tax when purchasing those materials.

Q: Did it matter that another vendor sold the main equipment?
A: No. The installation itself permanently integrated the system into the building.

Q: Did the ruling cover maintenance and emergency service?
A: No. It addressed the provided construction-project contracts.

Citations and references

• Fla. Stat. § 213.22 (Technical Assistance Advisements)
• Fla. Admin. Code r. 12A-1.051(1)-(4) (real property contracts, pricing classifications, and contractor tax treatment)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-025

Original ruling text

SUMMARY
QUESTION:
Is a contract to install a commercial refrigeration system, which was purchased for a third party
vendor, a contract for the improvement of real property?
ANSWER:
Yes. The installation process consists of running tubing and wiring to and from the equipment in
such a way that the conduits cannot be removed without damaging the building. As such, the
installation process is considered to be an improvement to real property.

September 17, 2008

XXX
XXX
XXX
XXX
Re:

Technical Assistance Advisement 08A-025
Sales and Use Tax
Improvements to Real Property; Installation of Commercial Refrigerators
Rule 12A-1.051, Florida Administrative Code (F.A.C.)
Petitioner: XXX
FEI: XXX

XXX
This is a Technical Assistance Advisement ("TAA") issued pursuant to s. 213.22, F.S. It is in
response to your letter dated June 11, 2008, where you requested a TAA from the Department.
Your letter complied with the criteria for issuing a TAA found in Chapter 12-11, F.A.C.
ISSUE
Are the services provided by Client under the provided construction project contracts
improvements to real property and not subject to Florida Sales Tax?
PRESENTED FACTS
Your letters of June 11 and August 1, 2008, provide in part:

Technical Assistance Advisement
Page 2 of 4
We are requesting a Technical Assistance Advisement about whether a contract for the
furnishing and installation of refrigeration equipment is subject to sales tax in all or in
part. . . .
[Client] is a supermarket refrigeration contractor. Their contracts consist of new
construction projects, large or small renovations, emergency service, maintenance
programs and comprehensive management programs. Their customers consist of major
supermarket chains, independent grocers and wholesale clubs. We have enclosed
contracts representing the construction project transactions from various customers for
your review. . . .
A typical contract for [Client] involves the supermarket retail chain purchasing
refrigeration fixtures, systems and components directly from manufacturers. [Client] is
then contracted to facilitate the installation of the systems. A typical contract for
installation would include all labor, equipment, refrigerant piping and materials needed to
complete the project according to specifications. All materials are purchased from third
party suppliers. The systems are then installed under a mechanical code and are hard
wired and piped into the structure in the same fashion as the electrical, plumbing and
HVAC. . . .

LAW AND DISCUSSION

Rule 12A-1.051, Florida Administrative Code, provides in part:
12A-1.051 Sales to or by Contractors Who Repair, Alter, Improve and Construct
Real Property.
(1) Scope of the rule. This rule governs the taxability of the purchase, sale, or use of
tangible personal property by contractors and subcontractors who purchase, acquire, or
manufacture materials and supplies for use in the performance of real property contracts
....
(2) Definitions. For the purposes of this rule, the following terms have the following
meanings: . . .
(d) “Improvement to real property” or “real property improvement” includes activities of
building erecting, constructing, altering, improving, repairing, or maintaining real
property. . . .
(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.

Technical Assistance Advisement
Page 3 of 4
(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. . . .

Technical Assistance Advisement
Page 4 of 4
The documentation provided with your request indicates that Client enters into lump sum
contracts. Under these contracts, Client installs piping, wiring, reinforcement, and refrigerant that
are incorporated into the walls and structure of the real property. As such, these contracts are
properly classified as lump sum real property improvement contacts, the taxation of which is
addressed in Rule 12A-1.051(4), F.A.C., quoted above.
CONCLUSION
A contract to install commercial refrigeration equipment that has been purchased from a third
party is a contract to improve real property and not subject to Florida Sales Tax. As such, Client
should pay sales tax when it purchases piping, wiring, refrigerant, and other tangible personal
property that will be incorporated into the real property during the performance of the contracts.
However, Client should not collect sales tax from its customers on these contracts.
This response constitutes a Technical Assistance Advisement under Section 213.22, Florida
Statutes, 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, Florida Statutes. 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, Florida Statutes, and are subject to disclosure to the public under the
conditions of s. 213.22, Florida Statutes. 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 10 days of the date of
this letter.

Sincerely,

Kama D.S. Monroe
Senior Attorney
Technical Assistance and Dispute Resolution
Control #46916