How did Florida tax commercial-refrigeration installation and maintenance contracts covering both fixed and movable equipment?

Plain-English summary

Florida treated the lump-sum installation of commercial display cases, walk-in coolers, and freezers as a real-property improvement. The installer ran piping, wiring, reinforcement, and refrigerant into the building so the conduits could not be removed without damage.

The installer therefore was the consumer of piping, wiring, refrigerant, and other incorporated materials and had to pay tax when buying them. The customer separately owed sales or use tax on refrigeration equipment bought from the third-party vendor. The installer did not collect tax from the customer on the installation contract.

Maintenance was different because the agreement covered both fixed real-property equipment and self-contained refrigerators that remained tangible personal property. A reasonably stated charge allocated exclusively to real-property maintenance was not taxable, but any unallocated portion covering both types of property was fully taxable.

What this means for you

Installation tax treatment turns on whether the work becomes a real-property improvement. Mixed maintenance agreements should use a reasonable, good-faith allocation between fixed systems and movable taxable equipment.

Common questions

Was the installation contract taxable to the customer? No, on the stated lump-sum real-property-improvement facts.

Who paid tax on incorporated installation materials? The installer.

Who paid tax on equipment purchased from the third-party vendor? The customer, through sales or use tax.

What happened to an unallocated maintenance charge covering both property types? The entire mixed portion was taxable.

Citations and references

• Fla. Admin. Code rr. 12A-1.051 and 12A-1.105, as cited and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-035

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?
Also, is a contract to maintain commercial refrigeration units subject to sales tax?
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.
Yes. Any portion of the maintenance contract which is allocated to include maintenance on both
real property and tangible personal property is subject to sales tax.
July 1, 2009
XXX
Re:

Technical Assistance Advisement 09A-035
Sales and Use Tax
Improvements to Real Property; Installation of Commercial Refrigerators
Service Warranties; Maintenance of Commercial Refrigerators
Rules 12A-1.051, and 12A-1.105, Florida Administrative Code (F.A.C.)
Petitioner: XXX (herein “Taxpayer”)
FEI: XXX

Dear XXX:
This is a Technical Assistance Advisement ("TAA") issued pursuant to Section (s.) 213.22,
Florida Statutes (F.S.) It is in response to your letter dated February 9, 2009, 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
Your client installs commercial refrigeration systems and provides separate maintenance
contracts covering commercial refrigeration systems. You ask if either of these services provided
by your client are subject to Florida Sales Tax.
PRESENTED FACTS
Your letter provides in part:

Letter of Technical Advice
Page 2 of 7
Our client . . . is in the business of installing refrigeration equipment on a contracted basis
and performing repairs and maintenance on refrigeration and heating, ventilation and air
conditioning (HVAC) systems.
A copy of a sample installation invoice for refrigeration installation is enclosed for your
review along with the maintenance service agreement. The installation services involve
the installation of large refrigeration and freezer systems in grocery stores including
display cases, walk-in coolers, and freezers purchased by the customer. The refrigeration
display cases, walk-in coolers, and freezers are purchased by the customer from another
unrelated vendor. The taxpayer has been charging sales tax to their customers on the
entire invoice for installing these refrigeration units (installation, materials, service,
repairs, renovations, emergency service, etc). The taxpayer has been using a sales tax
exemption certificate when purchasing the materials used for the installation of services
and then charging sales tax to the customer with the installation contract.
One of the taxpayer's large commercial customers recently sent the taxpayer a copy of
Technical Assistance Advisement 08A-025 (copy enclosed) and requested the taxpayer
no longer charge sales tax to them on the labor for the installation, service, repairs,
renovations, emergency service, etc. on all invoices located in Florida for installation of
refrigeration systems. The customer has also requested that the taxpayer now pay the
sales tax on the purchase of the materials and not charge the customer sales tax on
materials.
The basis for this request was the conclusion of the aforementioned Technical Assistance
Advisement that 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. The TAA conclusion also states that the contractor 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.
The contractor should not collect sales tax from its customers on these contracts.
Additionally, as part of the contracted services the taxpayer makes periodic service calls
to the customers' places of business for preventative maintenance services on the
refrigeration and HVAC equipment as well as actual repair calls when the equipment is
not working properly. These service calls are billed separately for labor and materials.
The taxpayer's current practice has been to charge sales tax on the entire monthly
maintenance agreement for the regular maintenance with the exception of $200.00
allocated to HVAC maintenance.
In reviewing these contracts, it became clear that permanently installed refrigeration units and
self contained refrigeration units were both covered by the maintenance agreement. In your email of May 7, 2009, you provided additional information indicating that self contained end
cases accounted for approximately 25% of the maintenance time spent on refrigeration units,
while 75% of the time was spent on permanently installed refrigeration units.
REQUESTED ADVISEMENT

Letter of Technical Advice
Page 3 of 7
1.
Taxpayer is requesting guidance from Department of Revenue regarding the taxability of
the installation contracts. Should they continue charging sales tax on these contracts or should
they follow the conclusion of TAA 08A-025 and not charge sales tax on these contracts?
2.
Taxpayer is requesting guidance on the taxability of the maintenance contracts on the
refrigeration systems. The taxpayer has been charging sales tax on the entire maintenance
agreement with the exception of a portion of the monthly fee allocated to HVAC maintenance.
APPLICABLE LAW
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.
(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

Letter of Technical Advice
Page 4 of 7
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. . . .
Rule 12A-1.105, F.A.C., provides in part:
(1)(a) Every person who solicits, offers, provides, enters into, issues, or delivers any
service warranty, or who receives, on behalf of another person, any consideration from a
service warranty holder is exercising a taxable privilege and shall register as a dealer with
the Department of Revenue before such person may engage in or conduct business in this
state. See Rule 12A-1.060, F.A.C.
(b)1. The term “service warranty” means any contract or agreement which indemnifies
the holder of the contract or agreement for the cost of maintaining, repairing, or replacing
tangible personal property, whether or not the contract provides for the furnishing of
parts. The term “service warranty” includes motor vehicle warranties issued under Part I
of Chapter 634, F.S., and service warranties issued under Part III of Chapter 634, F.S.

Letter of Technical Advice
Page 5 of 7
a. Example: A service contract covering an appliance, such as a refrigerator, is a service
warranty.
b. Example: A service contract (motor vehicle service agreement) covering the repair of a
component part of a motor vehicle is a service warranty.
c. Example: A warranty agreement which indemnifies the agreement holder for the cost
of repair or replacement of a television is a service warranty.
d. Example: A maintenance contract covering the cost of labor only to repair or maintain
computer hardware is a service warranty.
e. Example: A service agreement covering the cost of labor, and which provides for the
furnishing of parts at an additional charge, to repair a washing machine is a service
warranty.

2. The term “service warranty” does not include contracts or agreements to repair,
   maintain, or replace tangible personal property if such property when sold at retail in this
   state would not be subject to sales tax or if the parts and labor to repair tangible personal
   property qualify for an exemption under Chapter 212, F.S.
   a. Example: The sale of a wheelchair in Florida is not taxable. A service contract
   covering the cost of maintaining, repairing, or replacing a wheelchair is not a service
   warranty.
   b. Example: The purchase of a hearing aid in Florida is not taxable. The purchase of a
   service agreement covering the cost of repairing or replacing a hearing aid is not a service
   warranty.
   c. Example: A maintenance contract covering the cost of parts and labor that are exempt
   when used to repair industrial machinery and equipment, as provided in Section
   212.08(7)(xx), F.S., is not considered a service warranty contract.
3. The term “service warranty” does not include contracts or agreements covering
   tangible personal property which becomes a part of real property.
   a. Example: A central air conditioning system is considered to be part of real property. A
   service contract covering the cost of repairing a central air conditioning system is not a
   service warranty.
   b. Example: An elevator or escalator is considered to be part of real property. A
   maintenance contract covering the cost of repair or maintenance of an elevator or an
   escalator is not a service warranty.
   (c)1. If a transaction involves both the issuance of a service warranty subject to tax and
   the issuance of a warranty, guaranty, extended warranty or extended guaranty, contract,
   agreement, or other written promise which is not subject to tax, the consideration shall be
   separately identified and stated with respect to the taxable and nontaxable portions of the
   transaction. If the consideration for such a transaction is not separately identified and
   stated, the entire transaction is taxable.
4. If a reasonable, good faith apportionment of the actual consideration for the taxable
   portion is not evident, that is, if only a nominal amount of the consideration is attached to
   the taxable portion, the Department shall have the power to reform the contract; such
   reformation by the Department shall be considered prima facie correct; and the burden to
   show the contrary shall rest upon the dealer. Sales tax shall apply to the transaction to the
   extent that the consideration is for a service warranty subject to tax.

Letter of Technical Advice
Page 6 of 7
3.a. Example: A service contract covers the cost of repairing a central air conditioning
system and a refrigerator. The cost of the contract covering the repair of the central air
conditioning system and repair of the refrigerator are separately identified and stated on
the service contract. The separately identified and stated amount of the contract for the
cost of coverage for repair of the central air conditioning system is $500. The separately
identified and stated amount of the contract for the cost of coverage for repair of the
refrigerator is $100. The portion of the contract covering the refrigerator ($100) is
taxable, while that portion covering the central air conditioning system ($500) is not
subject to tax.
b. Example: A service contract covers the cost of repairing a central air conditioning
system and a refrigerator. The costs of the contract covering the repair of the central air
conditioning system and repair of the refrigerator are separately identified and stated on
the service contract. The separately identified and stated amount of the contract for the
cost of coverage for repair of the central air conditioning system is $599. The separately
identified and stated amount of the contract for the cost of coverage for repair of the
refrigerator is $1. Evidence provided to the Department fails to show the apportionment
between the taxable and nontaxable portion of the contract was made on a good faith
basis, and the Department determines $500 represents the fair amount of the contract
which represents coverage for the repair of the central air conditioning system and $100
represents the fair amount of the contract which represents coverage for the repair of the
refrigerator. The portion of the contract covering the refrigerator ($100) is taxable, while
that portion covering the central air conditioning system ($500) is not subject to tax.

4. Example: A service contract covers the cost of repairing a central air conditioning
   system and a refrigerator. A single charge is made for the contract, and items covered
   under the contract are not separately stated. The entire charge for the contract is taxable.

DISCUSSION
With regard to the installation contracts, 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.
The maintenance agreements, however, involve both the maintenance of tangible personal
property (the self contained end-case refrigerators) and real property (permanently installed
refrigeration cases and HVAC units). Taxpayer has been charging sales tax on the entire
maintenance agreement with the exception of a portion of the monthly fee allocated to HVAC
maintenance. Looking at the Rule, and assuming the allocation is reasonable, this is an
acceptable method of taxing the transaction. One portion of the transaction amount is allocated
exclusively to real property maintenance and is properly exempt from taxation. The other portion
of the transaction includes both the maintenance of tangible personal property (the self contained
refrigeration units) and real property (the permanently installed refrigeration units) and the
charges are unallocated between those two items. Therefore, that entire portion of the charge is
subject to sales tax under the provisions of Rule 12A-1.105(1)(c)4., F.A.C.

Letter of Technical Advice
Page 7 of 7
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.
Similarly, when purchasing the refrigeration equipment from the third party vendor, the customer
should pay sales tax or accrue use tax on such equipment. However, Client should not collect
sales tax from its customers on the installation contracts.
Regarding maintenance contracts, any charge or portion of a charge for such an agreement which
includes both the maintenance of tangible personal property and real property, which is not
allocated between the two types of property, is subject to sales tax. Therefore, based on
taxpayer’s current allocation of the charges, sales tax is being correctly charged and remitted on
the maintenance contract.
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 #59553