When and on what cost did a Florida public-works contractor owe use tax on self-fabricated resin-impregnated pipe?

Plain-English summary

The contractor made dry pipe components outside Florida, brought them to a Florida facility, impregnated them with resin, and then delivered the finished pipe for installation. Florida treated the contractor as the ultimate consumer under its public-works contracts.

Use tax became due when resin impregnation produced the final fabricated item, not when the unfinished dry component first entered Florida or when installation occurred. Direct materials already bearing Florida sales tax could be excluded from fabricated cost, and properly paid tax to another state could support a credit.

The taxable fabricated cost included direct materials and related freight, handling and storage, production labor and payroll burdens, allocated officer compensation, and production-related engineering, design, and support services. Transportation of the completed pipe from the fabrication plant to the job site was excluded.

What this means for you

Contractors that make items for their own public-works installation should identify the true final fabrication step and maintain cost records for materials, production labor, payroll burdens, and allocated services. The location of an earlier component-making step did not remove the finished item from Florida use tax when used on a Florida project.

Common questions

Was tax due when the dry pipe entered Florida? No. It was still a component of the final fabricated product.

When did tax become due? When resin impregnation completed the finished pipe for use or consumption.

Was job-site delivery included in fabricated cost? No.

Could tax already paid on materials reduce the calculation? Yes, under the exclusions and credits described in the ruling.

Citations and references

• Fla. Stat. § 212.08(6) and Fla. Admin. Code rr. 12A-1.043, 12A-1.051, and 12A-1.094, as discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-039

Original ruling text

SUMMARY
QUESTION:
Taxpayer seeks guidance on installation contracts. Specifically, taxpayer asks how to properly calculate
fabricated cost on a component (piping) manufactured outside of Florida, which requires an additional
manufacturing process (resin impregnation) that is completed in Florida prior to installation. Taxpayer’s
contracts are primarily with municipalities and other governmental entities.
ANSWER:
Tax is due at the time the final fabrication for use or consumption occurs. Since the resin impregnated
piping is the final fabricated item, taxation occurs when the pipe is impregnated with resin.
July 22, 2009
XXX
Re:

Technical Assistance Advisement 09A-039
Sales and Use Tax – Public Works Contract
Section: 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.038, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner: XXX [hereinafter “City”]

Dear XXX:
This letter is a response to your petition dated July 31, 2008, 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 Section 213.22, F.S.
ISSUES
The issues presented in the taxpayer’s letter concern the proper application of Florida sales and use tax to
all steps involved in producing and installing taxpayer’s product, which is typically used to fulfill public
works contracts. The taxpayer’s questions are summarized as:
1) Is Taxpayer a public works contractor?
2) Is tax due on the XXX XXX at the time it enters Florida?
3) Should tax be paid on the resin and other chemicals used in fabrication at the time they are
purchased?
4) Are the following costs of producing the XXX XXX out of state a part of the cost price of the final
product:

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•
•
•

Out of State direct labor
Out of State indirect labor
Transportation costs from out of state facility

5) If the XXX XXX is fabricated at an out of state facility should Florida use tax be paid on:
• Out of State XXX direct labor
• Out of State XXX indirect labor
• Transportation costs from wet out facility to the project site
6) If XXX XXX is fabricated in state and then installed out of state, is Florida use tax due? If so, how
should the use tax be calculated?
PRESENTED FACTS
Currently, the taxpayer is under audit and the audit involves the same issues as are addressed in this TAA.
The auditor in that case has submitted a Request for Internal Technical Advice on these same issues.
However, since the Taxpayer’s request for a TAA was submitted first, the request for Internal Technical
Advice will be denied and this TAA will serve to answer the questions posed by both the auditor and the
Taxpayer.
The Taxpayer is involved in the construction industry and specializes in a “trenchless technology” to
“rehabilitate, replace, maintain, and install underground pipes.” First, the Taxpayer manufactures the dry
portion of the piping in an out-of-state manufacturing facility. These XXX XXXs are then shipped into
Florida. At a Florida facility, these tubes are then impregnated with a resin and are shipped to job sites
both inside and outside Florida in refrigerated trucks which prevent the resin from curing before the pipes
are placed in the ground. The majority of Taxpayer’s contracts are with municipalities and other
governmental agencies.
POSITION OF THE TAXPAYER
On October 8, 2008, the Taxpayer submitted a letter which states in part:
1) Fabrication labor and Overhead costs
[Taxpayer] believes the auditor . . . is referring to Rule 12A-1.043, F.A.C., prior to its amendment on
July 27, 1999. Indirect manufacturing costs such as overhead, indirect labor, indirect material and
supplies, rent, depreciation, general administrative expenses to name a few are no longer part of Rule
12A-1.043, F.A.C., as costs subject to Florida sales and use tax.
For XXX tube brought into Florida, [Taxpayer] uses a report which is downloaded into an Excel
spreadsheet (auditor referred to this as “June 2007 XXX Charges”) to breakout our internal cost
between material, labor, and overhead costs. Material costs include wet and XXX XXX, chemicals,
and resin from the XXX facility. [Taxpayer] pays tax on all materials transferred and used in Florida.

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Labor costs include direct labor cost for employees or temporary labor “allocable to the production of
the finished property” [Rule 12A-1.043(b)(2), F.A.C.]. [Taxpayer] believes only the direct labor costs
incurred at our out-of-state manufacturing facilities and the direct labor incurred at either our out-ofstate or Florida XXX facility is taxable. [Taxpayer] does not believe that its indirect labor is taxable as
it does not include labor costs relating to engineering, design or other support employees allocated to
production.
[Taxpayer’s] overhead costs include facility costs such as rent, maintenance, utilities, insurance, etc.;
office supplies and administrative staff; travel expenses. [Taxpayer} believes that Rule 12A-1.043,
F.A.C., as amended on July 27, 1999, specifically removed “overhead costs” from the definition of
taxable costs and therefore overhead costs should no longer be taxable. See attached copies of Rule
12A-1.043, F.A.C., before and after the July 27, 1999, amendment. . . .
2) Transfers of tube from out-of-state manufacturing facilities to the XXX facility in Florida
remains inventory
Each pallet of XXX XXX is assigned an order number. Each order number generally corresponds to a
specific customer and project location which may be in or outside of Florida. Each XXX facility,
including the facility located in Florida, receives XXX XXX based on customer orders and projects.
Prior to the start of the XXX process, the Florida XXX facility knows which XXX XXXs will remain
in the state of Florida and which tubes will be transported outside the state.
It is [Taxpayer’s] opinion that costs relating to XXX tube installed in Florida are not taxable until the
tube is withdrawn “from inventory” and transferred to the Florida project site as a finished product “to
go into or become a part of public works”. [Taxpayer] believes the above opinion would apply
regardless of whether the tube is wetted-out at a Florida XXX facility or an out of state facility.
3) Timing of Taxation
Rule 12A-1.043(1)(f), F.A.C., provides that tax is due at the time the article of tangible personal
property is manufactured, produced, compounded, processed, or fabricated for use or consumption.
XXX XXX is not ready for use until further manufacturing processes have been completed at the
XXX facility. Once the processes at the XXX facility are complete, the XXX XXX is delivered to the
job site for installation. All materials including XXX XXX remain “in inventory” until the final
product, XXX XXX, is produced. Once XXX XXX is produced it is immediately delivered to the
project site for installation. We believe as a public works contractor installation is the point of
[Taxpayer’s] ultimate consumption. As a result, if installation occurs outside of Florida tax is not due
in Florida but rather in the state of installation as [Taxpayer] has not consumed or used the XXX XXX
in Florida. If installation occurs in Florida, [Taxpayer] pays Florida use tax on all materials and direct
labor allocated to the fabricated cost of the XXX XXX because [Taxpayer] is consuming the XXX
XXX upon installation. Additionally, [Taxpayer] believes it would pay the surtax using the county
rate applicable to the project site where installation (i.e. consumption) occurs not the XXX facility
location.

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APPLICABLE LAW
Rule 12A-1.043(1), F.A.C., provides that:
(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.

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(e)1. To purchase direct materials tax exempt, dealers registered with the Department to sell
tangible personal property may extend a copy of their Annual Resale Certificate (Form DR-13) to
the selling dealer in lieu of paying tax at the time of purchase. The cost of such materials is subject
to tax on the cost of the items so manufactured, produced, compounded, processed, or fabricated,
as provided in paragraph (d). . . .

(f) The tax is due at the time the article of tangible personal property is manufactured, produced,
compounded, processed, or fabricated for use or consumption, and such tax shall be remitted to the
Department of Revenue in accordance with Rule 12A-1.056, F.A.C.
Rule 12A-1.051, F.A.C., provides in part:
(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 other than public
works contracts performed for governmental entities, which are governed by the provisions of
Rule 12A-1.094, F.A.C. If a real property project involves multiple subcontractors, each
subcontractor is responsible for paying, accruing, collecting, and remitting tax on his subcontract
in accordance with this rule.
(2) Definitions. For purposes of this rule, the following terms have the following meanings:
(a) “Fabricated cost” means the cost to a real property contractor of fabricated items, as defined in
the following paragraph. The elements of cost included in fabricated cost are set forth in Rule
12A-1.043, F.A.C. Fabricated cost does not include the cost of transporting fabricated items from
the contractor’s plant to the job site or the cost of labor at the job site where the fabricated items
are incorporated into the real property improvement.
(b) “Fabricated items” means items contractors manufacture, produce, process, compound, or
fabricate for their own use in performing contracts for improvements to real property. The term
applies only to items the contractor manufactures, produces, processes, compounds, or fabricates
at a plant or shop maintained by the contractor. For this purpose, a temporary facility established
at a job site that is used exclusively in connection with performing a contract for a real property
improvement at that job site is not considered to be a plant or shop maintained by the contractor. .
..
(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 . . . [Such contractors] 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,

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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. . . .
(10) Use tax on fabrication costs. Contractors may maintain shops, plants, or similar facilities
where they manufacture, produce, compound, process, or fabricate items for their own use in
performing contracts. Contractors are required to pay use tax on the fabricated cost of those items.
The elements that must be included in the taxable cost of such items are set forth in Rule 12A1.043, F.A.C. In the case of real property contractors, the taxable cost of an item manufactured,
produced, compounded, processed, or fabricated for use in performing a contract does not include
labor that occurs at the job site where the item will be incorporated into a real property
improvement or transportation from the plant where an item was fabricated to the job site.
Examples of real property contractors who are subject to tax under this subsection include cabinet
contractors who build custom cabinets in their shops, roofing contractors who operate tile plants,
or heating/air conditioning/ventilation contractors who maintain sheet metal shops for making
ductwork. Real property contractors that are required to remit use tax on fabricated items must
register as dealers for purposes of remitting such tax if they are not already registered as dual
operators. . . .
(17) Specific activities classified as real property contracts. Contractors who are engaged in the
following activities are generally considered to be real property contractors, although any
particular job may be determined not to involve an improvement to real property: . . .
(aa) Plumbing work; . . .
(qq) Water, sewer, and drainage systems; . . .
Rule 12A-1.094, F.A.C., provides in relevant part:
12A-1.094 Public Works Contracts.
(1) This rule shall govern the taxability of transactions in which contractors manufacture or
purchase supplies and materials for use in public works contracts, as that term is referred to in
Section 212.08(6), F.S. This rule shall not apply to non-public works contracts for the repair,
alteration, improvement, or construction of real property, as those contracts are governed under the
provisions of Rule 12A-1.051, F.A.C. . . .
(2) The purchase or manufacture of supplies or materials by a public works contractor, when such
supplies or materials are purchased for the purpose of going into or becoming part of public
works, whether the purchase or manufacture occurs inside or outside Florida, is taxable to the
public works contractor if the public works contractor also installs such supplies or materials,
since the public works contractor is the ultimate consumer of such supplies or materials. Public
works contractors that purchase or manufacture such supplies and materials in Florida are liable
for sales tax or use tax on such purchases and manufacturing costs. A public works contractor that

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purchases supplies or materials that may be sold as tangible personal property or may be
incorporated into a public works project may purchase such supplies or materials without tax by
issuing a copy of the contractor’s Annual Resale Certificate and accrue and remit tax upon
withdrawing such supplies or materials from inventory to go into or become a part of public
works. Public works contractors that purchase or manufacture such materials outside the State of
Florida are liable for use tax, subject to credit for any sales or use tax lawfully imposed and paid in
the state of purchase or manufacture.
(3) The purchase or manufacture of tangible personal property for resale to a governmental entity
is exempt from tax, provided this exemption shall not include sales of tangible personal property
made to, or the manufacture of tangible personal property by, public works contractors when such
tangible personal property goes into or becomes a part of public works. . . .
(5) Contractors that manufacture materials for incorporation into public works shall be liable for
tax in the manner provided in subsection (10) of Rule 12A-1.051, F.A.C.
DISCUSSION
At the time dry felt tubes are brought into Florida they are considered tangible personal property and a
component used in producing the final fabricated item. The XXX XXX, as loaded into the refrigerated
truck for delivery to the job site, is considered to be the final fabricated product, which is being used by
the taxpayer to fulfill the public works contract.
Tax is due at the time the final fabrication for use or consumption takes place. Because the XXX XXX is
the final fabricated item, this occurs when the pipe is impregnated with resin producing XXX XXX. See
Rule 12A-1.043(1)(f), F.A.C.
This means that taxpayer should remit use tax when the entire XXX XXX is manufactured. However,
under Rule 12A-1.043(1)(c), F.A.C., if the taxpayer has already paid Florida sales tax on direct materials
which are incorporated into the final product, then those direct materials may be excluded from the
calculation of fabricated cost. If the taxpayer has properly paid sales tax on the direct materials in another
state, then they may take a credit equivalent to the amount paid against any Florida sales and use tax due
on those direct materials.
The complexity in this case involves the fact that the taxpayer is not only fabricating the final product
(XXX XXX) but they are also fabricating a major piece of the direct materials used in making that final
product (dry felt pipe). As such, the full fabricated cost of the XXX XXX must include the full fabricated
cost of the XXX XXX.
Taxpayer is correct that the definition of fabricated cost was changed when the Department last amended
Rule 12A-1.043, F.A.C. The current rule contains a more detailed listing of those items which are
properly considered a part of the fabricated cost. That listing includes Material costs, Labor costs, and
Service costs.

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Material costs include all the cost of direct materials (which includes the full fabricated cost of the dry felt
pipes), shipping charges incurred on those direct materials, the costs of handling and storing the direct
materials, and any excise taxes paid on the materials.

Labor Costs include the direct labor costs for employees and contract labor used in manufacturing the
finished product (XXX XXX) plus the entire allocable portion of the payroll burden including “overtime
premium, vacation and holiday pay, sick leave pay, shift differential, payroll taxes, payments to
supplemental unemployment benefit plan, and employee fringe benefits.” Labor costs also include
executive compensation “to the extent it is allocated to production and not to administrative functions.”
Auditor believes items are not currently being included in the labor costs upon which the Taxpayer is
paying use tax. Taxpayer will need to show that tax is being properly remitted on these costs.
Service costs include the cost of engineering, design, and support employees which are allocated to
production.
All of these items must be accounted for when calculating the final fabricated cost of the XXX XXX, and
when determining the full fabricated cost of the component referred to as XXX XXX. Use tax should be
remitted on the final fabricated cost of the XXX XXX for all Florida public works contracts.
Based on this discussion, taxpayer’s questions can be answered as follows:
First, Taxpayer “supplies and installs tangible personal property that is incorporated into or becomes a
part of a public facility pursuant to a public works contract with a governmental entity” and is thus, a
public works contractor under the definition contained in Rule 12A-1.094(1)(a)1., F.A.C.
Second, because the XXX XXX is a component in producing the final fabricated product, tax need not be
remitted when it enters the state. Instead, tax is due when the fabrication process is complete.
Third, the resin and chemical which are going to be incorporated into the finished product, known as
XXX XXX, need not have tax remitted upon them at the time of purchase. However, chemicals which are
used in the process but which do not become part of the finished product, such as lubricants and cleaning
products, should have sales tax paid on them at the time of purchase.
Fourth, the full fabricated cost of the XXX XXX will need to be included in the full fabricated cost of the
XXX XXX. That full fabricated cost includes direct labor, indirect labor and transportation charges as
discussed above. The tax will be due at the time the final product, XXX XXX, is fabricated.
Fifth, the full fabricated cost of the XXX XXX, which is installed in Florida, is subject to the use tax. This
includes the costs of both out-of state direct and indirect labor. However, the transportation cost of
moving the full fabricated XXX XXX to the job site is not considered a part of the fabrication cost, and
use tax need not be remitted on this cost.
Sixth, Florida’s use tax is imposed on tangible personal property used inside the state. Products

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manufactured in Florida and used in another state are subject to Florida tax.
CONCLUSION
Because the XXX XXX, resin, and other chemicals, are not finished, fabricated products, Taxpayer need
not remit tax on those items until they have been incorporated into the final fabricated product which is
referred to as “XXX XXX.”
Taxpayer should be remitting use tax on the full fabricated cost of the XXX XXX that is used in Florida.
This cost should include all of the items listed in the current version of Rule 12A-1.043, F.A.C., which
includes direct materials cost (including the full fabricated cost of the XXX XXX), labor costs (including
vacation pay and fringe benefits), and service costs (including engineering and design costs). Where the
facilities that produce the pipe are located (in state or out of state) does not affect the taxability of the
product which is used in fulfilling a Florida public works contract.
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 Section
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 10 days of the date of this letter.
Sincerely,

Kama D. S. Monroe
Senior Attorney
Technical Assistance and Dispute Resolution
Control # 63748