Were equipment purchases for an assigned state radio-system contract taxable to the company acquiring and continuing the contract?

Plain-English summary

Florida ruled that a company acquiring an assigned state radio-system contract could purchase system equipment tax-free for resale or re-lease to the state.

The contract was not a public-works contract because it did not improve land, public buildings, structures, or related infrastructure, and the radio equipment did not become part of a public facility. Its essence was the state's acquisition of a large electronic transmission and receiving system.

The arrangement closely resembled a capital lease or installment sale. The state had sole use and operational control for 20 years, state personnel operated the system on state-licensed frequencies, and the state could buy the system at the end for a nominal amount. Whether treated as a lease or sale, the acquiring company bought equipment for resale or re-lease to the state.

Florida also declined to treat the transaction as a communications service because possession of tangible equipment passed to the state, and the communications-services definition excluded sales or rentals of tangible property.

What this means for you

Large technology contracts are classified by their substance. Equipment possession and control, the purchase option, integration into real property, and whether the customer receives a service or the equipment itself all matter.

Common questions

Was this a public-works contract? No.

Was it a communications service? No. It was a sale or lease of tangible equipment.

Were the assignee's equipment purchases taxable? No, because they were for resale or re-lease to the state.

Citations and references

• Fla. Stat. §§ 202.11, 202.12, 212.02, 212.05, and 212.08(6), and Fla. Admin. Code rr. 12A-1.071 and 12A-1.094, as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 10A-013

Original ruling text

SUMMARY
QUESTION: Is telecommunications equipment for the XXX that is the subject of a
contract between Assignor and the XXX (1) not a public works contract, (2) most closely
resembles a contract for the sale or lease of tangible personal property, and (3) the
tangible personal property being purchased by Taxpayer from Assignor is a purchase or
resale?
ANSWER: The contract between Assignor and the XXX, purchased by Taxpayer, is not
a public works contract. The contract most closely resembles a contract for the sale or
lease of tangible personal property to the State. As the Transaction involves purchases of
tangible personal property for resale or release, and the tangible personal property is
resold or released to the State, no tax is due on these purchases.
March 12, 2010
XXX
Re:

Technical Assistance Advisement 10A-013
Sales and Use Tax – Communications System
Sections: 212.05, 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.071, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner: XXX [hereinafter “Taxpayer”]
XXX. [hereinafter “Assignor”]
XXX. [hereinafter “SellerA”]
XXX. [hereinafter “Seller B”]

Dear XXX:
This letter is a response to your petition dated October 12, 2009, 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 1211, Florida Administrative Code. This response to your request constitutes a TAA and is
issued to you under the authority of Section 213.22, F.S.
Issue
Whether telecommunications equipment for the XXX that is the subject of a contract
between Assignor and the XXX is (1) not a public works contract, (2) most closely
resembles a contract for the sale or lease of tangible personal property, and (3) the
tangible personal property being purchased by Taxpayer from Assignor is a purchase or
resale.

Technical Assistance Advisement
Page 2
Presented Facts
Your petition sets forth the following information:
[Taxpayer] is a XXX corporation with its principal place of business in . . .
Florida. On April 16, 2009, [Seller A and Seller B, collectively “Seller”], the
indirect parent companies of Commission licensee [Assignor], executed an Asset
Purchase Agreement to sell to [Taxpayer] substantially all of the Seller’s
worldwide wireless network systems business, which business designs, builds,
distributes, maintains and supplies wireless communications systems, including
land, mobile radio and broadband equipment systems and networks for the public
safety, utility, federal, military and commercial markets. The assets included all
of [Assignor’s] assets – including [Assignor’s] authorized radio communication
facilities (the “Transaction”).
Included amount the purchased assets in the Transaction were the assets of a
system that is referred to as the XXX. . . .
There are four entities to the Transaction:
•

[Assignor. Assignor] is the licensee and assignor in the Transaction.
[Assignor] is a Florida corporation headquartered in . . . XXX, and a
leading supplier of critical communications systems and equipment for
public safety, utility, federal, and select commercial markets. Its products
range from some of the most advanced IP-based voice and data networks,
to traditional wireless systems that offer customers reliability,
interoperability, scalability and security. [Assignor] is an indirect, whollyowned subsidiary of [Seller].

•

[Seller A. Seller A] is the first of the two sellers in the Transaction.
[Seller A] is a corporation organized under the laws of the [European
country] and operates as a holding company. [Seller A] is [Assignor’s]
indirect parent company and an indirect, wholly-owned subsidiary of
[Seller B].

•

[Seller B. Seller B] is the second of the two sellers in the Transaction.
[Seller B] is a company limited by shares and organized under the laws of
[an island nation. Seller B] is a leading global provider of engineered
electronic components, network solutions, undersea telecommunication
systems, and wireless systems. [Seller B] designs, manufactures and
markets products for customers in industries from automotive, appliances
and aerospace and defense to telecommunications, computers and
consumer electronics. [Seller B] employs more than 96,000 people
worldwide, and it had FY 2008 revenues totaling nearly US $ XXX
[Seller B] is a publicly traded company listed on the New York Stock

Technical Assistance Advisement
Page 3
Exchange and the [island nation’s] Stock Exchange. [Seller B] is the
ultimate, indirect parent company of both [Assignor] and [Seller A].
•

[Taxpayer. Taxpayer] is the purchaser and assignee in the Transaction.
[Taxpayer] is an international communications and information
technology company serving government and commercial markets in more
than 150 countries. [Taxpayer] provides mission-critical communications
and electronics, government communications, broadcast communications,
and wireless transmission network solutions. [Taxpayer] has XXX
employees worldwide and had FY 2008 revenues [of] $XXX.

Background information from a previous communication is set forth as follows:
[Assignor] is a Florida corporation engaged in the business of manufacturing and
selling radio frequency and microwave communications equipment. [Assignor] is
currently installing XXX for use by Florida's XXX agencies. The system is
intended to provide statewide interagency radio communications on a dedicated
XXX MHz radio network.
The system is comprised of radio towers, antennas, and associated receiving,
transmission, and processing equipment located throughout Florida. The
communications system is quite extensive; it offers - through the coordination of
several dispatch centers - a seamless communications medium throughout the
entire State. Only government agencies are allowed use of the system, and the
system serves as the primary communications medium for law enforcement
officers and base law enforcement operations throughout the State, which
currently includes more than 6500 users with more than 14,000 radios located in
fixed sites and mobile assets. The system is operated solely by state personnel and
uses radio frequencies licensed to the State by the Federal Communications
Commission.
Prior to the development of the current system, the State's law enforcement
communication system was inadequate for the State's communications needs, and
it prohibited statewide communication in many instances. In order to build and
finance an adequate and reliable communications system, the State entered into
the instant contract with [Assignor]. The contract was entered into in XXX XXX
by the State and [Assignor’s] predecessor-in-interest . . . .
The contract between the State and [Assignor] is titled a "service and access
agreement," and it generally requires [Assignor] to provide an adequate
communications system for use by the State for a period of 20 years. At the time
of execution, the agreement required that the State convey title to all then-existing
system equipment and towers to [Assignor. Assignor] was then required to
upgrade/replace the existing equipment, and after the 20 year initial term, the

Technical Assistance Advisement
Page 4
State has an option to purchase all then-existing system equipment for a nominal
amount, $XXX.
Under the contract, [Assignor] continues to own the towers for 50 years from
contract execution. The contract authorizes [Assignor] to lease the use of the
towers to third-party communications providers in need of antenna space, and the
[Assignor] and the State are to share in this third-party revenue. The State is
allowed to use the towers through the entire 50 year period, after which the State
has an option to repurchase the towers for $XXX per tower.
The towers are generally located on lands owned by state or local government. In
some instances, the towers are located on private property that has been leased,
and, in the case of at least one tower, [Assignor] leases antenna space from a
private third party. In all the land held by the government in which the
government has a fee or leasehold interest, the government granted a
lease/sublease to [Assignor].
The State operates and oversees the system. Several dispatch centers, which
control operation of the system, are located throughout the State and are manned
solely by State personnel. Furthermore, once system segments are operational, the
State retains oversight of equipment and system changes/modifications.
The contract identifies the system requirements in general terms. For instance, the
contract provides that [Assignor] will provide 800 MHz trunked radio sites that
include shelters, towers, generators, trunked repeaters, conventional mutual aid
stations and other equipment. [Assignor] is also required to provide eight
integrated, multi-site Console Controllers (IMCs) equipped to support interfaces
and dispatch consoles. At the end of the 20 year term, the State's purchase option
with respect to the system equipment extends to all RF and microwave
equipment, all antenna and repeater systems, all mobile data network equipment,
all generators, all shelters, and all consoles.
Contract payments are not identified as a specific amount. Rather, the contract
requires that the State make quarterly payments to [Assignor], which payments
consist of all deposits made into the State's State Agency Law Enforcement Radio
System Trust Fund. The funding comes from the state's surcharge on motor
vehicle and vessel registrations. . . .
Applicable Authority
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 . . . .

Technical Assistance Advisement
Page 5
Section 212.08(6), F.S., provides, in part:
(6) EXEMPTIONS; POLITICAL SUBDIVISIONS.--There are also exempt from
the tax imposed by this chapter sales made to the United States Government, a
state, or any county, municipality, or political subdivision of a state when
payment is made directly to the dealer by the governmental entity.... This
exemption does not include sales of tangible personal property made to
contractors employed either directly or as agents of any such government or
political subdivision thereof when such tangible personal property goes into or
becomes a part of public works owned by such government or political
subdivision. A determination whether a particular transaction is properly
characterized as an exempt sale to a government entity or a taxable sale to a
contractor shall be based on the substance of the transaction rather than the form
in which the transaction is cast. The department shall adopt rules that give special
consideration to factors that govern the status of the tangible personal property
before its affixation to real property. In developing these rules, assumption of the
risk of damage or loss is of paramount consideration in the determination....
Rule 12A-1.094, F.A.C., provides, in part:
(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. In applying this rule, the following definitions are used.

(c) "Public works" are defined as projects for public use or enjoyment, financed
and owned by the government, in which private persons undertake the obligation
to do a specific piece of work that involves installing tangible personal property in
such a manner that it becomes a part of a public facility. For purposes of this rule,
a public facility includes any land, improvement to land, building, structure, or
other fixed site and related infrastructure thereon owned or operated by a
governmental entity where governmental or public activities are conducted. The
term "public works" is not restricted to the repair, alteration, improvement, or
construction of real property and fixed works, although such projects are included
within the term.
Rule 12A-1.071, F.A.C., provides, in part:
(1)(a) For the purpose of this rule, the term "lease" includes any rental or license
to use personal property, unless a different meaning is clearly indicated by the
context in which it is used.... It is not essential for a transfer of possession of
tangible personal property to include the right to move the tangible personal
property.... All leases of tangible personal property other than conditional-sale
type leases as described in paragraph (1)(d) of this rule, are operating leases.

Technical Assistance Advisement
Page 6
Whether a transaction is a "sale" or a "rental, lease, or license to use" shall be
determined in accordance with the provisions of the agreement.

(d) Where a contract designated as a lease transfers substantially all the benefits,
including depreciation, and risks inherent in the ownership of tangible personal
property to the lessee, and ownership of the property transfers to the lessee at the
end of the lease term, or the contract contains a purchase option for a nominal
amount, the contract shall be regarded as a sale of tangible personal property
under a security agreement (commonly referred to as a conditional-sale type
lease), from its inception. The purchase option shall be regarded as a nominal
amount if it does not exceed $ 100 or 1 percent of the total contract price,
whichever is the lesser amount.
(e) Whether a lease is a conditional-sale type lease or an operating lease shall be
determined in accordance with the provisions of the agreement, read in light of
the facts and circumstances existing at the time the agreement was executed....

(2)(a) Tangible personal property purchased exclusively for leasing purposes by a
dealer registered with the Department at the time of purchase may be purchased
tax-exempt. The purchasing dealer is required to issue a copy of the dealer's
Annual Resale Certificate to the selling dealer at the time of purchase in lieu of
paying tax, as provided in Rule 12A-1.039, F.A.C.
Discussion
Public Works. Retail sales or rentals of tangible personal property are generally taxable
in Florida, unless specifically exempt. See sections 212.05 and 212.21(2), F.S. Florida
law does provide a sales tax exemption for sales to government entities. See section
212.08(6), F.S. However, the section only exempts direct purchases by government
entities; the exemption does not apply when a contractor, employed by a government
entity, purchases tangible personal property that will be incorporated into and become
part of public works owned by the government entity. With respect to such contracts, the
contractor, not the government entity, is considered to be the purchaser of the tangible
personal property, and such purchases are considered taxable.
Florida regulatory authority defines a public works contract as one wherein a contractor
undertakes an obligation to perform work that involves the installation of tangible
personal property in such a manner that the property becomes a part of a public facility.
See Rule 12A-1.094(1)(c), F.A.C. In the instant case, it neither appears that the radio
equipment purchased is located entirely on government land, nor does the equipment
become part of a public facility.
The instant contract is for the sale of a vast radio system. The necessities of the
transaction required legal transfers of towers and other property interests in order to
secure the interests of the parties. However, the essence of the transaction is merely that
the State has purchased a quantity of radio equipment.

Technical Assistance Advisement
Page 7
Rule 12A-1.094(1)(c), F.A.C., defines "public works" as "projects... in which private
persons undertake the obligation to do a specific piece of work that involves installing
tangible personal property in such a manner that it becomes a part of a public facility. For
purposes of this rule, a public facility includes any land, improvement to land, building,
structure, or other fixed site and related infrastructure thereon . . . ."
The instant contract does not involve the improvement of land, public buildings,
structures, or any infrastructure for such property. Rather, the instant contract involves
the sale of electronic transmission and receiving equipment on a grand scale. The instant
contract is not a contract to improve public works.
Contract Type. Florida law provides that where substantially all of the rights in tangible
personal property are transferred to a lessee, and the lessee has a bargain purchase at the
end of the lease, the lease is considered a direct sale of the equipment at the inception of
the lease. See Rule 12A-1.071, F.A.C.
In the instant case, the State has acquired the sole use of radio equipment for the period of
20 years. Only state agencies are permitted use of the system. The system is operated by
state personnel and the grant of license by the FCC is to the state. After the end of that
period, the state is permitted to purchase the entire system for a nominal amount of
$XXX.
During the 20-year period, the state is permitted to use the equipment for any operational
purpose that it desires. The state controls the routing of information across the equipment
and monitors the interconnection of users across the system.
The facts of the instant case closely resemble those of a capital lease. The State is
purchasing a vast communications system for use by its law enforcement personnel, and
instead of paying up front for the system, the State has chosen to pay for the system over
a period of 20 years. After the contract term, the State will pay a mere $1 for
communications equipment that processes communications for thousands of law
enforcement users. Except for limited circumstances, state organizations are the only
users of the system, and state personnel operate and control communications over the
equipment. Whether the lease is legally treated as a lease or as a direct sale at the
inception of the transaction is of no consequence to the questions asked herein. In either
circumstance, Taxpayer is authorized to extend a resale certificate upon purchase of the
tangible personal property purchased for use in the system.
One might argue that the contract involves the sale of a communications service by
Taxpayer to the State. Florida law imposes communications services tax on the
transmission, routing, or conveyance of information or signals. See sections 202.11(2)
and 202.12, F.S. Certainly, information and signals are being transferred across the
system. Thus, a good question is why this transaction is not the sale of a communications
service.
Florida law specifically defines communications services to exclude the sale or rental of
tangible personal property. See section 202.11(2)(c), F.S. The instant transaction involves

Technical Assistance Advisement
Page 8
the immediate transfer of possession of the equipment and the potential transfer of title to
the equipment at the end of an initial 20 year period. Florida law defines the sale of
tangible personal property as the transfer of title or possession for a consideration. See
section 212.02(15)(a), F.S. Upon installation, the use and possession of the equipment is
transferred to the State for use in meeting its communications needs. The state uses the
system on frequencies licensed to the State. There is clear transfer of possession of the
equipment for use by the state. Florida law prevents treatment of the same transaction as
the sale of a communications service.
Conclusion
The contract between Assignor and the XXX, purchased by Taxpayer, is not a public
works contract. The contract most closely resembles a contract for the sale or lease of
tangible personal property to the State. As the Transaction involves purchases of tangible
personal property for resale or release, and the tangible personal property is resold or
released to the State, no tax is due on these purchases.
Any changes to the contract between Assignor/Taxpayer and XXX occurring after March
14, 2006, may result in a different response than indicated herein.
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,

Sara D. Faulkenberry
Senior Tax Specialist
Technical Assistance and Dispute Resolution
Control # 72600